More steps are needed to prevent frauds including tightening of internal and external audit systems of banks
More steps are needed to prevent frauds including tightening of internal and external audit systems of banks
Amidst the celebration of ‘Azadi Ka Amrit Mahotsav’, the biggest banking scam in India has come to the fore. in this matter, Dewan Housing Finance Corporation Limited (DHFL) has defrauded a consortium of banks run by Union Bank of India ₹35,000 crore tune Through financial misrepresentation. The DHFL case was not the only case. In February this year, ABG Shipyard Limited Surat had already taken a loan of about Rs 23,000 crore through fraudulent means.
take a hit
On February 1, 2019, a consortium of banks held a meeting to take cognizance of serious allegations of loan repayment default. DHFL, Subsequently, a core committee consisting of the seven largest banks – State Bank of India (SBI), Bank of Baroda (BOB), Bank of India, Canara Bank, Central Bank of India, Syndicate Bank and Union Bank of India (UBI) – was formed. KPMG (a global network of professional firms providing audit, tax and advisory services) inducted as assessors to lead a unique survey review of DHFL for the period April 1, 2015-March 31, 2019 was.
The Central Bureau of Investigation (CBI) in its first information report showed that State Bank of India was the worst hit with a non-performing asset (NPA) base of Rs 9,898 crore, which DHFL had obtained. , Inevitably, Bank of India and Canara Bank have been robbed of over Rs 4,000 crore by DHFL. In addition, over Rs 3,000 crore has been cleared by DHFL from Union Bank of India and Punjab National Bank.
The banking system of any country is the backbone of its economy. Excessive loss to banks affects every person in the country because the amount deposited in the banks belongs to the citizens of the country. Banks’ NPAs are mainly due to bad loans and scams.
Data from the Reserve Bank of India (RBI) shows that around 34% of scams in the banking industry are due to inside work and poor lending practices and involvement of junior and middle level management. RBI data also shows that one of the fundamental problems in the way of growth of banking in India is due to rising bank scams and consequent cost on infrastructure. Surprisingly, as in a Global Banking Fraud Survey (KPMG), the issue is not exclusive to India; This is a worldwide issue.
One NPA Projection, One List
In a financial stability report released by RBI in December 2021, gross NPAs of banks are projected to grow from 6.9% in September 2021 to 8.1% of total assets (under baseline scenario) and 9.5% by September 2022. A severe stress scenario. Frauds in the banking industry can be classified under four classifications: ‘management’, ‘outsider’, ‘insider’ and ‘insider and external’ (combined). All scams, whether internal or external, are the result of operational failures. Research conducted by Deloitte showed that monitoring of limited assets after disbursement (38%) was the most prominent reason behind stressed assets and insufficient due diligence before disbursement (21%) was one of the major factors behind these NPAs.
Every few weeks there are some fresh/new bank scams or other news which is breaking the trust of common man in the banking system. There are several examples of bank scams: Nirav Modi And Mehul Choksi scam The case of Punjab National Bank (₹11,400 crore) is involved businessman vijay mallya (₹9,000 crore) involving around 13 banks, Andhra Bank fraud (₹8,100 crore), PMC scam (₹4,355 crore), Rotomac pen scam (₹3,695 crore), Videocon case (₹3,250 crore), Allahabad Bank fraud (₹3,695 crore), ₹1,775 crore), Syndicate Bank scam (₹1,000 crore), Bank of Maharashtra scam (₹836 crore), Kanishka Gold Bank fraud (₹824 crore), IDBI Bank fraud (₹600 crore), and RP Info Systems Bank scam (₹600 crore). ₹515 crore) to name just a few.
A high NPA apart from raising the operating cost of banks also reduces their net interest margin; These banks meet this cost by charging convenience charges to their small customers on a day-to-day basis.
According to Reserve Bank of India 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%. A study by the Indian Institute of Management Bangalore has revealed that poor bank corporate governance is the reason behind bank scams and rising NPAs.
Steps that need to be considered
Over time, bad loans lead to higher NPAs. Therefore, banks should exercise due diligence and caution while offering funds. The regulation and control of Chartered Accountants is a very important step to reduce the non-performing assets of the banks. Banks should be careful while lending to Indian companies taking heavy foreign debt. There is also an urgent need to tighten the internal and external audit system of banks.
The rapid rotation of the employees of the loan department of the bank is very important. Public sector banks should set up an internal rating agency for rigorous evaluation of large projects before sanctioning loans. In addition, there is a need to implement an effective Management Information System (MIS) for monitoring early warning signals about business projects. The CIBIL Score of the borrower (formerly Credit Information Bureau (India) Limited) should be evaluated by the respective bank and RBI authorities. It should 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. However, there may be limits to the adoption of digitization beyond a point as AI provides quantitative information but does not take into account the qualitative aspects.
While the Government of India and the RBI have taken several measures to address the issue of scams in the banking industry, the fact remains that there is still a long way to go. Instead of continuously writing off bad loans of large corporates, India will have to improve its debt recovery processes and put in place an early warning system at the post-disbursement stage. Banks need to conduct fraud risk assessments every quarter.
Mere setting up of National Asset Reconstruction Company Limited (NARCL) or ‘Bad Bank’ is not the real solution. These measures can only help when the loan is bad but not in the process of loan going bad.
Brajesh Kumar Tiwari, author of ‘The Changing Scenario of the Indian Banking Industry’ is Associate Professor, Atal Bihari Vajpayee School of Management and Entrepreneurship, Jawaharlal Nehru University, New Delhi. Views expressed are personal. @bkt_brajesh