Bank Frauds
By Dhurjati Mukherjee
Notwithstanding innumerable laws in the country, their implementation is a far cry. Though every government promises ‘good governance’, the state of our monitoring mechanism in reality is very poor due to vested interests, who receive patronage and support from a section of the political class and bureaucracy. This has been ongoing for decades with corruption increasing in almost all sectors.
The recent Punjab National Bank scam, which went undetected for seven long years but geared momentum in the last year or so, once again demonstrates the fact there is virtually a lackadaisical system of monitoring in the banking sector. In addition, another fraud of a consortium of banks amounting to Rs 3695 crores of Rotomac chairman, led by Bank of India and Bank of Baroda, has been detected and action taken.
The rise in non-performing assets (NPAs) of banks is obviously due to defaulting, most of which may be characterised as ‘wilful defaulters’ and it may be over Rs 1.1 lakh crore. Out of the 9000 such accounts for which banks have filed lawsuits for recovery, the top 11 debtor groups, each with dues of Rs 1000 crores together had over Rs 26,000 crores outstanding to banks!
Thus, questions have arisen again, and rightly so, whether the framework designed by the Reserve Bank of India (RBI) to prevent and detect such frauds is grossly inadequate or it is unable to ensure its effective implementation. Questioning a few officials of banks may be just a cover of such large frauds. Meanwhile, Finance Minister expressed his displeasure with State-run banks, maintaining these had failed to keep the Government’s trust by not interfering with their decisions and assured that cheats would be punished. Only time will tell how much of his assurance is valid.
It is believed that such frauds would not have been possible by very senior officials of the banking system, including the RBI and Finance Ministry, without political pressures from the highest levels. As in the case of Vijay Mallya and others, though the truth would never be revealed, there is need to ensure that in future banks would have to withstand pressure from the highest levels.
If private banks can increase their business and profits, why should this not happen with nationalized banks? The monitoring mechanism has to be the same, i.e. extending welfare through implementation of Government plans and programmes and trying to extend profits by granting loans to genuine corporate groups who have a proven record. There are extensive trainings for bank officials and as such these should be put into practice as per RBI’s guidelines.
Meanwhile, after the Finance Ministry has sent a letter to the RBI regarding the PNB scam questioning why it went undetected for such a long time, the central bank announced appointment of YH Malegam, who was part of the RBI’s board for over 17 years, to head a panel, comprising four others, that will look into the causes of fraud at lenders and the reasons for the failure in identifying defaulters. According to the RBI, its inspection had shown that there are major differences in the default accounts identified by it and those classified by banks.
Apart from the ministry that questioned whether the RBI had the proper systems to detect fraudulent transactions, the All India Bank Officers’ Association (AIBOA) also blamed it for lapses to detect the fraud in PNB. In a statement it pointed: “If PNB has not linked the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system with their Centralised Banking System (CBS), blaming the industry is absolutely unfair and also unjust”. Importantly, the RBI has wide-ranging powers under sections 35, 35(A) and 36 of the Banking Regulation Act.
Unfortunately, the Finance Ministry has no answers as why there is a lack of supervision by the RBI? Does it not coordinate with the RBI regarding the health of the public sector banks? It appears that the public banking structure is so vulnerable that at this stage there may be need for implementations of fresh regulations. At the same time, it’s understood that the Government is thinking to oversee loans over and above Rs 250 crores to be vetted at a higher level. Experts believe that unless there is greater autonomy given to banks, like that being contemplated for universities, such scams may continue to recur.
Further, due to the increasing NPAs, the government has been pumping money into public sector banks. Over the past 11 years, three finance ministers pumped close to Rs 2.6 lakh crores into such government-run entities with their requirement for funds rising steadily as more skeletons keep tumbling out. If such frauds continue, public money would go to dishonest businessmen, who want to cheat the banks for amassing huge wealth.
Let us now examine the system of audit in the country. The role of organisations such as Institute of Chartered Accountants of India (ICAI), which has been created by an Act of Parliament, has been in the process of training accountants. But these accountants go to various organisations that are hired by corporate groups and sometimes paid profusely for manipulating accounts. Recall, PWC has recently been banned by the government for fraudulent auditing.
Questions have also been raised over how effective the auditing concerns are and how much integrity these demonstrate in operations. There have been suggestions to create the National Financial Reporting Authority (NFRA) and till that is done creating the Listed Entity Audit Quality Board (LEAQB) to ensure audit quality in listed companies is necessary. The rationale for creation of LEAQB stems from global experience. It should possibly be under the preview of SEBI and must be tasked with overseas audit quality in listed firms in India.
Unless the banking system is set right, it would be difficult to improve the economic system. Moreover, the stock market has been in a state of crisis and it is necessary for stability to return. Thus, while the whole issue is indeed quite complex and government intervention is urgently required, no such urgency is manifest or visible. Only time will tell what the government would do to check recurrence of such frauds in the banking industry.
Resolution of bad loans and restoring the health of PSBs is the biggest challenge which requires a response on multiple fronts, primarily that of sincerity, honesty and transparent decision-making. Though the Malagem committee would be keenly awaited, the immediate task would be to be extra cautious in granting loans to corporate projects and ensure these do not become stressed assets in future.
Moreover, banks have to come out of the influence of political leaders and also powerful businessmen so they are not in a position to influence loan sanction, specially those that are of heavy amounts. Banks have to work in a free and independent manner, subject to the regulations of RBI, and carry out their work cautiously without any bias and pressure from any quarters. The question, however, remains when and whether public sector banks would become more professional in their approach and carry out their activities judiciously and in the interest of the economy and society. – INFA