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Strengthen Banks’ Internal Control Mechanism

The Indian Banks’ Association (IBA), a representative body of bank managements, has lamented the “spate of chargesheets and arrests” of bankers by investigative agencies, accusing them of “high-handedness” in alleged bank fraud cases. “To slap a criminal case against bankers for sanctioning loans is silly,” said V G Kannan, IBA CEO. Kannan should know better than anyone that investigative agencies are not going after bankers for sanctioning loans. Where would there be any ground for an investigative agency to arrest and prosecute a top bank manager if it was a simple case of sanctioning loans and recovering interest? Investigative agencies are not investigating loan cases but fraud cases. There were bank frauds even before liberalization of the economy in 1991. However, post-liberalization, the number of bank frauds has phenomenally increased. The frauds are causing major losses to the banks. The figures of non-performing assets (NPAs) have been rising, adversely impacting the profitability of the banks. The Indian Banks’ Association might try to explain the rising NPAs in terms of global slowdown and the consequent slowdown in the Indian economy. However, not all of NPAs can be explained in those simple economic terms. There is strong evidence of relationship between NPAs and rising number of frauds.

The frauds are threatening to erode people’s trust in banks. They are raising a question mark over the stability of country’s banking system in the eyes of citizens and foreign investors. A stable and strong banking system supports increasing production and consumption of goods and services. Thus a robust banking system is an indicator of the well-being and living standards of people. The Indian Banks’ Association should be concerned about the loss of credibility of bankers and erosion of the faith in the stability of the banking system, rather than defending the rogues and robbers in their ranks.

The frauds have set alarm bells ringing in the Reserve Bank of India, government of India and stock markets. On Wednesday, the Economic Offences Wing (EOW) of the Pune police arrested CEO Ravindra Marathe, former managing director Sushil Muhnot, executive director Rajendra Gupta and two other officials of Bank of Maharashtra for allegedly colluding with a real estate developer to “divert money and cheat shareholders.” Former IDBI chairman Yogesh Agarwal and four other executives were arrested in a case linked to Vijay Mallya’s loan default. Former CEO Usha Ananthasubramanian and other managers of Punjab National Bank have been arrested in connection with the Nirav Modi scam.  Former Canara Bank chairman R K Dubey and former United Bank of India chairman Archana Bhargava are also facing investigation into fraud cases. ICICI Bank CEO Chanda Kochhar faces charges of favouritism and impropriety and has been forced by the bank board to proceed on long leave to facilitate an independent investigation. The top managers of some other banks also face charges of being party to fraud and causing loss to their banks.

The Nirav Modi credit scam is a tell-tale case of involvement of managers of Punjab National Bank at various levels. The managing of Modi’s SWIFT (Society of Worldwide Interbank Financial Telecommunication) account, through which money was given to him by PNB through international bank transfers, was not one officer’s responsibility. The process is that SWIFT messages for international bank money transfers are authenticated by two managers, one called the ‘initiator,’ the other ‘confirming officer.’ These two must satisfy themselves that the transactions underlying the messages are genuine and carry the necessary authority. They have to check and crosscheck the contents of every SWIFT message such as dates, amounts and names with the original vouchers or notes. Following their checks, a credit officer authorises messages relating to letters of credit or undertaking. Then it goes for verification by a branch auditor. There are other checks as well. In the Nirav Modi case, there were queries made and questions raised at some levels but they were ignored. How could queries and objections pass and communications be blocked at various levels of control in PNB management when Modi was drawing huge amounts of money? At least someone in the top management would have smelt something was wrong. As no one in PNB did, prima facie it could be seen as nothing but massive management collusion.

Of course, investigative agencies may pin down the culprits in one or the other bank fraud, but they cannot set the banking system on a stronger footing. For the banking system to be on stronger footing the RBI has to rewrite banking rules and carry out regular and closer monitoring. The boards of bank managements have to strengthen their internal control mechanisms.

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