Whenever there is a problem in a public sector bank, almost as a reflex action, there are critics saying that the only solution is privatisation. The same has been the case with the recent incident involving Punjab National Bank (PNB) where it has been seriously argued that the government should reduce its stake to less than 50 percent - as if government ownership is responsible for such deeds, which is absolutely incorrect. This school of thought seriously is convinced that privatisation is the panacea to all problems involving the public sector.
The PNB case can be looked at as a case where a few bad people have exploited the loopholes which exist in the technology that is used in the bank and kept this act of swindle alive for almost 7 years. Also, the knowledge that this could not be easily detected helped to encourage them.
It may be argued that a failure in technology (systems) and audit has no bearing on the ownership pattern of banks. For the present fraud committed, there are private banks also involved as counter-parties and their systems did not detect such transactions, even though the fraud was perpetuated in branches of PNB. Hence the problem appears to be more with systems followed by audit.
Systems should have enough safety checks to ensure that passwords cannot be misused and just like how even in a branch multiple keys are used to open the cash chest, similar layers have to be provided here. Assuming that this is the first instance of such a fraud (PNB has officially clarified that the subsequent audit of all branches have reassured them that there are no other cases of fraud) there are lessons to be drawn where loopholes are plugged. In fact, this should be done for all other transactions which are out of the core banking network of banks.
The issue of audit is more complex as practically speaking it is not possible for anyone to audit the entire load of transactions. Such checks hence have to be in the system where transactions are mapped across the bank. Unless this is done, there is no assurance that by changing the ownership of banks anything else will be achieved. In short, correcting systems is the requirement today which is agnostic to ownership patterns.
The magnitude of fraud is large and has built over time which is why such drastic solutions are being suggested. But it should be remembered that operational risks involving fraud is inherent in financial business especially banks though the scale varies.
There have been cases of fraud in say, warehouse receipt financing relating to a private bank in the past which was covered only in a cursory manner as it is often assumed that when it is not a PSB it is an internal issue which affects the private shareholders. Therefore, often it has been observed that while such issues occur in private banks and foreign banks too (though not of this magnitude), it does not reach the headlines because when it is PSBs involved there is a lot of satisfaction which critics derive from deriding them. There may be some truth here. The biggest wrongdoing in a bank in the history of banking involved Global Trust Bank, which was a private sector company that had to be merged with a PSB.
Further, in case of audit, the Reserve Bank of India (RBI) has already penalised several private sector banks on their presentation of accounts, and hence it would be incorrect to conclude that such stories emanate only from PSBs. Here, too, the goal should be to look at ways of strengthening these systems, and the decision to institute a committee to look into this is a positive sign for the banking system.
However, for the sake of argument, let it be assumed that these banks are privatised (assuming someone would be interested in taking over such banks afflicted by this problem). Would this really reduce the wrongdoing in the business because at the end of the day it is employees who are involved in siphoning out funds? Change in ownership or control will not change things.
It is now agreed that one of the reasons why there have been wrong doings in PSBs at any level is due to the low level of compensation. This can never be an excuse for committing fraud but if this is accepted then almost every government service has the same challenge of compensation which is never considered to be adequate. Therefore, unless this is increased, can one hope that the character of officials changes. This evidently cannot be achieved in even 10 years as given the volumes of officials involved no private buyer would be willing to increase the pay packages.
Privatisation further means a change of management which does not lead either to a change in the people down the line or the systems or operating practices. Besides, if it is a case of only changing the latter, it can be done by statute in all banks with orders coming from above. Also, this would major reorganization if purchased by another bank which will be an expensive affair and as the staff has to be existing one, will not make a difference. There is again no assurance that when there are gaps in processes, there would not be a temptation to err even in a private bank. The answer hence is to correct the systems and make them robust.
The solution is to ensure that the operations systems are improved significantly and the existing lacunae are plugged. The problem here was that the CBS was not linked with SWIFT which meant that on the face of it the bank did not recognize this transaction while the counter party bank receive the guarantee authorisation on the former system. Further, it would be necessary to also ensure that all banks are on similar technology platforms so that there is a good degree of integration across banks.
Fraud in banks is not uncommon in the world and this is but natural when the size of the system and complexity increases and the volumes rise exponentially. The problem is that such upgradation does not take place on a real-time basis as a result of which technological change in banks does not keep pace with business. The fact that such an act could go on for so many years and go undetected is a signal to other banks to also introspect and check on their operations.
The way forward is to focus on correcting the system rather than looking for extraneous solutions like privatisation. Privatisation of banks does have some very compelling arguments, but perpetration of fraud is definitely not a reason to go ahead with such a drastic move. In fact, non-banking corporate India has also been witness to such attacks and hence it would be disingenuous to say that the identity card of a public sector worker increases the likelihood of a fraud being committed.
Updated Date: Feb 22, 2018 18:00 PM