The Punjab and Maharashtra Cooperative Bank is the latest in a spectacular drumbeat of banking malfeasance. Alas, the heart-rending tale is a 51-year old man, whose savings of Rs.90 lakhs is trapped with the scam-ridden PMC bank, died of heart-attack after participating in a protest by the bank customers who were fighting to get back their deposits. The depositors’ money is scapegoat for the impostures of unscrupulous bank executives and fraudulent borrowers.
The multi-crore loot in the cooperative bank scam, which lent Rs 6,200 crore to real-estate developer Housing Development and Infrastructure Ltd., is a stunning 70 per cent of the bank’s loan book. While the HDIL has since filed for bankruptcy, the crisis yet again proves Indian banks are ‘sitting ducks’ when it comes to recovery of big-ticket loans. It isn’t just HDIL, we have seen Kingfisher, Winsome Diamonds, and several others. While not all Non-Performing Assets are frauds, most of the banking frauds pass through the NPA stage.
Who is responsible?
Apparently, the top management blatantly derided regulations that debar such a large exposure to a single sector, in this case, real estate, let alone to a single unit. A naked conflict of interest, the Chairman of PMC Bank, Waryam Singh, was on the board of directors of HDIL till 2015. How no one noticed? Did multiple checks and balances fail? Even after the whistle-blower report reached the RBI, the limiting withdrawals took a few days to be put in place, by which time, a few large depositors had already made massive cash withdrawals. Why the leading regulator responds only after the event? True, supervision cannot work miracles, but the central bank could have done better. These scams show how quickly trust can vanish.
While the number of bank frauds detected rose by 45 per cent in FY19 compared to FY09, the average fraud amount has increased from Rs.0.4 cr. in FY09 to Rs.10 cr. in FY 19. Over 6,800 cases of bank fraud involving an unprecedented Rs.71,500 cr. was reported in 2018-19, a narrative citing RBI said.
Are auditors clean? When fraud is discovered within a business, the initial response is “How could that have happened?” And if audited financial statements were issued, the question is, “Why didn’t the auditors have a clue?” These two posers ask whose task it is to prevent and detect fraud. Are the auditors duty-bound to unearth accounting fraud? When external auditors do not exercise due-diligence to examine the financial reports, the risk of failure to detect any ongoing fraud increases manifold. The internal audit function should include fraud risk management in its scope, instead of employing the forensic audit, which is more a post-mortem exercise.
Once fraud is detected (which itself takes about 4/5 years), banks generally desist from revealing to others unless mandated by law or if their loss need to be reported in their financial statements. Most investigations do not reach the public domain.
What is worrisome is the large ‘internal control’ gaps that are being increasingly manipulated by fraudsters. Cost-cutting exercise, leading to fewer resources monitoring controls, are perhaps feeding fraudsters to be more active than earlier. Do banks have trained staff to identify financial fraud risk areas?
Why do people, who seem doing well in the corporate world, cheat? For instance, Ramalinga Raju founded the Satyam Computers with the dream of capturing software market. However, greed got the better of him…. Instances galore, where the rich and famous played the con game.
To cheat is a sixth-sense that some find it compelling and short-cut to success. A few repent later. But when they cheat, they persuade themselves that they were absolved of their actions.
A Tamil proverb says that a man who collects honey will always be tempted to lick his fingers. Banks all the time deal with money, a temptation is, therefore, obvious. Though not all cheat, the challenge is to sift the bad from the rest.
Protect the whistle-blower
Some women employees of the PMCB reportedly played the whistle-blowing role. As credit department staff, they were aware of the “ghost” accounts through which loans were extended to at least 44 borrowers linked to HDIL. The 21,000 fictitious accounts never passed into the bank’s core system, a similar move to the PNB-Nirav Modi scam.
Most employees seem reluctant to report about irregularities, feel it is not incumbent upon them to provide tip-off, which leads to known instances of fraud remaining unreported. Employers should use open-dialogue in the workplace. Motivate whistle blowing by protecting the anonymity of the whistle-blowers, ensure fair treatment of their complaint, implement a reward mechanism and securely blow the whistle, especially where fraud involves a boss or senior colleague.
There is no single-window remedy. Rather, the pace of new threats is not going to slow down. Meanwhile, it’s the customers, investors and tax-payers who will carry the ‘cost’.
(The views expressed by the author in the article are his/her own.)