Economic Highlights

New Delhi, 5 March, 2018

Bank Regulation

STOP CORPORATE MEDDLING  

By Shivaji Sarkar

The banking sector is shaky. Loan frauds have affected a number of different banks. The latest to surface is Rs 390 crore Oriental Bank of Commerce scam. The malaise may be deeper if bank officers are to be believed.

According to All India Bank Officers’ Confederation (AIBOC), 11643 borrowers have availed 38 per cent of the total loans given by banking sector till March 2016. The statement says 12 non-performing asset (NPA) accounts have an outstanding Rs 2.5 lakh crore and 84 per cent of NPAs belong to the corporate. The worse, says the AIBOC, “Every year banks are writing off thousands of crores (of corporate loans), which is the biggest scam”.

Of late, there has been a tendency not to heed the employees of an organisation. They are considered “irresponsible” and hampering “growth” path decided by the autocratic heads of organisations. They are penalised for speaking out the truth and branded as working against the “interest of the organisations”. The truth is they are aware of each misdeed be it in banks, autonomous bodies, departments or public or private sector.

This calls for a change in corporate and departmental, particularly autonomous body, set ups. The chairmen are often government functionaries instead of being independent professionals.  Unfortunately enough, they do not meet the employees or officers, who red flag inaccuracies or inappropriate functioning of the heads of organisations. The heads, whether they are honest or not, reportedly function like despots, go on a rampage of penalising employees, inflicting a sense of fear as they boast there would be no hearing against them. 

Is not the RBI aware of the malfunctioning? It would be naïve to say so. In the Financial Stability Report, June 2017, the RBI had pointed out that one of the emerging risks to the financial sector is a rising trend of frauds in commercial banks and financial institutions. During the last five financial years, the RBI report said the volume of frauds had increased by 19.6 per cent from 4,235 to 5,064 and the loss incurred had gone up 72 per cent from Rs 97.5 billion to Rs 167.7 billion (Rs 9800 crore to 16800 crore). Now the Finance Ministry has put another list of 9,500 non-banking finance companies, which have been categorised “high risk”.

A former RBI Deputy Governor SS Mundra on September 7, 2016, had questioned the SWIFT. “We have come across instances of fraudulent messages confirming documentary credits being transmitted using SWIFT. The SWIFT transactions could be done without corresponding information in the CBS”.

Obviously, online operations have loopholes. AIBOC wants independent strong supervision. “It is a well-known fact the SWIFT has been used for frauds from the 1990s and there are many reported hacks of SWIFT”, say the officers.  One of the worst reported hacks is of online transfer of $ 81 million from the Bangladesh Central bank in February 2016 using SWIFT out of the New York Fed. In February 2018, Russia reported a similar heist from a bank of $ 6 million. Attackers circumvent a bank’s local security systems and gain access to SWIFT network. Fraudulent messages are then used to initiate cash transfers. This is precisely what Nirav Modi did in Punjab National Bank fraud and others in Oriental Bank.

Again, this raises the questions on mandatory Aadhar and other online linkages for bank depositors. It needs scrutiny of the system’s safety. It would be wise to put it off for now to save gullible depositors as also unnecessary burden on the banks. The AIBOC too had objected to banks being burdened with the responsibility of Aadhar enrolment.

Note that millions of mobile phones are stolen every year. While they have IMEI security numbers only a fraction of these are recovered. The present generation must come out of the belief that online is safe and I-D linkages are foolproof. Indian banks have been suffering more frauds as online transactions increase. The defaulters or fraudsters are well known corporate personalities but recoveries are thwarted. So why repeated I-Ds and KYCs are insisted upon?

They have swindled almost all banks as mounting losses of State Bank of India and others suggest since 2008 incentives in the wake of the US sub-prime scam that did not hit India. The banks often allege they work under government’s diktat. A wider study must be done to substantiate or reject this. By now it’s well-known that with impunity corporate have swindled people’s deposits. The people’s tax-paid money is utilised to recapitalise the banks, whereas depositors are penalised with higher bank charges even for a cheque book, issue of a draft, online transactions and lower interest rate accrual.

Corporate or their owners have been subjected to least penalisation. It is time to unravel why this happened and what role the well-known trade bodies played in forcing the banks to take a soft approach. In fact, the RBI has been blamed quite often. It has not published the list of NPA borrowers; not been able to stop the organised loot despite corporate debt restructuring (CDR) – a method to allow larger leeway; including interest waivers without the recovery, asset quality review (AQR) or prompt corrective action (PCA). It is said that with the revised norms, the banks may have to declare more as NPAs. Many more banks may slip into losses.

The only feature that is saving the Indian economy is the implicit sovereign guarantee of the banks, which has maintained confidence of the market. This aspect has to be strengthened but not with repeated infusion of capital at taxpayers’ cost. The system needs to be fortified so that recoveries are regular and faster, gestation for repayment are shorter and long-term corporate loans are sanctioned at higher interest rates of 15 to 20 per cent to save the poor man’s deposits. For faster repayment interest incentives could be built into the agreements.

It also calls for strengthening the public sector enterprises with more autonomy, less control by government officials and better functioning. The banks have erred but are not beyond redemption. The Narendra Modi government has the capacity to redesign the banking structure in a people-friendly way and efforts must begin to start a foolproof banking system that does not become a puppet of the corporate. It must appoint an expert body to suggest remedial measures. ---INFA

(Copyright, India News & Feature Alliance)