How PNB Rs 11,300 crore scam exposes the most significant flaws in the Indian banking system

Amid the blame game between Punjab National Bank BSE -2.10 % (PNB) and other affected lenders in the Rs 11,300-crore scam, the elaborate web of deception has served to expose the biggest flaws in the Indian banking system – weak risk management practices and glaring oversight lapses.

While international banks tightened supervision and corporate governance after the subprime credit crisis in 2008, most Indian banks appear to have remained laggards.

Doubts are now asked in several quarters as to how PNB officials at Mumbai’s Brady House branch continued to issue letters of undertaking (LoU) against import receipts from Nirav Modi and his firms for seven long years without attracting management supervision. Overseas subsidiaries of other lenders such as Axis Bank BSE -1.10 % or Allahabad Bank BSE -0.36 % issued buyers’ credit against these letters of undertaking (LoUs). The money has been credited to the Nostro account of PNB’s branch.

Nostro account refers to an account that a bank holds in a foreign currency in another bank. PNB had honored the claims until January 5 but has now dubbed these transactions as fraudulent. “We will honor all our bonafide commitments,” PNB chief Sunil Mehta said on Thursday in his first interaction with the media after the scam became public.

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