Banking Scams: How RBI, banks can tackle loan frauds

Banking Scams: How RBI, banks can tackle loan frauds

To achieve the $5 trillion economy target, Indian Banking today needs a new approach to expansion and prosperity.

 To cure the Indian economy, priority has to be given to the treatment of incurable Banking. To cure the Indian economy, priority has to be given to the treatment of incurable Banking.

An efficient and vibrant banking system is the backbone of the financial sector. The challenges facing the Indian banking industry could be classified under Four Cs Competition, Convergence, Consolidation and Capital Adequacy (NPAs). These Cs will be the key drivers of the banking sector in the days ahead.  

Recently, the country's biggest banking scam was unearthed, in which ABG Shipyard Company of Surat took a loan of about Rs 22,842 in a fraudulent manner. This fraud has happened with a consortium of 28 banks led by the State Bank of India (SBI).

These include big banks like ICICI, IDBI, Bank of Baroda, Bank of India and Punjab National Bank (PNB). 

Also Read: ABG Shipyard: How it plunged into debt and defrauded 28 banks of Rs 22,842 cr

The biggest problem faced by Indian banks is that of Non-Performing Assets (NPA), which is affecting both private and public sector banks alike, Non-Performing Assets (NPAs) of banks mainly are due to bad loans of banks. Most of these are white-collar crimes committed by rich and powerful people.  

Under severe stress conditions, the NPA level may rise from 7.5 per cent in 2021 to 11.2 per cent in March 2022. Corporate loans account for about 70 per cent of these bad loans, while retail loans, which include car loans, home loans and personal loans, account for only 4 per cent. 

The point is clear that if banks have to be saved from NPAs, then banks have to be very careful in giving loans to big corporates. 

Banks today including PSUs are mainly focusing on retail advances or corporates. The banking sector mostly ignores MSME advances. This trend is not healthy for the economy. MSMEs are the backbone of the Indian economy and generate employment for about 15 crore people.

This sector contributes 16% to the Indian GDP, which according to the report is to be increased to 25% by 2022.  

According to an IMF report, 35% of the total debt in India is at risk and banks have the capacity to absorb only 8% of the losses. It is completely unfair to present the formation of bad banks and the promotion of privatisation as the key to the crisis of the banking industry.  

Bad loans lead to higher NPAs over time, so banks have to exercise due diligence and caution while offering funds. The regulation and control of Chartered Accountants are very important to reduce the non-performing assets of the banks. 

Also Read: Loans to ABG Shipyard turned NPAs prior to 2014: FM Sitharaman

Banks should be cautious while lending to Indian companies which have taken huge loans abroad. There is an urgent need to tighten the internal and external audit systems of banks. 

The government needs to amend laws and give more powers to banks to recover NPAs. Junior executives are often held responsible for defaults; however, major decisions are made by a credit sanction committee consisting of senior-level executives.

Therefore, it is important to hold senior executives accountable. The fast rotation of the employees of the loan department is very important. 

Public sector banks should set up an internal rating agency for rigorous evaluation of large projects before sanctioning loans. Further, there is a need to implement an effective Management Information System (MIS) for monitoring early warning signals about business projects.  

The credit information bureau (India) Limited (CIBIL) score of the borrower should be evaluated by the bank as well as the RBI officials. the classification and responsibilities of the lending and recovery departments is also required. 

RBI lacks the supervisory capacity to conduct forensic audits and must be strengthened with human as well as technical resources. 

Financial fraud can be reduced to a great extent by the use of Artificial Intelligence to monitor financial transactions. However, the adoption of digitisation beyond a point may prove to be wrong as artificial intelligence provides quantitative information but does not take into account the qualitative aspects. 

The inputs from the branch on the background of the borrowers and other relevant ground realities, which are crucial in assessing the risks, should be given due importance.  

RBI and banks will have to play a more proactive role in prevention with more supervisory oversight on debt management. Along with this, the policymakers of the country should also consider the formation of the Banking Vigilance Commission. 

To cure the Indian economy, priority has to be given to the treatment of incurable Banking. The Indian banking sector has emerged as one of the strongest drivers of India's economic growth. 

According to a PricewaterhouseCoopers (PWC) report, India could be the third-largest banking hub in the world by 2040. To achieve the $5 trillion economy target, Indian Banking today needs a new approach to expansion and prosperity. 

{The author is Associate Professor,Atal Bihari Vajpayee School of Management & Entrepreneurship (ABVSME), Member (Innovation Council, JNU), Jawaharlal Nehru University (JNU).} 

Published on: Feb 16, 2022, 5:12 PM IST
Posted by: Manali, Feb 16, 2022, 5:09 PM IST