Hyderabad: In the midst of critical challenges, the rise in bank frauds, collapse of big non-banks, cooperative banks and their collective collateral damage had wider implications on the performance of banks, more importantly, the Public Sector Banks (PSBs).
The genesis of rise in bank frauds can be traced to the lending profligacy notably observed during the period 2007-2012 when the economy was shining with an average growth of 8 per cent during 11th five year plan.
The bank credit growth recorded a hefty rise, sometimes even breaching 25 per cent mark. Such irrational exuberance of PSBs in lending led to liberal borrowing by corporate sector, more than what their business could absorb. The overleveraged borrowers went into diversification, many times into unconnected lines of business.
When large borrowers could not sustain profitability, they began to default. Some of the PSBs had to restructure loans using facility of forbearance window of RBI to rollover credit postponing classification of loans into bad and doubtful.
It led to evergreening of loans and divergence of asset quality data that did not reconcile with central bank data. The forbearance facilitating restructuring of bank loans was ended by RBI from April 1, 2015.
1. Increasing bank frauds:
Availability of loans on liberal terms led to diversion of loan funds to purposes other than for which it was granted. In the midst of increased load of bulging credit portfolio, there could be slackness in monitoring of end use of funds, many times allowing unscrupulous borrowers to diversify loan funds, may sometimes even committing frauds.
In the euphoria of economy doing well, the practice of liberal lending by PSBs also provided mischievous miscreants to dupe banks increasing incidence of frauds.
Liberal lending to catch up big business levels that contaminated asset quality leading to surge in bank frauds. It had exacerbated the regulatory concerns and RBI therefore imposed an enhanced scrutiny of bank loans by imposing asset quality review (AQR), a systemic control to bring greater transparency in asset quality.
According to the financial stability report (FSR) of RBI (December 2019), the number of frauds in banks have been going up steeply. During the last five years, the number of frauds reached 4412 cases, involving an amount of Rs. 1,13, 374 crores of which 90.6 percent were related to lending and credit operations.
A systemic and comprehensive check of legacy stock of bad loans of PSBs during H1: 2019-20 have unearthed frauds perpetrated over a number of years and this has reflected in an increased in number of reported incidents of frauds. In the last 11 years the total losses on account of bank frauds worked out to a whopping ₹2.05 trillion. Out of the incidents of frauds, over 90 percent have occurred in PSBs that too are credit related.
2. Implications of rising frauds:
The track record of bank frauds can highlight the magnitude of its collateral damage creating phobia against credit decisions in the minds of PSB functionaries.
The top management of PSBs, many times suffer from fear of prolonged enquiries and prosecution even for bona fide credit decisions and by default, getting entangled in the consequences of frauds due to their functional position in the chain of events.
Moreover, since 90 percent of frauds in banks are associated with credit sanctions, the key management people form part of the decision process have to suffer even if they take bona fide decisions.
When such loans become bad due to subsequent developments, if it turns out to be a fraud, the nagging pain of protracted investigation and constant fear of partially losing/delay in receiving life time terminal benefits haunts the decision makers.
It thus creates a fear psychosis against taking credit decisions more importantly after number of credit related frauds increased.
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Thus the tendency of large number of loan related frauds has created a phobia against taking credit decisions due to fear and apprehensions. Though this is not a new phenomenon, it has increased more after the balance sheet clean up exercise was taken up by RBI using AQR.
This has brought sanction of fresh large loans to almost a stand still recording credit growth below the lending rates, effectively reaching a stage of de-growth.
Digital banking frauds are also on rise due to slack systemic controls and gaps in cyber security. Hence, RBI has made it mandatory for banks to engage a separate internal ombudsman to deal with customer grievances on digital operations and to enhance cyber security measures to protect against digital frauds.
In addition to the amount of loss to the banking system, the collateral damage that frauds have caused to the interconnected business units is phenomenal. Whenever a business unit turns fraudulent, the entire supply chain related to it looses business potentiality and suffers loss.
It can impact unorganized daily wage employment that hits micro economy below the belt hurting vulnerable sections of the society. So, increase in bank frauds has far reaching implications that touches every chord of the economy.
3. Reinstating lending appetite:
Even the best written regulations, robust systemic controls, transparency and disclosure standards are unable to detect the connivance and nexus between disgruntled elements in the financial system and fraudsters.
The reason is obviously the flawed implementation of laid down laws, regulations, rules, procedures in letter and spirit that often escapes the regulatory scrutiny fomenting the rot.
It exposes the inadequacy in capturing and preventing frauds to protect the banking system. With the passage of time, while asset quality woes are tackled with enactment of Insolvency and Bankruptcy Code – 2016 and formation of Insolvency and Bankruptcy Board of India (IBBI) but nothing concrete is done to assuage genuine unspoken sufferings of functionaries of PSBs against looming threat of loan decisions going awry.
Post AQR, the fear is about the next generation employees, a more career conscious potential leaders turning averse to granting loans loans.
4. An apt move:
Taking cognizance of how the increasing incidence of bank frauds have maligned the moral standards of employees taking credit decisions in PSBs, the government had felt the need to build a credit decision friendly ecosystem essential to revive credit appetite.
Suitable remedy of assuring decision makers in PSBs against the investigations is now mooted. Finance ministry has recently asserted that no case around a bank employee’s culpability can go to CBI witout clearance from an internal committee to be formed by banks.
Henceforth, there will be no ‘suomoto’ case against against a bank unless the bank files a case and seeks investigation on its own. It is seminal change that can bring some respite to the sufferings of PSBs.
But their internal controls and techniques to curb frauds have to improve to reinstate appetite to lend so as to revive the sagging economy. It is an apt initiative to placate the adversities of bank frauds.
(Article by Dr. K. Srinivasa Rao. He is an Adjunct Professor, Institute of Insurance and Risk Management – IIRM, Hyderabad. Views expressed above are his own.)
