the-scam-faultline-is-damaging-indian-banks

Why in the news?

The biggest banking fraud in India has come to the fore, DHFL has fooled a consortium of banks conducted by the Union Bank of India to the theme of ₹35,000 crores through monetary misrepresentation.

How do scams affect the economy?

  • The banking system of any nation is the spine of its economy.
  • Extreme failures in banks affect every person in the country because the payments deposited in banks belong to the citizens of the country.
  • The NPAs that banks become liable for are mainly due to bad loans and scams.
  • The data by the RBI also indicate that one of the real problems in the way the evolution of banking in India is an account for rising bank scams and the costs accordingly forced on the framework.
  • Strangely, as in a Global Banking Fraud survey (KPMG), the issue is not just for India alone; it is a global issue.

Reasons for scams

  • Scams in the banking industry can be grouped under four classifications: ‘Management’, ‘Outsider’, ‘Insider’ and ‘Insider and Outsider’ (jointly).
  • Operational failures: All cons, whether interior or outside, are the results of functional failures.
  • Limited asset monitoring: Research by Deloitte has revealed that restricted asset monitoring after disbursement (38%) was the major reason for stressed assets and inadequate due persistence before disbursement (21%) was among the primary elements for these NPAs.
  • Poor bank corporate governance: A analysis by the Indian Institute of Management Bangalore has exhibited that poor bank corporate management is the reason behind increasing bank scams and NPAs.

The problems of high NPA

  • In a Financial Stability Report released by the RBI in December 2021, there is a point of the gross NPAs of banks rising from 6.9% in September 2021 to 8.1% of total investments by September 2022 (under a baseline scenario) and to 9.5% under an extreme stress system.
  • An increased NPA also lowers the net interest margin of banks besides improving their operational cost; these banks fulfil this cost by increasing the comfort fee from their small customers on a day-to-day basis.

Suggestions

  • Banks have to exercise due diligence and caution while offering funds.
  • Regulation and control of CAs: The regulation and the control of chartered accountants is a very important step to reduce the non-performing assets of banks.
  • Banks should be careful while loaning to Indian firms that have taken massive loans in foreign.
  • Regulating audit system: There is also a critical need to control and keep a check on the internal and external audit systems of banks.
  • Fast rotation of employees: The fast rotation of employees in a bank’s loan branch is very crucial.
  • Public sector banks should place up an inner rating agency for strict valuation of extensive projects before approving loans.
  • Effective MIS: Further, there is a requirement to execute an adequate Management Information System (MIS) to observe early alarm signals about business projects.
  • CIBIL score of the borrower: The CIBIL score of the borrower (formerly the Credit Information Bureau (India) Limited) should be assessed by the bank involved and RBI officials.
  • Use of AI: Financial hoaxes can be lowered to a great degree by the use of artificial intelligence (AI) to scrutinise financial transactions.
  • Improve loan recovery process: Instead of having to constantly write off the bad loans of immense corporates, India has to enhance its loan recovery procedures and launch an early warning system in the post-disbursement phase.
  • Risk assessment: Banks need to carry out inauthentic risk assessments quarterly.
  • Only the building of National Asset Reconstruction Company Ltd. (NARCL) or the ‘bad bank’ is not a genuine solution.

Conclusion

  • While the Government of India and the RBI have taken several measures to attempt and resolve the issue of scams in the banking sector, the reality is that there is still a prolonged path to go.