Can banks escape frauds?
I n mid-february of this year, Indian banks’ gross non-performing assets (NPAS), or bad loans grabbed the media headlines. A bunch of corrupt bankers and a diamond magnate conspired to launder money to the tune of Rs 13,000 crores. The businessman in question was Nirav Modi and the bank associated with it was Punjab National Bank, the country’s second largest bank. The sheer scale and duration of the scam exposed that our banking system is vulnerable to frauds of unimaginable proportions. The country was just beginning to come to terms with Nirav Modi’s smash and grab job when a new scam surfaced. By February-end a yet another Rs 3,695 crore-scam unearthed known as the Rotomac scam, involving the Kothari family. The compromised banks in this case were a consortium of seven lenders including Bank of India, Bank of Baroda, Indian Overseas Bank, Union Bank of India, Allahabad Bank, Oriental Bank of Commerce, and Bank of Maharashtra. If the PNB scam failed to set alarm bell ringing this one surely was a wake-up call. Meanwhile, the state-run banks announced their financial results of 2017-18 FY which exposed the monster of NPAS that emerged from this exercise was worthy of starring in its own horror film. The accumulated bad loans resulting from the non-performing assets reported by 26 banks together amounted to Rs 7.31 lakh crore. The staggering growth of 50 per cent in NPAS from the corresponding period last year revealed a lot about the ailing banking system. Ironically, many fraud incidents happened when the Indian payment landscape was being swept by innovation in digital payments. The series of product launched by NPCI including UPI, IMPS, BBPS, and Aadhaar Enabled Payment System heralded the beginning of exciting time for digital payments.
banks at crossroads
While the plethora of payments options empowered the digital-savvy customers, banks found themselves stuck at a crossroad. Though the new modes of payments generated additional revenue stream for a bank, the situation on the ground couldn’t be further away from the truth. The PNB fiasco revealed that besides large private sector banks and State Bank of India, very few of the banks had integrated their back office including core banking system (s) with the SWIFT Financial messaging system.
What is causing this complexity?
Customer preferences rapidly change in India whose 65 per cent of population is below the age of 35. The online shopping era has fuelled a culture of instant gratification among youth. Today, youth expect similar immediacy in most of their interactions including payments. The banks will have to fall in line to cater to such tech-savvy generation otherwise they will end up losing business to Fintechs. The problems don’t just end there. Most software systems in a bank accept and process data in a specific format. Besides, different payment and settlement channels have their own data formatting and technology standards, which increase complexity of transaction processing leading to transaction failures. Proactive monitoring of several frauds and automation of enterprise-wide reconciliation can insulate banks and its customers from potential fraudulent payments. The risks managers in banks have a difficult task to detect and prevent frauds originating from the financial crimes committed both by internal staff and cyber criminals. In India, a huge number of people have embraced digital payment modes and there is a need to protect the first-time users who can easily fall prey to fraudulent practices. The rapid proliferation of the modes of payments makes it imperative to have an enterprise wide reconciliation process.
What is the solution?
The industry needs a homogenous payment landscape dotted with core banking system, enterprise fraud management, and unified reconciliation. The payment environment should provide the capability of straight through processing for any type of transaction, originating from any channel for both corporate and retail clients.
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