Strategies for the Indian Government to Combat Banking Frauds and Improve Economic Stability

The recent banking fraud at Diwan Housing Finance Limited (DHFL) has brought to light significant irregularities and highlighted the need for stringent measures to combat such fraudulent activities and ensure the health of the Indian banking system. Financial stability is the backbone of any economy, and frequent cases of loan scams have led to a rise in non-performing assets (NPAs). This article explores the strategies and measures the Indian government can implement to mitigate these issues.

Critical Issues and Recent Cases

One of the recent cases that gained attention is the irregularities in debt related to Diwan Housing Finance Limited (DHFL). CBI reported that DHFL transferred an astounding 35,000 crore rupees to a consortium of banks, led by Union Bank of India, through a banking fraud. This shocking figure was uncovered by the audit firm KPMG. Such incidents have become more frequent, with instances of bank scams emerging every few days. This has resulted in a spike in NPAs, with predictions by the Reserve Bank of India (RBI) that the net NPAs might increase by up to 10 percent by September 2022.

Impact on Economic Growth

The implications of such frauds and increased NPAs are significant for the economy. A higher proportion of NPAs leads to increased operating costs for banks, ultimately affecting the overall economic health. A survey by Deloitte revealed that approximately 40 percent of NPAs occur due to inadequate attention paid to the recovery of loans. Furthermore, it is alarming to note that out of every 100 rupees given as a loan to industries, 70 rupees sink, indicating that a few big creditors are disrupting the system despite the contributions of the common man.

Internal and External Fraud Prevention Measures

According to RBI data, nearly 35 percent of frauds in the banking system are internal, resulting from collusion between junior and middle-level management. To address this, enhanced regulation and control by chartered accountants are essential. Strengthening the internal and external audit systems of banks is equally critical.

Senior Officer Accountability and Internal Rating Agencies

Traditionally, junior officers are often blamed for errors, but it is equally important to make senior officers answerable. Creating an internal rating agency can help public sector banks conduct thorough risk analysis of large projects before accepting loans. Such an agency would ensure that comprehensive evaluations of potential risks are undertaken before sanctions are given.

Improving Loan Recovery Processes

Instead of allocating bad loans of big corporates to discount accounts, the government should focus on improving the loan recovery process. Banks should conduct regular fraud risk assessments, such as on a trimester basis, to ensure that potential frauds are identified and mitigated in a timely manner. Additionally, the Reserve Bank of India (RBI) should enhance its supervisory capacity, especially in terms of human resources and technical resources, to conduct forensic audits more effectively.

Ultimately, addressing these issues requires a comprehensive strategy involving legal, regulatory, and operational measures. By implementing these strategies, the Indian government can significantly improve the integrity of the banking system, reduce NPAs, and ensure sustainable economic growth.

Keytakeaways:

Internal and External Control: Strengthen internal and external audit systems. Senior Officer Accountability: Increase accountability for senior officers in fraud prevention. Loan Recovery: Improve the loan recovery process and assess risks regularly. Enhance Regulation: Increase regulation and control by chartered accountants.

Together, these measures will help to build a more robust and transparent financial system, benefiting both the government and the broader economy.