|Demand of the question|
Introduction. Contextual introduction.
Body. Discuss various reasons and impact of the rise in cases of bank frauds in the last decade in India. Explain the need of bringing reforms in banking governance to prevent such frauds.
Conclusion. Way forward.
In the present-day economic system, banks play a very important role in the economic development of the country. As the banking sector is flourishing, it is getting plagued by some operational problems such as frauds etc. The Financial Stability Report of the Reserve Bank of India (RBI) shows that the Indian banking system reported about 6,500 instances of fraud involving over ₹30,000 crore in 2017-18. These frauds need immediate attention.
Various reason behind these frauds:
- Poor banking governance: Most frauds show that banks did not observe due diligence, both before and after disbursing loans. Poor level of checks and balances in the banking system is one of the reasons.
- Poor monitoring: Lack of technology and fraud monitoring agencies to detect frauds makes the problem more complex. There is an absence of an effective mechanism to monitor the credit flow. Flawed risk-mitigation design, which creates an excessive focus on credit or market risks, but focuses less on operational risks also leading to more breaches.
- Technological backwardness: Excessive dependence on manual supervision, at both external and internal levels makes it impossible to manually control and supervise the sheer volume of transactions.
- Immoral behaviour: The disintegrating moral fibre of Indian businessmen, bankers and other white-collar professionals, nepotism in internal committees of banks, unnecessary political interventions lead to increased frauds.
- Political interference: The political pulls and pressures on investigating agencies, and long-drawn processes of the legal system act less as a deterrent.
Impact of such frauds:
- Credibility: This unhealthy development of rising fraudulent activities afflicting the banking sector impinges their credibility adversely.
- Rise in Non-performing Assets: Frauds add to Non-performing Assets and lead to loss of banks and economy. The Gross NPAs to Gross Advances Ratio has shown a rising trend over the years
- Financial dilemmas: Frauds and fraudulent activities wreak severe financial dilemmas on banks and their clients, as well as cause a significant reduction in the quantum of money accessible for economic development.
- Reduce profitability: Frauds have a significant impact on profitability of the Indian banking sector. Profitability of banks is on a steady decline which needs to be an eye opener as it poses a threat to the economy.
Need of governance reforms and other measures:
- Checks and balance: Banking governance needs an overhaul with proper checks and balance in places. Indian banks need significant improvements in operation and governance standards to work in an effective manner, by constantly working on the loopholes so that the banking sector can contribute more to the growth of the economy.
- Accountability: Accountability needs to be established among the bank managers and other administrators.
- Risk assessment measures: While it may not probable for banks to conduct their operations in a zero fraud milieu, proactive measures, such as conduct of risk assessment of policies and procedures can aid banks to circumvent their risk of contingent losses resulting from frauds.
- Data analysis: The data analysis technology can be leveraged by banks to detect frauds at the incipient stage itself and reduce their loss causing impact significantly.
- Improving capabilities: Apart from improving capabilities in the banking system, accountability of third-party service providers such as auditors and lawyers should also be fixed.
- Prior assessment: Assessment of working capital limit should be done before the flow of credit.
- Awareness: Awareness should be created about loopholes, consequences of bypassing procedural aspects and benchmarks should be provided for evaluating genuineness of various essential documents.
- Internal control: The Banks should pay the required attention to the area of internal control system and the fraud prevention measures to ensure compliance of instructions issued by them from time to time.
It is evident that post liberalization era has showered new colours of growth upon the Indian banking sector but simultaneously it has also posed some serious challenges. One of them being rise in frauds and NPAs. Thus proper measures should be taken beforehand to stop such frauds in future and prevent crisis in banks.