How to prevent banks from failing? Analysts suggest scrutiny & revamp of audit process

NEW DELHI: Rs 4,335 crore Punjab and Maharashtra Cooperative (PMC) Bank fraud case has caused lots of aches and pains to the general public. This has raised questions on banking structures prevalent in the country.

In a detailed affidavit filed before the Bombay High Court last year, the Reserve Bank of India (RBI) had virtually admitted that it was ‘fooled’ by the management of the scam-hit Punjab & Maharashtra Cooperative (PMC) Bank.

The affidavit, filed by Rajlaxmi Sethi, Assistant General Manager, Department of Co-operative Bank Supervision, RBI, states that PMC Bank had submitted fraudulently manipulated data to the central bank for sample checks, but “the sample of accounts picked for inspection did not contain undisclosed HDIL accounts.”

While the HDIL accounts shown by PMC Bank were seen by the RBI inspection team, a majority of them were declared as non-performing assets.

It added that the PMC Bank had also sanctioned mortgage limits to a wholly-owned subsidiary of the HDIL when the bank’s Chairman, the now arrested S. Waryam Singh, was also a director of the company — a clear conflict of interests and violation of the RBI’s Master Circulars to the effect of July 2010 and July 2012.

This brings people to a bigger question. How does one prevent banks from failing?

A revamp of the audit process carried out by RBI and internal auditors of banks can address the situation, K. Yatish Rajawat wrote in an editorial for The Sentinel. "These audits failed to detect multiple accounts, over 20,000 accounts with the same address and ownership. This shows a systemic failure. Auditors need to use technology and simple programming languages like Python to sort through large databases to identify risks, especially concentric risks. It also shows that core banking solutions (CBS) a software platform mandated by RBI is prone to manipulations.," he wrote.

He further added, "There is a culture of hiding risks associated with a borrower at several points in the process of credit approval and disbursement. This has become part of the credit system. If a borrower cannot pay interest on loans, they do not disclose his situation and position as it shows the branch, the branch manager and the credit team in a bad light. The managers see it as a personal failure. The bank also takes strict action against staff responsible for approving such a loan."

Also Read: Credit Culture Needs To Change

Also Watch: Candles Lit to express grief over the death of the Two Children in Beltola Fire.