*The Crisis faced by the Banking Sector*
By: Dr. K. Cherian Varghese
Published:17 Feb 2018, 02:07 pm
Two weeks ago, I asked the Branch Manager of leading private sector bank whether I can get a locker big enough to keep documents like title deeds. The Manager immediately asked an officer to open the safe room and check the availability. The officer after verification answered in the affirmative.
I asked the Manager why the stipulation from time to time that the safe room should be opened only jointly by the Branch Manager and another authorised person was not complied with. The Manager was embarrassed and replied that he had handed over his keys to the officer taking into account the need for quick service. How lightly safety requirements are handled by some banks!
The “four eyes principle” in banks stipulate that two authorised officials are required to put through any transaction. It is heard that in several banks the private computer password given to one official is being passed on unauthorizedly to another. When safety stipulations are not complied with, opportunities are being created for facilitating frauds.
There is an inspection machinery in banks to ensure that no mistakes happen even when the two authorised officials comply with the safety stipulations. There is also concurrent audit at major branches of banks. Apart from all these there is an annual statutory audit of banks. There is also the stipulation to rotate officers at frequent intervals so that no irregularities are continued.
It needs to be examined whether laxity with which responsibilities were handled at different levels had facilitated the fraud of Rs.11,300 crore in Punjab National Bank, the second largest bank in the public sector in India.
4.1. People are anxious to know the type of transaction in which a fraud of this magnitude has happened. There is a system of giving buyer’s credit in banks for those who import goods. As per media reports the following transactions had taken place in PNB.
A branch of PNB in Mumbai had issued Letters of Undertaking (LoU)/ Letters of Comfort to other banks guaranteeing repayment of the buyer’s credit granted by them to the alleged culprits, Nirav Modi and connected institutions. On the guarantee of these LoUs bank branches abroad discounted bills showing sale of diamonds and credited the proceeds to the nostro account of PNG maintained in foreign currency. This money was given by PNB to the alleged fraudsters as buyer’s credit. The stipulation was that money should be repaid to PNB on the due date prescribed. When money was thus received PNB remitted it to the bank branches abroad which discounted the bills. The official of PNB who had been handling transactions in this manner for about seven years retired recently. The new official who replaced him in January,2018 asked the alleged fraudsters to provide securities for issuance of LoUs. When they refused the chain of uninterrupted transactions was broken.
On verification it has come be known that no permission had been obtained from sanctioning authorities to issue LoUs and they were not accounted for in PNB’s records.
6.1. In this context several questions need to be answered. When the LoUs were advised by the PNB branch through the SWIFT messaging system to the bank branches abroad was the stipulation that two officials jointly only can put through the transactions complied with? Why the SWIFT messages were not integrated with PNB’s core banking system? Were the stocks of diamonds stated to have been imported verified and were they in tune with the borrowers’ sales. Why officials had not been rotated periodically as per rules? When the amounts remitted by overseas bank branches after discounting bills into the nostro accounts of PNB were reconciled why the unaccounted LoUs which facilitated the transactions not detected? Did no whistle blower official alert the bank?
6.2. Why the fraud could not be detected in the concurrent audit? Did not the Inspection of machinery also raise any suspicion?
6.3. Could any indication have been obtained through the statutory audit? Could not the overseas bank branches have obtained confirmation for the LoUs from PNB’s higher authorities? How there was wholesale failure of all mechanisms to detect frauds? Are such massive frauds to be detected just by chance? What should be done to avert the lapses?
7.1. Instead of blaming one another efforts have to made for resolution of the issue. Very fast action has to be initiated against those who committed the fraud. There are media reports that efforts in this direction have started. It is reported that Reserve Bank has instructed that PNB should pay as per LoUs to all overseas bank branches. Therefore, the issue may get restricted to PNB.
7.2. It has to be reviewed whether existing stipulations on safety are being complied with in all banks before issuance new instructions running into several pages.
8.1. Trust in banks is to be safeguarded to protect our national interests. Coloured news which may cause apprehensions should not be allowed to spread. Some people are eager to use the fraud as a stick to beat the public sector. The attitude of kicking a person who has fallen should not be allowed to destroy the morale of honest officers in PNB as well as other banks. Unless banks disburse loans in a prudent manner the economy will become stagnant; employment opportunities will not be created.
8.2. We should not forget that the global financial crisis of 2008 was created by large private sector banks abroad.
8.3. The insurance cover for deposits is Rs.1 lakh only in all banks in India, including public sector banks. Notwithstanding this, based on the experience so far it is comforting to note that that the public sector has the backing of the Central Government. PNB has assets to the tune of Rs.7 lakh crore indicating its inner strength.
8.4. The Central Government had recently announced a package of Rs.2.11 lakh crore for recapitalisation of public sector banks.
8.5. Let us hope that at this juncture, the Central Government may defer the Financial Resolution and Deposit Insurance Bill,2017 which envisages bail-in provisions to rehabilitate failing banks by using the depositors’ money.
8.6. Let the provisions of the Bill which carry the message that taxpayers’ money cannot be used time and again to meet the lapses on the part of banks, become instrumental in correcting the lax approach in the banking sector. After the introduction of Goods and Services Tax even ordinary people have become tax payers.
8.7. We should become capable of selecting banks with discernment. This will make the banks and their staff to become more responsible. Let us hope that the officials will carefully observe safety stipulations tvo protect the interest of depositors and make efforts with prudence and promptitude to ensure timely availability of loans. For this, there is no need for a differentiation between banks in the public sector and private sector; all should have their place in the performing sector.
Writer is Former Chairman BIFR, Union Bank of India, Corporation Bank and South Indian Bank.
FOLLOWING is also worth reading which exhibits sympathy for demoralised staff of PNB
Reproduced as received but worth reflecting
On account of PNB fraud media, customers, politicians, general public and sometimes even ministry officials talk very casually and indulge in lose talk about PSU banks functioning.
Agreed that there are a few dishonest staff (less than 0.01%) which have brought a bad name to the PSU banks. But this cannot be allowed to undermine the silent hardworking and honestly performing 99.99% staff who give their 100% efforts for the improvement of the PSU banking system.
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.
They freed the poor villagers from the clutches of the centuries of oppresive financial wickedness of local sahukaars and mahajans.
They brought within the reach of common man so many luxuries and comforts of life in those days when financial institutions used to lend only to the rich and wealthy.
Crores of enterprenuers were developed in the nooks and corner of India due to timely and adequate finance and trust of the psu banks.
PSU banks are responsible to a great extent for the rapid industrialisation of our country as well as massive agri revolution.
Poor and needy sections of the society were serviced and continue to be serviced even today mainly by the PSU banks.
Middle class enjoys luxuries like hifi car, big house, lavish furniture etc due to liberal and affordable loans given by psu banks.
Had PSU banks not been there today, none of these foreign and private sector banks would have even looked at the poor, lower and middle class sections of society which accounts for nearly 98% of society.
The efforts of these 99.99% unsung heros cannot be simply swayed away by lose talk and baseless arguments.
Late sitting, sacrificing personal life and family time is UNHEARD of in any other sector .
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