These days most of the Banks are suffering from the problems of Bad Loan around the world especially the Asian countries. As a result of globalization, any failure in banking systems in any part of the globe affects the banks in other countries too. The subprime lending in American banks had its effects in the banking sectors across the globe.
The recent trend of increasing NPAs and frauds happening in the banking sector is a serious matter which has shaken the confidence of not only of the depositors and other stakeholders but also that of the general public, in the banking institutions.
This trend needs to be curbed in order to reverse the shaking of confidence of the public in the banking systems. The reasons for loans becoming NPA is already discussed in the blog published on 16th December 2017. The reasons for frauds may be:-
- Due to staff negligence/Connivance.
- Lack of proper supervision and controls.
- Lack of experience, knowledge and adequate training of the staff.
- The absence of corporate governance from the banking systems.
Most of the frauds have happened due to the staff connivance and it appears as if these were like a consensual rape. Unless there are strict deterrents in place, the frauds will continue to happen. Any laxity in taking strict actions against the delinquent staff of all cadres overtly or covertly involved in the fraud will continue encouraging them to commit more frauds. Many big and small frauds have happened in the past, but hardly there is any action against the perpetrators, more so, in the higher cadres. Only a few small fish is caught in the net and the big ones are allowed to escape. All those who are involved in the crime need to be named, shamed and severally punished. There should be no place for the dishonest people in the financial sector as they not only spoil the sacred institutions by themselves but also induce others to follow the dirty trend.
However merely Staff is not responsible for all the deceit in the system, there are many problems with the audits and inspections in the banking system too. The staff hardly gets time to attend or go through all the voluminous audit and inspection reports and thus they are hardly of any use. Many inspections are just repetition of each other and need to be done away with. Nothing can be achieved by repeating the inspections and only effective inspections and audits should be carried out. At present, the banks go through:
- Internal inspections mostly conducted by the bank staff only.
- The concurrent audit carried out daily, snap inspections by all senior executives every month.
- Credit audit and stock audits.
- Central bank’s audit and statutory audit of select branches in every quarter.
- An audit by the teams from Auditors from Auditor General’s office.
- The yearly statutory audit by the chartered accountants deputed by the comptroller and auditor general’s office.
In spite of all these audits, financial frauds are still happening. ‘Too much of everything is bad’ is an old adage which is truer in respect of the audits of banks. Banking system can adopt following measures to make audits simple and more effective:-
(A). The concurrent audit on real-time bases should be made more effective by allotting the job to professionals and they be made accountable for any lapse that may remain in the day to day transactions. The concurrent audit is the most suitable solution because when a lapse happens and if not detected immediately may prove to be fatal afterward. Lapses such as ‘release of the loan without execution of documents’ can only be rectified on or before the date of release of the loan and not afterward.
(B). Statutory audit is the domain of comptroller and auditor general whose auditors are masters in their field and have a reputation. Unfortunately, this important task is outsourced by the CAG to the Chartered Accountants against a fee to be paid by the banks directly to the Chartered Accountants. Anybody is bound to be loyal to his paymaster and to none else. Banks can get their balance sheets structured by putting pressure on these CAs. In case if the CAG does not have enough staff to take the load of these statutory audits of banks, then at least they can pay the fee of the CAs through their office after successful completion of the audit after recovering the same from the concerned banks. CAs would then not oblige the banks, instead, they will remain true to the audit and the CAG.
(C). Recently the World Bank has advised Indian Government to give more teeth to the Reserve Bank. RBI auditors too are very professional but the audits are not properly followed and strict actions are not taken. RBI should make the Boards and the top bosses in the banks accountable for any laxity in the corporate governance of the respective banks.
(D). Too many audits and inspections consume the too much working time of the branch staff and they get fed up by repeated audits and tend to ignore the same. Some of the useless inspections may, therefore, need to be done away with.
(E). Banks are doing everything except banking. They should not enter into the domains not meant for them. They are made to go for pennies and lose pounds. Banking is the backbone of country’s economy so they must be allowed to focus only on their field of activity.
(F).Well trained, efficient and experienced staff should be posted in the audit and inspection units of the banks. Generally, those who fit nowhere in the system or don’t compromise with their bosses are posted in the inspections department. This vital organ of banking has been ignored but it needs to be strengthened. As a matter of policy, it should be made mandatory for every upcoming officer to undergo a Compliance training or certification by the bank and must be made to give at least one tenor in this department for promotion to a higher grade because one learns a lot in this department.
Banks, therefore need to lay more stress on corporate governance, make inspection wings more active, vibrant and efficient. ‘When the old cock crows the young one learns’, the senior functionaries should therefore create a self-example of honesty, dedication, and sense of belonging to the institution. Unless some harsh measures are not taken to restore public confidence, it is feared that the future of banks may remain uncertain. The Central Government, Central Bank, and Comptroller & Auditor General need to make changes in the policies for the banks for bringing transparency in their functioning.