Tuesday, April 23, 2024
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Need to restore depositors’ faith in banking system

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The two huge big frauds of Rs 11,500 crores at Punjab National Bank and the different scam of Rs 3,695 crores willful loan default clearly shows that occupational fraud can result in huge financial loss, legal costs, and ruined reputations that can ultimately lead to the downfall of an organisation. The Reserve Bank of India has rightly pointed out failure of internal control as of the main reason behind the Rs 11,500 crores fraud that rocked state-run lender Punjab National Bank. In India, loan frauds typically refer to cases where the borrower intentionally tries to deceive the lending bank and does not repay the loan. It also reveals the fact that the problem of non-performing assets in banking industry is not enough, but few bank officials are also indulging in malpractices that further deteriorates India’s financial condition.

The bank people in India are always respected. But lately, a few Bank people have brought a bad name to the entire banking system in India with their corrupt practices. The intention of corruption of the bank men involved in corrupt practices is simple — they get money from those customers that get undue services from the bank.

The fraud in PNB is a case of operational risk arising on account of delinquent behaviour by one or more employees of the bank and failure of internal controls. A thorough investigation of such cases in nationalised banks may reveal the reasons for non-performing assets that threaten the very existence of these banks. The banking system as a whole has been witnessing higher level of non-performing assets (NPA). With restructured loans turning bad, the problems of the industry have only compounded. To make matters worse, banks are unable to recover money from these individuals who are fleeing to other countries.

It only means that we need to think in terms of additional layers of security and control. We need to break risk down to an actionable item that people understand.

Rather than routinely reiterate the importance of strengthening corporate governance in public sector banks and promising to infuse greater professionalism, transparency and accountability, it is time the Centre, the major shareholder in these institutions, takes serious steps to translate this intent into action. To restore the depositor’s faith in the banking system, the government, the RBI and the judiciary must ensure that prompt and salutary action is taken. The PNB fraud must be speedily investigated to restore faith in the banking system.

The government should step in such a situation to help the banks. It should explain to the satisfaction of the public what went wrong and what preventive measures are taken to avoid such lapses in future. We also need on urgent basis anti-fraud mechanisms to counter trade-based laundering and transactions, a major area of concern in the public sector banks.

The rise in high NPAs in Banks is due to some infrastructure projects, slowdown in global economic recovery, and continuing uncertainty in global markets leading to lower growth of credit. Public sector banks continue to be under stress on account of their past lending. It is nice that India’s central bank set up a panel to study and recommend ways to prevent the increasing incidents of frauds in the banking system after the nation’s second-largest state lender alleged that a diamond merchant had fraudulently dealt in obtaining in loans. Corruption fell in the middle and made up less than one-third of cases. Corruption schemes happen when employees use their influence in business transactions for their own benefit while violating their duty to the employer.

Very often and unfortunately, it’s the employee you least expect that commits the crime. It is imperative to know your employees and engage them in conversation. Those who are willing to commit fraud do not discriminate. We must remember that the cost of trying to prevent fraud is less expensive to a business than the cost of the fraud that gets committed.

(The views expressed by the author in the article are his/her own.)

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  1. Right now go any PNB branch and you will notice the staff is totally demoralised and feeling ashamed to face people as if they have committed the fraud. I do not deny the fact that PSU banking system is going through a rough patch and very bad time due to several reasons many of which are due to external reasons beyond control of the bank. But people critising the PSU banks cooly forget the heroic efforts taken by 99% of staff which is loyal and honest. PSU banks are the lifeline of Indian economy.

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