Open Forum
New Delhi, 28 February 2018
Bank Frauds
RBI FRAMEWORK INADEQUATE?
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
(Copyright, India News & Feature
Alliance)
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