Alea Consulting has come up with a risk review report on Indian Banking Sector. The Indian banking system emerged safe out of the credit crisis of 2008-09, however, the relief was short-lived as Indian banks are swamped by two major challenges - bank frauds and NPA crises leading to stressed balance-sheets at these banks. The Nirav Modi - Punjab National Bank (PNB) scam (US$2 billion) is deemed to be the biggest banking fraud in the history of India and more such are getting exposed.
Gross NPAs of public sector banks (PSBs) and private sector banks as on September 30, 2017 stood at Rs. 7.34 trillion and Rs. 1.03 trillion, respectively, according to RBI data. Among the top 20 banks (counting GNPAs in absolute terms), 18 are PSBs and 2 are private sector banks. Leading corporate houses and companies accounted for approximately 77% of the total GNPAs from domestic operations for the banks.
GNPAs of Indian banks, after staying below Rs. 1 trillion mark between FY06 and FY11, began to rise from FY12 (Rs. 1.4 trillion in March 2012, to almost six times over the next 5 years.) While PSBs’ GNPA ratio stood at 12.95%, the private sector reported 4.05% of their loans as bad debts and for foreign banks, the GNPA ratio was at 3.96%.
PSBs have reported 8,670 “loan fraud” cases totalling Rs. 612.6 billion (US$9.58 billion) over the last 5 financial years up to March 31, 2017.
Strengthening the Legal Framework
The Banking Regulation (Amendment) Ordinance, 2017 empowers the RBI to issue directions to banking entities to initiate an insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code (IBC).
RBI has put 11 banks under its Prompt Corrective Action (PCA), which restrict the bank’s lending activities. It has 5 more PSBs under the radar to place under PCA.
In 2015, the government had announced a revamp plan Indradhanush to infuse Rs. 700 billion in PSBs over four years, towards meeting their capital requirements in line with global risk norms ‘Basel III.’ Indradhanush is a 7-pronged plan to address the challenges faced by PSBs - Appointments, Banks Board Bureau, Capitalisation, De-stressing, Empowerment, Framework of accountability and Governance reforms. Many of the measures taken were suggested by PJ Nayak Committee on Banking Sector Reforms (2014). In January 2018, the government announced that it would infuse Rs. 880 billion of capital in 20 PSBs in the current fiscal while proposing reforms package to make them more accountable.
In January 2018 it was reported that the Government is considering hiking FDI cap in the banking sector from 74% to 100%, and increasing the permissible limit for FDI in PSBs to 49% (from 20%).
In 2016 Banks Board Bureau was formed to improve governance and quality of human resources in PSBs. Its function is to recommend candidates that will be heads of PSBs (even from the private sector, if need be) and aid them in formulating strategies to raise additional capital. It has also made suggestions like setting up of nomination and remuneration committees in banks, and refresher trainings to have back-up officers.
Strong internal control systems through integration of technology (real-time flow monitoring applications), effective internal audit including consistent credit monitoring and regular feedback. RBI has recently revised limits in reporting of fraud cases.
Sensitive positions must be monitored closely, and periodical job rotation should be encouraged. Robust risk assessment and improvement in credit underwriting standards. In Jan 2016 RBI proposed a Central Fraud Registry to have a searchable centralized database for use by banks.
Proposed consolidation of PSBs to bring about rationalisation of resources and improve geographic coverage.
Implementation of policies that encourage moral behavior and demonstrate an ethical culture.
Banking reforms such as IBC, 2016 and bank recapitalization will be ineffective unless governance standards are improved. A comparison with recommendations of PJ Nayak Committee Report suggests that the extent of capitalization in the PSBs is not sufficient to overcome the problem of NPAs and to achieve Basel–III levels of Tier-I capital. There is a need to tighten the system to bring in more transparency and accountability. Higher FDI limits will not change things materially for the state-owned banks, unless the government is able to bring in long-term strategic investors.
Greater usage of data analytics can help make bank policies more effective. A system of continually and repeatedly advising customers must be created so that customers can be protected from electronic banking and payments related fraud.
Alea is a global risk mitigation and investigative consulting firm, which helps organizations reduce reputation and operational concerns. The firm has conducted significant assignments for international organizations and industries including banking, education, EPC, financial services, healthcare & diagnostics, hotels, infrastructure, insurance, logistics, manufacturing, mining, pharmaceutical, power, real estate, renewable energy, retail and telecom.
Alea’s risk mitigation services include: senior employee background checks, KYC/AML checks, corporate intelligence, investigative monitoring, asset searches, intellectual property protection, crisis management response, insurance & fraud investigations, litigation support and due diligence of business partners.
Stock Market in tensed state According to sources the benchmark BSE Sensex surrendered early gains Wednesday to end in the negative terrain after a 600 point swing amid escalating cross border tension between India and Pakistan. Investor sentiment took a beating after Pakistani fighter jets on Wednesday violated Indian air space in Jammu and Kashmir's Poonch and Nowshera sectors, experts said.
- SpiceJet, Air India may fly 40 Jet Airways planes from next week
- Employees of TCS disappointed after company gifted them wrist watches on completion of 50 years
- Jio Digital Fibre rising about Rs 27,000 crore to fund expansion
- Uber Technologies Inc. & its bankers will hit road this month
- Jet Airways fights to keep flying
- Jet Airways assured Indian Oil Corporation of payment of dues, Indian Oil restored oil supply
- Zomato service contributes about three-fourth to overall revenue
- Ratan Tata says it is hard to understand a Business Leader
- Manufacturing PMI showing strong momentum in last few months
- Titan to venture its business in jewelry business
- By March 31 Essar Steel Lenders likely to get payment
- DLF Shares falls 4%
- Medlife, Zoomcar, ixigo Partner with GrabOn for Cricket Fantasy League
- Why Reliance pledged 12.50 Crore shares with IndusInd Bank?
- Why Jet Airways Pilots & Captains attended Interview in SpiceJet?