Credibility of Indian Banks

The fact that though the genesis of the PNB fraud dates back to 2011, it surfaced only after a long span of eight years, is a strong indicator of the ineffectiveness of the plethora of surveillance and due diligence mechanisms prevalent in the bank. During this period, the bank was subjected to several audits including those conducted by external agencies, statutory auditors, bank’s in-house inspection officials and RBI. Further, the accredited rating agency CRISL had allotted AAA and AA ratings on PNB’s debt instruments. All these processes are supposed to or meant to objectively assess the financial health of a bank and are very costly exercises. Still they did not serve the purpose for which they are instituted. All these things cast serious suspicions in the minds of people. When a scam of such a magnitude remains under the carpet for such a long time, it takes a heavy toll on the bank. Massive loan write-offs and provisioning for NPAs have compounded the situation.

The PNB scam has dragged a few other banks also into its whirlpool. The terms ’system failure’ and ‘software deficiency’ are used only as a veil to cover the facts and human negligence and connivance. The greed of all those who are involved in the fiasco motivated them to siphon off public funds, as can be seen from the admission of the booked bank officials that they have accepted bribes to flout rules. The blame has to be put not on the systems or on the software but squarely on the people. It is rightly said that the main ingredient in operational risk is the human risk, which also includes connivance of staff in perpetrating frauds.

The facts behind the PNB scam so far unearthed also indicate that scams of different magnitudes could have occurred in more banks as things stand. If every scam has a ‘gestation period’ like the PNB scam, the banking industry will have to pay a heavy price before long.

It is only in the interests of the country, the economy and the people that all banks are subjected to a rigorous, high level, exhaustive special audit / inspection covering a fairly long period, conducted jointly by RBI and strong audit houses. The modus operandi of the PNB scam could facilitate framing of rigorous guidelines and checklists for such an audit/inspection. This is imperative for reinforcing the credibility of Indian banks. The banking industry should be safeguarded at all costs.