KEY POINTS

·        Rather than attempt piecemeal fixes to individual cases, the RBI must undertake system-level interventions to improve risk management at PSBs

·        But large-value frauds cropping up across different business verticals raise concerns that the RBI’s regulatory fixes after the PNB scam do not address the root causes of bank fraud, which lie in governance and risk control lapses at PSBs.

Problem areas

·        Banks’ lending practices that fraudsters have exploited, lending decisions by bank employees at all levels from the branch-level executive to the sanctioning authority in top management ignoring obvious flaws in collateral or project contours suggest that many frauds are perpetrated with the active collusion of bank employees.

·        The  tenures and poor compensation structures of top managers at PSBs actively involves negligence. This can only be fixed through pay structures that directly link their compensation to bank asset quality.

·        Long delays between the occurrence of a fraud and its detection (the average time taken by banks to report large frauds was 55 months) point to yawning gaps in banks’ post-disbursement monitoring of funds.

·        The window-dressing and misappropriation that accompany large loan frauds cannot be perpetrated without the co-operation of statutory auditors or valuers who vet projects. It is therefore critical that they are brought to book when bank frauds surface.

Remedial measures

·        Here, whistle-blower protection laws may help bank insiders red-flag frauds at an early stage.

·        Transparent auditing by firms and its monitoring by RBI.

·        The PSBs also need to step up technology-related investments to effectively monitor end-use of their loans. Information sharing through a common credit registry, as mooted by the RBI, can help.

·        The Centre, if it is keen to ward off future bad loan build-ups at PSBs, needs to empower the RBI to effectively supervise PSBs and to allow an independent entity like the Bank Boards Bureau to fill key management positions.

PLease Review!!

Dear Sir/ma'am,

Kindly review my answer. Thank you very much.

Q.RBI needs to undertake systemic level interventions to curb the frequent banking frauds and improve risk management of Public Sector Banks. Examine. 

With respect to financial year 2017-18, there has been a 15 % increase in cases of banking frauds as per RBI report. And if perceived in terms of value than this increase is almost 74 % with respect to previous financial year. Most of these cases belong to public sector banks accounting for more than 90 % of this value. And large value frauds surfacing from various business verticals are raising concern that RBI’s regulatory fixes after PNB’s nirav modi case are not able to address the root cause of bank fraud. 

As per the report following are the major problems with banks lending areas:

• As per the report, there is big yawning timeframe from when a fraud happens to the time it is detected. On average it takes 22 weeks to detect a fraud since it happened.

•  Fault in lending decisions made by banking executives that suggests that banking frauds are perpetrated by collusion of bank executives. 

• In case of fraud detection, often employees in the lower and middle hierarchy are the ones to face heat of fraud, whereas lending authorities face little scruity for ignoring obvious flaws in collateral or project contours. 

Rather than just piecemeal intervention from case to case basis, RBI needs to focus on improved governance and risk control lapse rate at PSBs. Possible solution to address frequent banking frauds are as below:

• As per recommendations from YH mahajan committee, a setup of advisory board to look after banking frauds is necessary.

• Decision making authorities in the banking sector must be  filled through independent entity such as banking board bureau.

• Fleeting tenure and poor compensation at higher hierarchy is adding to lax oversight and negligence, This can be fixed through pay structures that directly link their compensation to bank asset quality. 

• Technology update investment in PSBs banking structure for better information sharing through common credit registry and effective monitoring of end use of loan.

Need of hour to address increasing bank frauds in case of PSBs for RBI is to develop a methodology for detection of banking fraud in limited timeframe, systematic intervention at various levels and rigorous monitoring of large loans.

Kindly review

Kindly review