The recent incident regarding the failure of the Punjab And Maharashtra Cooperative (PMC) bank has once again shown the ugly face of the Indian Banking System (IBS). It has shattered the belief of lakhs of people who deposit their hard-earned money in the banks to keep it safe and secure. But, it has also unmasked how the bank regulators including the Reserve Bank of India (RBI) and the National Bank For Agriculture And Rural Development (NABARD), the internal auditors, and the statutory auditors are not serious and vigilant, and go about business with their eyes closed.
Alicia Tuovila, in an article in Investopedia.com, defines statutory audit as “A legally required review of the accuracy of a company’s or government’s financial statements and records. The purpose of a statutory audit is to determine whether an organisation provides a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records, and financial transactions.”
There is a saying “Saamp ko nahin, Saamp ki Maa ko mariye jo anginat Saamp paida karti hai.” (Don’t kill the snake, but kill the mother of snakes which gives birth to hundreds of snakes.)
The above-mentioned auditing and checking authorities, responsible for curbing the birth of ‘snakes’ in the IBS, should be kicked off with a hard hit. If they can’t even notice or smell the condition of the internal health of the banks during their off-site and on-site inspection and audit period, then what kind of surveillance are they conducting?
PMC Bank, a cooperative bank operating in seven states with 137 branches, having a deposit of ₹11,617 crores, a loan portfolio of ₹8,383 crores, net profit of ₹99.69 crores and declared Non-Performing Assets (NPA) of mere 3.76% in its balance sheet dated March 31, 2019. What a glorious picture the bank was painting!
Then, what were the reasons behind its sudden collapse? Keeping aside the rules and regulations, distorting all bars and codes, the bank had reportedly lent a major portion of its loan portfolio, nearly 70% of total advancement, to a single entity HDIL (a real estate development company), which had gone bad. The RBI failed to identify the violation of rules by the PMC bank. Why?
PMC bank’s collapse is not the first such incident in India’s banking sector. Nirav Modi and Mehul Choksi allegedly organised a fraud amounting to ₹1,3570 crores to Punjab National Bank (PNB), and Vijay Mallya eloped after giving a jolt to the tune of ₹9,000 crores.
During the financial year 2018-2019, around 6,801 fraud cases involving an amount of ₹71,500 crores have been detected in Indian banks, and this shows only the detected cases, there may be some higher number of cases that are still waiting to see the light of day.
India Today, on September 8, 2019, reported that during the first quarter (April to June) of this fiscal year of 2019-2020, frauds worth ₹32,000 crores have rattled 18 Public Sector Banks or government banks. An RTI answered by the RBI revealed that 2,480 fraud cases defrauding the amount of ₹31,898.63 crores have come under the limelight.
According to the RTI reply, around 1,197 cases of cheating involving ₹12,012.77 crores were detected in the State Bank of India (SBI) in the first quarter. Allahabad Bank with 381 cases amounting to ₹2,855.46 crores got the second position. The Punjab National Bank, despite having a deep wound caused by the fraud of ₹13,000 crores in February 2018 by Nirav Modi came in third with fraud amounting to ₹2,526.55 crores during these three months of this year.
Other public sector banks are also not far behind, and they also play a major role in keeping the ‘fraud-train’ running at nearly the same speed.
The BJP government, led by PM Modi, in 2016 made the public deposit their hard-earned life savings in banks by imposing ‘note-bandi‘ (demonetisation), which kept the earnings of the people on stake without making arrangements to secure and guarantee the entire deposit. Presently, the deposits of a person up to the maximum limit of one lakh Rupees in a bank are guaranteed by DICGC (Deposit Insurance and Credit Guarantee Corporation)
The DICGC was set up with a mission to contribute to financial stability by securing public confidence in the banking system through provisions of deposit insurance, particularly for the benefit of the small depositors.
Banks covered by Deposit Insurance Scheme are:
(I) All commercial banks including the branches of foreign banks functioning in India, Local Area Banks, and Regional Rural Banks.
(II) Co-operative Banks-All eligible co-operative banks as defined in Section 2(gg) of the DICGC Act.
The Reserve bank of India, under their frequently asked questions regarding the role of DICGC, state that:
In the event of a bank failure, DICGC protects bank deposits that are payable in India.
The DICGC insures all deposits such as savings, fixed, current, recurring, etc. except the following types of deposits.
(i) Deposits of foreign Governments.
(ii) Deposits of Central/State Governments.
(iii) Inter-bank deposits.
(iv) Deposits of the State Land Development Banks with the State co-operative bank.
(v) Any amount due on account of any deposit received outside India.
(vi) Any amount, which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India.
On what the maximum deposit amount is that us insured by the DICGC, the website says that, “Each depositor in a bank is insured up to a maximum of ₹1,00,000 (Rupees One Lakh) for both principal and interest amount held by him in the same capacity and same right as on the date of liquidation/cancellation of bank’s licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.”
Elderly retired persons or the present working employees keep their funds in banks to give a security cover to their future life, and farmers and businessmen also have their savings/sale proceeds or working funds in their bank accounts for their day-to-day needs. Also, the government has made such harsh rules and regulations which stop the public from keeping cash in their (white) pockets.
So, people are forced to keep money in banks. But when the public’s money is not safe even in government banks, and no security cover from the banks or the government has been provided to the depositors beyond ₹1 lakh per bank (not per branch), where should the people go? Such types of restrictions and insecure environments lead to unaccounted money and a chaotic situation.
Keeping in mind all these consequences, I feel that the public should not keep more than ₹1 lakh with a single bank. If a person keeps their money in different branches of a single bank, even then, the total of all their deposits in all the branches are counted as one account. So, there will be no security coverage from the DICGC for more than ₹1 lakh deposit even in scattered accounts in the same bank. In the present scenario, maybe the public should follow the thumb rule ‘Never put your all eggs in a single basket.’
Keep your deposits in different banks and not in different branches of a single bank. However, this is not an example of good governance, and the government should come forward to frame rules for securing hundred percent earnings of its citizens.