Rs 114-bn PNB fraud: People, not processes, responsible, say bankers

Bankers say it is the nature of the business of public sector banks that makes them susceptible to fraud

The alleged fraud at Punjab National Bank (PNB) has raised questions over the processes and systems in public sector banks (PSBs), but bankers say there are a number of reasons why it’s always the PSBs that seem to be affected, whereas private and foreign banks seem to be the most efficient.

To start with, the sheer size of the market the PSBs control makes them vulnerable to determined frauds. About 70 per cent of the banking system is controlled by PSBs, and by extension of that, most of the frauds get optically tilted towards these banks, say bankers.

These banks are also present in every nook and corner of the country, and the people manning them may not be that sophisticated. Many works are still done manually in these banks and vulnerabilities creep in, they say.

Besides, the quality of employees that PSBs attract these days is not always top grade, and the compensation paid to them is pittance. For example, a clerk in a PSB gets stuck at a monthly payment of Rs 20,000, whereas a probationary officer starts at Rs 30,000. Top quality people, therefore, are reluctant to choose banking as a career. Most of these people move to private sector banks, if at all, where the chances of rapid growth, albeit in a high pressure environment, are more.

“Earlier, banking was the only decent choice, now it is one of the last. The caliber of the staff we observe now is quite low,” said a senior bank official of a public sector bank. PSBs are also severely understaffed, and this hinders proper training.

“The priorities of branches are very different than the priorities of the head office. It is a rule that we need to send everyone for a two-year training. But If I send one of my people manning the teller, my operation gets hampered severely for many days. Thus, effective training never happens,” said the official.

However, even if the training happens, it is not very serious and doesn’t add much value.

“I was sent on a week’s training at a foreign location. It was more like a picnic,” said the official.

And then, there are issues around the quality of business that the banks seek in foreign offices. Since the Indian banks are not the dominant bank there, and the branch manager is in immense pressure, the bank does business with poor quality clients, often rejected by other established local banks. There is always a chance of a fraud or bad debt in such cases.

Bankers also say it is the nature of the business of public sector banks that makes them susceptible to fraud. For example, private banks are retail focused, whereas public sector banks are corporate focused.

The biggest banks in the country, such as State Bank of India, PNB, Bank of Baroda, and Bank of India, can afford to issue loans of hundreds of millions, but smaller private banks cannot take exposure in those assets because of limitations of their balance sheet size. Therefore, when there is a fraud or bad debt happening in these accounts, it is always large in size.

There are also issues of underwriting practices, which varies from bank to bank.

“It is not right to paint all banks with the same brush. State Bank of India will never give the kind of loans that other banks in the system will be ready to give,” said Pratip Chaudhury, former chairman of SBI.

“Banks vary in their culture as well. SBI has developed its culture, has better training facility, and better accountability, which many other banks lack,” Chaudhury said, adding private banks also face frauds, and in cases such as PNB, if guarantee, which is a non-fund based exposure, is issued without even the system of the bank knowing it, it is quite difficult to prevent such a fraud.

And therefore, more often than not, it is the people and not process that drives a bank and prevents malfeasance. But too much of tightening of the process would also hamper the smooth functioning of a bank.

“If the government has to enforce stricter controls saying that only certain people will have access to data would only make the process more cumbersome,” said Deepak Bhawani, CEO, Alea Consulting, a fraud prevention consultancy firm.