Fraud prone Indian Banking & RBI: Recent Steps to strengthen Banking.

Banking & Investment

After recent scam of 12646 crores in PNB done through fraudulent issuance of letter of undertaking (LOU) , RBI have to take necessary steps to prevent such fraud in future.

Market share of public sector bank is 70%, But after scam of 12646 crores in PNB the shares of public sector banks have lost their shine and huge fall in price is noticed. Due to such fall in share price, the market cap of 22 public sector bank taking together become less than the market cap of HDFC alone.

On February 28, the combined market capitalisation of public sector lenders fell to Rs 4.29 lakh crore from Rs 5.06 lakh crore on January 31, 2018. Private major HDFC Bank alone commanded a market cap of Rs 4.88 lakh crore as of February 28, 2017, after hitting Rs 5.20 lakh crore on January 31, 2018.

Indian banks are continuously facing fraud cases. Prevention of fraud is the biggest challenge for Indian banking system. Public sector banks have reported 8622 fraud cases during last three FY 14-15 to 16-17 (highest 2466 fraud cases by SBI). On the other hand private sector banks have reported 4156 fraud cases during last three financial year.

Following are the major steps taken to prevent & early detection of frauds in banking system:-

  • RBI sets April 30 deadline for banks to link CBS with SWIFT in the view to avoid hidden transaction without entering in CBS.
  • Cabinet approved Fugitive Economic Offenders Bill which targets big defaulters involved in economic crime of over Rs. 100 crores. This bill has been brought for confiscation of properties of such fugitives. There will also be the provision to confiscate those assets outside India but co-operation of that country will be needed.
  • On 1st March 2018, The Cabinet approved setting up of the National Financial Reporting Authority (NFRA), which will be an independent regulator for the auditing profession for listed and large companies.
  • As per directions of the Finance ministry, PSU banks are required to collect passport detail of all borrowers who have taken loans above Rs. 50 crore within 45 days. Such directions are issued with the intention to prevent the alleged fraudsters like Nirav Modi, Mehul choksi, Vijay Mallya and Jatin Mehta from fleeing the country. Further passport details are made mandatory for giving loan above rupees 50 crore.
  • RBI has initiated special audit of trade finance activities of all public sector banks. RBI has asked all the public sector banks to submit the details relating to letter of undertaking (LOU) written by  them including amount outstanding & margin kept. Most of the big banking frauds pertains to trade Finance, which includes LOU, LC, CC limits. Hence RBI has initiated special audit of trade finance activities.
  • RBI  constituted an Expert Committee to look into the reasons for high divergence observed in asset classification and provisioning by banks.
  • On 23rd February 2018, Reserve Bank of India launched the Ombudsman Scheme for NBFC.
  • On 12th Feb 2018, RBI issued a revised framework for the resolution of stressed assets providing for early identification & reporting of SMA (special mention accounts) and Timelines for referral under IBC (Insolvency and Bankruptcy code)2016.

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