The Reserve Bank, which does a regular inspection of banks in this country, could possibly examine the risk management lapses more closely.
Banks grappling with the evils of bad loans and non-performing assets have now been hit with the massive Rs 11,346-crore fraud at Punjab National Bank. It’s still not known how many banks are affected, though there are some indications that six other banks may be hit. This isn’t the first time a state-owned bank was hit by fraud. According to an IIM Bangalore study, in 2012-16 PSU banks have taken a hit of Rs 22,743 crores due to fraud, and in all cases hundreds of bank employees were involved. It’s like the fence eating the grass it’s supposed to protect. This is disturbing as it means in six years no one took these frauds seriously or finetuned the existing risk management systems and plugged loopholes. Frauds along with non-performing assets of Rs 6,98,668 crores indicate that over Rs 7 lakh crores of people’s hard-earned money have been lost in a short time. Can this betrayal by the custodians of the people’s money be taken lightly? A few bank employees have been arrested, but is this enough of a deterrent for other scoundrels?
Incidentally, depositors’ money in banks are insured only upto `1 lakh, which means that if you lose an amount above this you have to fend for yourself, and it’s not the responsibility of the government or the RBI to ensure that you get compensation. The question that’s even more perplexing is whether there’s something really rotten in the banking system, or this is a one-off. The latter can be discounted as fraudster Nirav Modi appears to have used the same methods as Harshad Mehta did in the early 1990s. Harshad Mehta used fraudulent bank receipts to cheat banks of `4,999 crores, while Nirav Modi used fraudulent letters of undertaking (LoU) to dupe banks. These frauds vindicate RBI deputy governor N.S. Vishwanathan, who recently chided banks for “lack of effective risk management practices”. He had said this in relation to non-performing assets, but it’s equally applicable in case of bank frauds, which occur due to a lack of management oversight. Globally, bank frauds are big business and are on the rise. According to the Association of Certified Fraud Examiners, frauds cost the banking industry $67 billion per annum in 2015-16. In most cases it were the bank’s employees who were involved.
The Reserve Bank, which does a regular inspection of banks in this country, could possibly examine the risk management lapses more closely. This would in no way impinge on banks’ autonomy. The collusion between bank employees and managements is well known. The former RBI governor was well aware of this, and tried to correct it by asking banks to clean up their balance sheets within a set timeframe. A powerful lobby acted to ensure he didn’t get a fresh term, becoming the only central bank governor not asked to stay on.
via Is huge fraud at PNB really an aberration?