BANK FRAUDS - ECONOMY
News: Won’t
take any blame for multi-crore bank frauds in the past, RBI tells Supreme Court
What's in the news?
● The
Reserve Bank of India (RBI) in the Supreme Court refused to take any blame for
multi-crore bank frauds in the past, saying individual bank managements are responsible for large-value loan
sanctions, their post-sanction management and monitoring.
Key takeaways:
● The
day-to-day functions and decisions are taken at the bank’s management level.
● The
banks being closest to the risk activity, own and manage the risk themselves.
● Large
value credit sanctions in banks are generally taken by a committee of the Board/
senior management of the bank.
● The
primary responsibility to assess the risks undertaken and ensuring that they
are appropriately managed through necessary risk mitigants and controls, rests
with the Board of Directors of the bank concerned, which is responsible for
putting in place robust internal control mechanisms.
The
banking system of any country is the backbone
of its economy. Excessive losses to banks affect every person in the country
because the amounts deposited in banks belong to the citizens of the country.
The NPAs that banks incur are mainly due
to bad loans and scams.
Banking scam and Bad loans:
● According
to the RBI data, corporate loans account
for nearly 70% of these bad loans, while retail loans, which include car
loans, home loans and personal loans, account for only 4%.
● Poor bank governance and corporate
governance led to rising banking scams and
subsequent rise in bad loans.
● Frauds
in the banking industry can be grouped under four classifications:
○ ‘Management’,
(Eg. Yes Bank case)
○ ‘Outsider’,
(Eg. Vijay mallya & Nirav modi case)
○ ‘Insider’
( Eg. PMC bank case)
○ ‘Insider
and Outsider’ (jointly). (Eg. ICICI Bank case)
● All
scams, whether interior or outside, are results of operational failures.
● Research
by Deloitte has shown that limited asset monitoring after disbursement (38%)
was the foremost reason behind stressed assets and insufficient due diligence
before disbursement (21%) was among the major factors for these NPAs.
Consequences:
WAY FORWARD:
● Exercise due diligence
and caution while offering funds. The regulation
and the control of chartered accountants is a very important step to reduce
non-performing assets of banks. Banks should be cautious while lending to
Indian companies that have taken huge loans abroad. There is also an urgent
need to tighten the internal and external audit systems of banks.
● The
fast rotation of employees of a
bank’s loan department is very important.
● Public
sector banks should set up an internal
rating agency for rigorous evaluation of large projects before sanctioning
loans.
● There
is a need to implement an effective Management
Information System (MIS) to monitor early warning signals about business
projects.
● The
CIBIL score of the borrower [formerly the Credit Information Bureau (India)
Limited] should be evaluated by the bank concerned and RBI officials. This must
also include the classification and responsibilities of the lending and
recovery departments.
● Financial
fraud can be reduced to a great extent by the use of artificial intelligence (AI) to monitor financial
transactions
CONCLUSION:
While
the Government of India and the RBI have taken several measures to try and
resolve the issue of scams in the banking industry, the fact is that there is
still a long way to go. Rather than having to continuously write off the bad
loans of large corporations, India has
to improve its loan recovery processes and establish an early warning system in
the post-disbursement phase. Banks need to carry out fraud risk assessments
every quarter.
Only
establishment of National Asset Reconstruction Company Ltd. (NARCL) or the ‘bad
bank’ is not a real solution. These measures can help only after a loan is bad
but not the process of a loan going bad.