It has now been a routine for the newspapers and the media to strike a headline on such events, let it be about the whereabouts of Nirav Modi who swept away with around 11,000 Crores of Punjab National Bank’s wealth or about the Padma Bhushan recipient ChandaKochhar’s pending investigation on round tripping investment into her spouse Deepak Kochhar’s company through Videocon Group or Vikram Kothari for rotating loans through shell companies.
Before we begin, let me highlight few facts on the system of Banking dealing in crores of public’s money which has been proved gullible to frauds and mishaps.As of Quarter three reports of financial year 2017-18, the total credit extended by the commercial banks surged to US$ 1,288.1 Billion and the deposits grew to US$ 1,715 Billion with major plans for rural expansion and credit inclusion. As per the Economic Times Report, the domestic banking sector reported a total of 12,553 fraud cases worth Rs 18,170 crores in the fiscal 2016-17. In recent years, frauds reported in the Indian Banking Sector show an increasing trend both in terms of number and quantum, wherein the public sector banks account for 85% of Bank fraud cases but the private bank have no special genes making them immune to scams and frauds.
The history of Indian Banking Industry have been littered with examples of failed banks that were forcibly merged with the stronger banks to safeguard depositors’ money and to avoid disruption. An example being, the scam case of Global Trust Bank merger with Oriental Bank of Commerce after its net worth was wiped out due to systemic fraud perpetrated by the insiders. Quoting a latest hot example of Nirav Modi, who colluded with the an insider and overcoming the weak internal control system of Punjab National Bank as well as regulatory reform of Core banking system to loot Punjab National Bank of 11000 Crores for seven long years.An enormous increase in the Non-performing assets (NPAs) and willful defaults by the perpetrators have also been associated to frauds and scams, where in Mrs. ChandaKochhar has asked to be on leave her top position in the Bank, upon her pending investigation to sanction loans to the Videocon Group (which have been admitted under the Insolvency and Bankruptcy Code (IBC)) to route its investments into her spouse Deepak Kochhar’sNuPower Group. Another example of fraud in the Banking Industry being round tripping of money, where in Vikram Kothari misappropriated 3700 crores.
Amongst this system of Billion dollars of public money, few top authorities who control the management as well as exercise the shareholders right have capriciously cheated the banks exploiting loopholes of the system and the power of authority through random appointments and transfer of chief executives, rationing out capital allocation in the name of fostering efficiency or inducing appointment of the board members in the Bank.
The government and the Reserve Bank of India have to play a great role in the process to tackle the frauds. The role of the government becomes even more crucial as it happens to be the principal owner of the majority of affected banks in India. On preventive measures, there is a need for evolving a framework in order to bring transparency into operations of the Banks on four major parameters – Project appraisal, monitoring, accounting and auditing. Greater emphasis must be placed on bringing efficiency and transparency into the accounting system. Emphasis should be given on strengthening the audit system in banks. These measures can potentially reduce the possibilities of collusion among the officials of the funding institutions and the borrowers. The regulator, Reserve Bank of India is expected to put in some equal efforts to regulate the sector and minimize its vulnerability to such frauds and scams, the best example being strict implementation norms of Core Banking System.
And finally to quote the Banking pundit RaghuramRajan who writes in his book, “I Do What I Do”: Today, a variety of authorities monitor the performance of public sector banks. It is important we streamline and reduce the overlaps between the jurisdiction of authorities, and specify clear triggers or situations where one authority’s oversight is invoked”.
Author
Rishi Y Tanna
Rishi Y Tanna is a senior-audit analyst and has been associated with KVA for 2 years. He has gained wide exposure among varied areas of work which includes legal compliances, international taxation, transfer pricing and financial reporting. He has gained valuable experience in diversified industries such as IT/ITES, capital markets, sugar industry.
