CONDITION OF BANKS TODAY

A total of 5,152 cases of fraud were reported across various banks of the country in the last fiscal. This is 76 more than the number of fraud cases reported the year before (5,076 in 2016-17). According to the RBI, over 23,000 cases of bank fraud, worth Rs 1 lakh crore, have been reported in the last five years. Increase in the number of NPAS along with such fraud cases raises serious concerns about the industry's health. According to a RBI report, sourced by Reuters through an RTI, state-run banks have reported as many as 8,670 “loan fraud” cases totalling Rs 61,260 crore over the last five financial years up to March 31, 2017. PNB topped the list with 389 cases totalling Rs 65.62 billion over the last five financial years, in terms of the total amount involved. The finance ministry has approved an infusion of Rs 11,336 crore for five state-owned lenders to help them meet the regulatory capital requirement, sources said. This is the first ever capital infusion in the current fiscal and the remaining amount of Rs 53,664 crore would be disbursed during the course of the year. As per the plan, sources said, PNB hit by the Nirav Modi scam, will get the highest amount of Rs 2,816 crore, while Allahabad Bank will get Rs 1,790 crore. Besides, Andhra Bank will receive Rs 2,019 crore, Indian Overseas Bank -Rs 2,157 crore and Corporation Bank - Rs 2,555 crore. management company (AMC) or an alternative investment fund (AIF). Proposed by a panel led by PNB chairman Sunil Mehta, it elaborates on how bad loans of up to Rs 50 crore will be managed at the bank level with a deadline of 90 days, and bad loans of Rs 50-500 crore will have the bank enter an inter-creditor agreement, thereby authorising the lead bank to implement a resolution plan in 180 days, or refer the asset to the National Company Law Tribunal (NCLT). For loans above Rs 500 crore, the panel recommended an independent AMC, supported by institutional funding through the AIF. The idea is to help consolidate stressed assets. It is, however, unclear whether this project or this recommendation from the Mehta committee is helpful or just another idea that will collapse in face of the persistent NPA crisis.

Instead, the Insolvency and Bankruptcy Code, 2016 (IBC), further amended in 2018, is a better way forward for the NPA problem. It paves way for the Insolvency Resolution Process (IRP), wherein the debtor's business is assessed – if it can continue or any recovery or revival of the same is feasible. The maximum time period of IRP is 180 days with a one-time extension of 90 days making it a total of 270 days, beyond which the adjudicating authority assigns a liquidator. The liquidator activates the option to sell the assets of the debtor under liquidation. This allows for a fast recovery of the debt which also prevents their deprivation after being held for extended periods. The “going concern” or a “slump sale of assets” process allows the collective sale of all assets, enabling the liquidator to realise a greater value than what could have been by the traditional approach (selling machinery or plant) as seen in the ‘Keshav Sponge and Energy' case. In the long run, the evolving IBC is a more appropriate alternative for the NPA issue provided the time breach issue of the IRP is resolved. it is a distributed ledger, i.e., a decentralised system, makes transacting on blockchain transparent. Decentralisation is a key aspect, as no single authority has full control over it, there is no central point of failure and the entire system operates in a state of consensus, making transactions transparent. By storing data across its network, blockchain eliminates the risks that come with data being held centrally. A key feature that can help prevent and detect fraud is the smart contract. Smart contract or digital contract is a program capable of digitally facilitating and verifying the negotiation or performance of a contract. In the recent public sector bank fraud, issuance of fake Lous would not have been possible on blockchain as the smart contract would have identified inconsistencies based on automatic reconciliation with the core banking system. Further, following the established limits, it would have restricted the payment initiation over the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. Blockchain technology can be used to train various machine learning algorithms to identify fraudulent patterns. Further, it would be impossible to forge documents as the entire process is cryptographically secured and immutable. RBI is working with the consortium of banks along with Infosys-led Edgeverve to understand how blockchain can be implemented in securities and trade finance verticals.

As Finance Minister Arun Jaitley said in his Budget speech, “The government will explore the use of blockchain technology proactively for ushering in digital economy” – the inevitable progression towards the implementation of this technology marks a significant step in adhering to our ‘prevention is better than cure policy'. Nevertheless, loopholes exist ceaselessly as a flip side of the coin and therefore, it is imperative to realise that there will be perpetrators exploiting those very loopholes. Instead of diligently convening hit-and-trials to arrive at a perfect state of this technology, covering its shortcomings will empower us to flip the coin and stay confidently secure, irrespective of the side.