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Serious lapses unravelled at Bank of India

Yashajit Saha

The Reserve Bank of India has found serious lapses on the part of the management of Bank of India for the pay-order crisis.

In its reply to the Joint Parliamentary Committee on the markets scam, the apex bank stated that the fraud occurred because of the "failure of the internal control and risk management system particularly in regard to setting up of inter-bank exposure limit on urban co-operative banks."

The pay-order scam that cost BoI a loss of Rs 1.37 billion, was chiefly brought about by the failure on the part of the management to fix ceiling on the powers of various branch officials with regards to discounting pay orders.

A special scrutiny conducted by the Department of Banking Supervision showed massive discounting of instruments drawn on Madhavpura Mercantile Co-operative Bank on behalf of Ketan Parekh. The public sector bank further had failed to set any inter-bank exposure limits for the co-operative bank.

"The bank had adopted an imprudent policy in delegating unlimited powers to branch officials for discounting of bankers' cheques and pay orders without weighing the financial standing and status of the counter-party bank and the track record of the party involved therein," stated the RBI in its report. BoI confirmed in its letter to the apex bank that no exposure limits had been set for MMCB.

Of the Rs 65.51 billion worth of banker cheques discounted by the stock exchange branch of BoI, cheques of Rs 42.14 billion were issued by MMCB for Ketan Parekh group of companies during January to March 2001.

This was done without establishing any exposure limits for customer/counter-party bank, stated the report. For 2000-01, of the total pay-orders of Rs 83.97 billion discounted by the concerned branch of BoI, Rs 49.18 billion were issued by MMCB.

The RBI has also blamed the BoI for delegating unlimited powers to the branch official. The Bombay Stock Exchange branch officials of BoI allegedly had allowed large scale discounting by the KP group of companies without assessing the risk associated with it.

The RBI questioned the management for allowing large scale discounting of pay orders without assessing the risk associated with the same.

RBI pointed out in its report that since the appointment of U H Somaiya as assistant general manager of the Stock Exchange branch, it had resorted to discounting of high value pay orders since he took charge in November 2000.

The regulator stated that even as Somaiya had been charge-sheeted in 1998 and punished under instruction of Central Vigilance Commission, the management had allowed him to take charge of a sensitive branch without vigilance clearance.

"Discontinuance of concurrent audit at an important branch handling large volume of sensitive business was also a serious lapse," stated the apex bank.

Since Somaiya's appointment, the concurrent audit of the same had been discontinued, though prior to November, BoI had a system of conducting inspection and audit of its branches.

The RBI has advised BoI to evolve a suitable framework to provide a centralised overview on the aggregate exposure to other banks.

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