The scam faultline is damaging Indian banking
What are NPAs?
NPAs can be classified into 3
|Substandard Assets||These are the assets which have remained NPA for a period of less than or equal to 12 months|
|Doubtful Assets||If the asset is in the substandard category for a period of 12 months|
|Loss Assets||These assets are of little value, it can no longer continue as a bankable asset, there could be some recovery value.|
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The Current issue.
Recently it has come to light that Dewan Housing Finance Corporation Limited (DHFL) has manipulated a consortium of banks led by the Union Bank of India for getting fake loans of ₹35,000 crore through financial misrepresentation.
What this represents
The DHFL case cannot be termed as an isolated incident. In February 2022, it came to light that ABG Shipyard Limited of Surat had already taken a loan of about ₹23,000 crore in a similarly fake manner.
The multitude of such cases shows there is a systematic issue plaguing the banking sector. This requires a fundamental shift in the way we handle these issues.
What has been done already?
A core committee of seven of the largest banks — the State Bank of India (SBI), the Bank of Baroda (BoB), the Bank of India, Canara Bank, the Central Bank of India, Syndicate Bank and the Union Bank of India (UBI) — has been created to look into this issue.
KPMG (a ‘global network of professional firms providing audit, tax and advisory services’) was asked to conduct a survey review of the DHFL for the period April 1, 2015-March 31, 2019.
What investigations have shown
The Central Bureau of Investigation (CBI), in its first information report, has deduced that the State Bank of India was impacted the most and has now acquired a non-performing asset (NPA) base of ₹9,898 crore i.e., the entire amount DHFL acquired from it.
Similarly, the Bank of India and Canara Bank have been left with NPAs of more than ₹4,000 crore each by the DHFL.
Also, around ₹3,000 crore each has been taken as loan by DHFL from the Union Bank of India and the Punjab National Bank which has since turned to be NPAs.
Data by the Reserve Bank of India (RBI) show that around 34% of scams in the banking industry are on due to inside work and due to poor lending practices by and the involvement of the junior and mid-level management.
Global Banking Fraud survey (KPMG) shows that the issue is not just limited to India alone; it is a worldwide issue.
In a Financial Stability Report released by the RBI in December 2021, there is a projection of the gross NPAs of banks rising from 6.9% in September 2021 to 8.1% of total assets by September 2022 (under a baseline scenario) and to 9.5% under a severe stress scenario.
Why this is a serious issue
The banking system of any country is the backbone of its economy. Excessive losses to banks will have negatively impact the country since the amounts deposited in banks belong to its citizens.
Global Financial Crisis of 2008 was started due to the increasing NPAs in banking industry of the West.
Frequent news reports of new bank scams will result in breaking the trust of the common man in the banking system which will adversely affect credit creation in the country.
A high NPA also reduces the net interest margin of banks besides increasing their operating cost, which forces banks to meet this cost by increasing the convenience fee from their small customers on a day-to-day basis.
What can be done?
Banks must exercise due diligence and caution while offering funds. Banks should be especially cautious while lending to Indian companies that have taken huge loans abroad.
The regulation and the control of chartered accountants is a very important step to reduce non-performing assets of banks. There is also an urgent need to tighten the internal and external audit systems of banks.
The fast rotation of employees of a bank’s loan department is very important.
Public sector banks should set up an internal rating agency for rigorous evaluation of large projects before sanctioning loans.
We must implement an effective Management Information System (MIS) to monitor early warning signals about business projects.
Financial fraud can be reduced to a great extent by the use of artificial intelligence (AI) to monitor financial transactions.