Tuesday January 28, 2020
Home Business Fraud at PMC ...

Fraud at PMC Bank Shows that there is Rot in System and Not the Bank

These audits failed to detect multiple accounts, over 20,000 accounts with the same address and ownership

0
//
Fraud, PMC Bank, System
Yes, there is no need to trigger panic but there is an immediate need to revamp the audit process carried out by RBI and internal auditors of banks. Pixabay

The fraud at Punjab and Maharashtra Co-operative (PMC) Bank shows that there is a rot in the system and not the bank. If unchecked, it can cause irreparable damage to the system. The complicity of bank officials with the Wadhawan family and its companies shows that there is a systemic flaw in the credit system. The extent of it may vary from one bank to another, but its existence is now undeniable.

Addressing a press conference after the Monetary Policy Committee review, Reserve Bank of Indai (RBI) governor Shaktikanta Das said that the PMC incident was an isolated one and there was no need to panic. Yes, there is no need to trigger panic but there is an immediate need to revamp the audit process carried out by RBI and internal auditors of banks. These audits failed to detect multiple accounts, over 20,000 accounts with the same address and ownership. This shows a systemic failure. Auditors need to use technology and simple programming languages like Python to sort through large databases to identify risks, especially concentric risks. It also shows that core banking solutions (CBS) a software platform mandated by RBI is prone to manipulations.

Finance Minister Nirmala Sitharaman seems to be cognizant of this challenge as she has asked public sector banks to appoint risk assessment officers at higher salaries. Cooperative banks also need risk assessment audit, as they are incapable of hiring such talent. RBI has to appoint these risk assessment auditors so that the extent of the problem in cooperative banks can be gauged and addressed.

There is a culture of hiding risks associated with a borrower at several points in the process of credit approval and disbursement. This has become part of the credit system. If a borrower cannot pay interest on loans, they do not disclose his situation and position as it shows the branch, the branch manager and credit team in a bad light. The managers see it as a personal failure. The bank also takes strict action against staff responsible for approving such loan.

Fraud, PMC Bank, System
Addressing a press conference after the Monetary Policy Committee review, Reserve Bank of Indai (RBI) governor Shaktikanta Das said that the PMC incident was an isolated one and there was no need to panic. Pixabay

The system treats default as a failure of the employee more than the borrower. The employee’s failure in judging the capability of the borrower is an individuals failure not because of economic cycles. Therefore, to prevent a borrower from failing, bank employees go to extreme lengths. Renewing loans, giving it to associated companies, ensuring that the interest payments are funded, and even committing fraud with the system. They try to hide it as long as they can, praying and hoping that the borrower will recover and repay.

This is the behaviour of the credit department in all banks. This is corroding the banking system as it’s endemic, barring a few private banks. The system does not know the exact risk it is carrying as nobody wants to acknowledge the borrower’s position till it blows up in the media. There is a conspiracy of silence among bank managers as every disclosure has a ripple effect across branches and banks.

The system needs correction to revamp the credit system, both process reform and behaviour change is required. The behaviour nudge is important versus any aggressive action as the latter will freeze the credit flow in the system already suffering from a slowdown. The asymmetric relationship between the bank manager and the borrower needs correction.

There is too much power with branch managers. Some banks have shifted the process of sanction to a central committee for loans beyond a size. But routing every single loan through a central committee slows down the process of sanction and disbursement. Hence, technology, data and artificial intelligence needs to be used to create solutions for approval and disbursement.

Also Read- More than 1 Million People Participate in Mass Rally against Chilean Government’s Austerity Policies

Decisions need automation in core banking solutions and manual interventions need to be reduced. The process of loan approval begins at the branch level. Due diligence needs to be outsourced. The paperwork, physical verification of assets, valuation of assets, determination of the creditworthiness of the business and individual to pay — these are data collection steps and here biases and corruption affect the outcome. There needs to be competition among branches to do it in the most exhaustive manner. We should see successful completion of this process as an accomplishment whether or not it grants the loan. This is the only way to bring rigour in this process.

The different processes in the system – evaluation, determination of interest rate to be charged and credit rating also need a revamp. There is graft, corruption and malfeasance. Branch managers lobby credit rating agencies for a better credit rating to justify their own evaluation report and offer a cheaper loan to the borrower. In a consortium, bankers blindly followed the evaluation of the largest lender which, if it’s State Bank of India (SBI), the report is copied and pasted by all the other banks. In terms of evaluation, SBI, because of its size, has a better evaluation system than most private sector banks. And if it wants, it can pull data on the past performance of cash flows of the promoters.

If SBI is not involved, the credit evaluation report is poor and prepared after the decision to lend or not is already made. Borrowers can influence lending in both public and private sector banks. Sometimes, to meet targets, branch managers behave like entrepreneurs. All checks and balances in the system are up for subversion if the manager has decided to lend. In the last few years, bankers have become wary of taking decisions that involve risk and do not want to lend either. The pile-up of NPAs and recovery has become the only target for most PSBs. Bankers are in a hurry to send a borrower to the insolvency board. They do not want to restructure for fear of being questioned. The pendulum has swung in the other direction. In a nutshell, the system is in a jam. Therefore, a revamp needs to be done in stages. The objective should not be to punish the bank employees but to change the overall credit culture. (IANS)

Next Story

Cyber Criminals to Target Online Payment Processing Systems in 2020: Kaspersky

Cybercrime: Online payment systems to be prime targets in 2020

0
Cyber online
More cybercriminal groups will target online payment processing systems in 2020, researchers from global cybersecurity have warned. Pixabay

More cybercriminal groups will target online payment processing systems in 2020, researchers from global cybersecurity and anti-virus brand Kaspersky have warned.

Over the past couple of years, so-called JS-skimming (the method of stealing of payment card data from online stores), has gained immense popularity among attackers.

Kaspersky researchers in their latest report said they are currently aware of at least 10 different actors involved in these type of attacks.

Their number will continue to grow during the next year, the report said, adding that the most dangerous attacks will be on companies that provide services such as e-commerce as-a-service, which will lead to the compromise of thousands of companies.

“This year has been one of many important developments. Just as we predicted at the end of 2018, it has seen the emergence of new cybercriminal groups, like CopyPaste, a new geography of attacks by Silence group, cybercriminals shifting their focus onto data that helps to bypass antifraud systems in their attacks,” Yuriy Namestnikov, Security Researcher at Kaspersky, said in a statement.

Online Payment
Cyber criminals will target online payment which will affect e-commerce. Pixabay

“Behavioural and biometrics data is on sale on the underground market. Additionally, we expected JS-skimmer base attacks to increase and they did. With 2020 on the horizon, we recommend security teams in potentially affected areas of the finance industry to gear up for new challenges,” Namestnikov said.

In addition, cybercriminals will also target mobile investments apps which have become more popular among users around the globe, according to the predictions from Kaspersky on the expected development of the threat landscape in the financial sector.

Not all of these apps utilize best security practices, like multi-factor authentication or protection of the app connection, which may give cybercriminals a potential way to target users of such applications

Kaspersky research and monitoring of underground forums suggests that the source code of some popular mobile banking Trojans was actually leaked into the public domain.

Previous similar cases of malware source code leakage (like Zeus, SpyEye) resulted in an increased number of new variations of these Trojans. In 2020, this pattern may repeat, the researchers warned.

They said tyhat they expect an increase in the activity of groups specialised in criminal-to-criminal sale of network access to banks in the African and Asian regions, as well as in Eastern Europe.

Also Read- Immediate Health Aid by WHO Protects Vulnerable Population from Health Threats

Their prime targets are small banks, as well as financial organizations recently bought by big players who are rebuilding their cybersecurity system in accordance with the standards of their parent companies.

Besides, it is expected that the same banks may become victims of targeted ransomware attacks, as banks are among those organisations that are more likely to pay a ransom than accept the loss of data. (IANS)