INDIAN BANKING INDUSTRY
Is it really vulnerable to frauds?
– I f s o, w h a t m a k e s t h e i n d u s t r y s o v u l n e r a b l e ?
The story begins with the decade of the nineties. The year 1991, being a year of Indian banking liberalization, fetched a happy era which saw the economy undergoing a pretty good amount of growth and changes. As such the Industry in India is well regulated with sufficient supervision, it is somehow bound to be threatened by its inner challenges with the perspectives of corporate governance, financial distress, and its ethical practices. It requires a deep and detailed introspection in this direction keeping in sight banking frauds and ever elevating credit card debts along with a detailed analysis of the secondary data. Not only this, the endeavor might also need to opt for an interview-based approach, spanning across all players involved in reporting financial misconduct.
The Indian banking industry has been witnessing the case of rising NPAs in last couple of years across various scheduled commercial banks, as well as public sector banks. It won’t prove to be a herculean task to find out ways for minimizing the future occurrence of frauds in the industry. No agency related to the sector should be left untouched. The credit rating agencies, as well as the auditing firms, should also come up with the credibility made un-questionable procedure. Undoubtedly these poles often have silly corners causing the mishap viz. inadequate diligence with a little careless-overlook. Though these are not the only contributors, there are end numbers of accident-prone nooks and corners.
Financial frauds have been inevitable phenomena in the sector lately with many such incidences. No matter how insignificant the after-effects of such frauds are shown, the trust on the banking system in general or faith in the entire system, in particular, is shaking inch by inch. The banking scams in India are usually treated as the cost of doing business and from the day one of the liberalizations the frequency, complexity, and cost of such banking scams have gone up shockingly. It results in a very grave cause of concern for all the regulatory authorities including the chief regulator – Reserve Bank.
Being the regulator of banks in India, RBI has its own well-built supreme parlance of understanding on and about the banking system in India. The RBI considers fraud in its parlance as – An act of deliberation or omission or commission by any person, carried out in the course of a banking transaction or in the books of accounts maintained manually or under computer system in banks, resulting into wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank- these lines is just an epitome of its in-depth and organized way of thinking about the matter.
It will be very painful if we make efforts to find out a total of money taken away from the public sector banks after liberalization or in the last decade or in last five years. The count of the last money might touch hundred thousand crores in toto and the obvious credit goes to a variety of banking frauds. The RBI had to toil a lot to bring down the numbers of banking frauds during this decade and still the money looted has increased helplessly.
This was not shocking when the probes came up with the fact that not only midlevel workers but also the top bank officials have also been involved. Talk about PNB or Syndicate Bank or Indian Bank, the involvement of both the levels is unfortunate. But still this is not the failure of the system, it is the failure of trust- a trust within or a trust within the family. The corporate governance had to undergo not only the re-checking of its effect-ability but also the hidden debilitated points in its system.
When we talk about public sector banks we usually forget one openly hidden pillar of it responsible to an indirect loss. This loss-making corner is otherwise known as non-performing-assets (NPAs). The indirect loss is the reduction in profitability direct or indirect, immediate or remote. Including global and domestic slowdown, there have been several causes attributed to risky NPAs. Still, a thin thread of connection has been noticed strikingly between NPAs and the banking frauds also.
Not only principally, but also pragmatically the banking and financial strength display the picture of the production and consumption of goods and services in a country. There is a strong bond between the banking and finance on one end and the production and consumption – on the other end. Both ways it shows the living standard of the denizens of a country. Henceforth, the innumerable non-profit-assets will sure debilitate the banking system through their gloomy faces of financial distress of borrower clients. Not only this, the inefficiencies in transmission mechanisms is also another sad part of it. All these present a cause to go for a detailed work out into finding the loopholes along with leakage points in the Indian banking system.
In the targeted workout, various aspects of Indian banking sector may be taken into consideration. For the detailed comprehension of all the ins and outs of the industry primary semi-structured interviews with bankers and industry, veterans can be conducted. A proper understanding of the sector’s dynamics certainly will help mitigate the challenging issue.
A detailed analysis of banking frauds in India requires primary research from interviews spanning across all players involved in reporting of financial misconduct. Then the detailed set of recommendations for prevention and early detection of frauds in the banking system can be worked out simultaneously. The objective of understanding and analyzing underlying causes contributing to increasing trend in frauds committed in Indian banking sector needs to be the aim of the exercise. It will also include suggesting appropriate and suitable measures helping the system in addressing the issues resulting in the frauds.
Going with a professional probing approach the trend analysis of frauds based on past data available with the RBI and various other entities can prove to be a major assistance. That will go in the direction of uncovering the broader trends within public sector banks (PSBs) and private sector banks (PVBs) in India. Along with this a full circle analysis through conducting interviews with banking officials, auditors, banking practitioners, banking policymakers, crime and compliance officers as well as the retired bankers, is also required.
Taking the inspiration of the Glass-Steagall Act (GSA) in America, India can also think of reducing risks to the financial system and tackle conflict of interests that exist in banking, by separating commercial banking functions from ‘risky’ investment banking functions. This process in practice will also teach the requirement of the viability of such an approach all the way through.
As per the great thinking of Kohler, an economical setup needs to increase transparency of financial structures as well as to raise the surveillance of international capital markets. The system has to lay out a well-defined strategy to combat different types of frauds and corruption along with creating a financial sector assessment program for assessing, diagnosing and addressing potential financial vulnerabilities. Such inceptions in the banking setup are a must with the progress of technical innovation age day by day. And thinking in this direction India might also need to depute various new agencies to help monitor and prevent fraudulent practices.
Before such fraudulent practices in the banking system bring some literal financial crisis, the country has to work towards making risk and vulnerabilities assessment framework effective, by advocating greater transparency and information sharing, along with empowered supervisory and regulatory bodies, as well as greater national-international collaboration towards regulation and supervision of financial institutions. Not only this, the gaps also need to be identified under financial surveillance as well as on the frequency of such surveillance especially in an economy with truly systemic financial sectors, whose failure might trigger a financial crisis.
In accordance with a research, approximately one in three banking crises followed a credit boom, which shows a correlation between relaxed credit expansion policies by banks and crises. ‘‘While most numbers of frauds have been attributed to private and foreign banks, public sector banks have made the highest contribution towards the amount involved,’’ this is what has been presented as an inevitable fact of Indian banking system by a well-known economist. Why is it so? Why has Indian banking system remained plagued with growth in NPAs during recent years, which resulted in a vicious cycle affecting its sustainability?
No doubt, this is existentially true that the stress of asset quality and marginal capitalization faced by public sector banks, and various recommendations to address these issues, and here the system needs a better governance with better autonomy to be conferred to public sector banks so that their competitiveness can grow higher along with the ability to raise money from markets easily.
They say, increasingly strict regulations will make business opportunities take a hit, – so true, it also exists as a general perception. Still, regulations do not seem to be a bar in the functioning of banks during the post-crisis era. Another noted economist holds that in absence of a broad-based trust and presumption of honest behavior, the possibility of a financial sector of the current scale and size would be next to impossible. In his opinion, the emergence of a moral hazard problem in the banking system is a direct-indirect privatization of profit and socialization of costs.
Is the Indian Penal Code also not to tight with the penal solutions in this regard? Can strict laws also help to minimize or reduce the fraudulent behavior in the Indian banking industry? In order to maintain uniformity in fraud reporting, frauds have been classified by Reserve Bank of India based on their types and provisions of the Indian penal code, and reporting guidelines have been set for those as per the Riser Bank. Reserve Bank displayed the will towards monitoring of frauds by the board of directors and issued a circular to cooperative banks for setting up a committee to oversee internal inspection and auditing and plan on appropriate preventive actions, followed by the review of the efficacy of those actions. In order to empower the employees to be able to handle frauds, the impartial policy guidelines and whistle-blower policy are also a must. Reserve Bank did not stop here and in the next admirable move, it issued a circular introducing the concept of red-flagged account (RFA), based on the presence of early warning signals (EWS), into the current framework, which will help in early detection and prevention of frauds.
Another banking expert suggest outlining of a few fundamental code of conducts which can be entirely useful for the prevention of banking frauds. Not only that, a strong appraisal system coupled with a constant monitoring is also needed badly. Some agencies working in and around the industry come up with their own set of solutions. They wish to have a hard check on the consumer bankruptcy as it is accountable to the extensive margin and lower stigma which is a part of it. According to them, financial innovations do lead to higher aggregate borrowings which end up in higher defaults. Around four years back as per one study, there is an inner relation between Sustainable Credit Growth (SCG) and GDP growth whereas he SCG paves the way for a healthy asset creation. Henceforth, a strict credit assessment along with utilizing early warning systems so that the asset quality of institutions can be monitored.
Technology is inevitable. It helps banking system too. The recently introduced CTS (Cheque Truncation System) has brought down the number of deposit related frauds. Though these frauds should be valued through the amount not through the account i.e. numbers, there is a relief being felt recently by dint of the CTS or the use of electronic transfer of funds. But today not the deposit related frauds, but the advance related frauds are more threatening and common which is more than half of the amount cheated out of the frauds in last five years. Technology is being used both sides. If the banking is utilizing it towards ease and safety, they, on the other side are also playing with it bringing venomous cyber themes for stealing fraudulently. Trade and business now have the letter of credit which is too vulnerable now for frauds in its implications. The data-bar of cybercrime cases in the industry is too unfortunately alarming. It was merely twenty-five cases or so fifteen years ago in the year 2003 and the bar is now touching around one lack such incidents.
Go by the studies and find the shocking fact – more than ninety percent of the number of fraud cases along with the same percentage of an amount, hail from commercial banks only. If compare them with the public sector banks, public sector banks account for just about twenty percent of a total number of fraud cases, whereas in terms of the amount involved, the proportion is higher than eighty percent.
Now look at the private sector banks, the contrast is unbelievable – with more than fifty percent of fraud cases, but just around fifteen percent of the total amount involved in such frauds which are approximately rupees one crore or more than that. It clearly displays the lackluster modus operandi of corporate governance which makes it easier for them to bring up the number of high-value bank loan default and possible collusion between corporate entities and high echelon bank officials.
As per a survey in banking sector recently last five years starting from 2013 till the date has been very painful for the sector since it has been witnessing the growing number bank frauds but also the frauds with a high level of technical execution utilization robbing the banks. And the worst part is this that the retail banking has been the prime avenue for these frauds. This vulnerability kills the trust people have in the banking system.
Is there some way the risk factor of banks can be checked properly? If the banks keep loosing trust not being able to do something about the risk factor, the lifespan of the bank is then in peril. Not only this the growing number of stressed assets also call for an immediate attention. The trend warns that before it gets too late banks have to build up a strict and strong vigilance system to keep monitoring the institution from the time of application onwards which should continue even after the disbursements with an eagle eye on the early signs of stress in the accounts of the borrower.