Context:
- RBI data shows that public sector banks (PSBs) reported 8,670 cases of “loan fraud” involving Rs61,260 crore over the last five financial years up to March 2017
- The amount will go up significantly once the recent frauds like Nirav Modi Fraud are added
- Government has asked PSBs to inspect all bad loan accounts above Rs50 crore
- It has also given them 15 days to address technological and operational risks
- It has also directed PSBs to rationalize overseas operations and proposed a new law against fugitive economic offenders
- This will give the government the power to confiscate the assets of a fugitive offender, both in India and abroad
- It has also decided to set up a regulatory body for auditors
- The RBI too has formed an expert committee to look into rising instances of fraud
Three broad issues in this fight against bank frauds
- Government should avoid over-regulating or overburdening the banking system.
- Inspecting all bad loan accounts in excess of Rs50 crore, for instance, could result in excessive fear among bankers(as at some point investigative agencies will also get involved).This could affect the flow of credit in the economy
- Action by investigative agencies in some of the cases related to non-performing accounts in recent years is said to have affected bank lending
- Therefore, it is important that bankers are protected adequately and are able to take commercial decisions
- Laws by themselves don’t act as a deterrent(Indian Experience)
- The government will need to build investigatory and judicial capabilities so that cases are decided in a reasonable time frame
- Only time-bound closure of cases will deter fraudsters
- India will also need to build institutional capabilities to be able to negotiate with foreign authorities in order to bring back fugitives and prosecute them under Indian laws
- PSBs need urgent governance reforms
- The fraud is the consequence of a complete collapse of governance
- Governance in PSBs needs an overhaul and government interference in appointments should be minimized
- In this context, the P.J. Nayak committee (2014) rightly noted: “Government officers and regulators may not possess the skills to appoint the top management of commercial banks”
- Therefore, the government needs to revisit the way appointments are made in PSBs, starting with the board