The Great Bank Robbery: Challenges in Indian Banking System

While Indian business tycoons are seeking political asylum in foreign lands for defaulting loans worth billions of dollars, the government has declined farm loan waiver.

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The Great Bank Robbery: Challenges in Indian Banking System

The common man has to pay back every paisa, while the tycoons get away with crores. Who is the bigger fool, the banks probably! The government is still coming in terms with the largest-ever banking fraud scandal, where two Diamond Kings – Nirav Modi and Mehul Choksi hoodwinked about 113 billion rupees ($1.7 billion) from the Punjab National Bank, India’s second largest public sector bank, earlier this year.

Reports state that this sum is one-third of the banks entire market capitalization. Both the men fled India even though the bank and the Prime Minister’s office were alerted well ahead. In 2016, liquor baron, Vijay Mallya left India after defaulting on loans of more than 9,000 crores from several banks. Not surprisingly, these loan defaulters are in the UK.

Why Have the Banks Failed?

So how is it that the banks are not able to detect the fraud right under their noses? Reports state that the banks are not following the basic principles of loans and advances. No one was paying attention to the notice. Moreover, it cannot be denied that there are deep flaws in India’s banking system. And this is linked to RBI. The governor of RBI said that the Banking Regulation Act does not allow the RBI to intervene effectively in public sector banks. Reuters reports highlight that external auditors approved by RBI, known as statutory auditors only do top line reviews and not in-depth inspections. Reports further highlight that top official in the PNB helped the scammers to get away with it via LoUs.

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The LoUs served as a guarantee that if the Modi defaulted, then PNB will pay up. If this was so, then why is PNB crying wolf? The bank’s top officials misused their power and position. There was a misuse of the international Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. There is no transparency in how the banks operate and manage loans. Another big question is that if the RBI was aware of the PNB scandal, why didn’t it take actions.

Blockchain Solution

Experts say blockchain technology could be the solution to help avoid future banking frauds. The blockchain is described as the incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value. Blockchain can transform finance and banking. It has the potential to reduce fraud in the financial world and has been getting attention since 45 percent of financial intermediaries such as stock exchange and money transfer services suffer from economic crime every year.

Experts say that Blockchain is essentially a distributed ledger where each block contains a timestamp and hold batches of individual transactions with a link to a previous block. This technology would eliminate some of the current crimes being perpetuated online today against financial institutions. The RBI should do more research on this technology to prevent banking frauds.