Banks should know their customer, staff and partner to prevent fraud
All the public sector banks in India are adequately capitalised and are meeting their requirement but going forward they will require additional capital to meet the future growth needs and future possible problems, deputy governor of the Reserve Bank of India (RBI), Mr R. Gandhi said at an ASSOCHAM event.We have been voicing our concern about capital infusion, right now banks are adequately capitalised, that is all right but what we have been telling the banks and the government is that-going forward, keeping the future growth that is likely to come in the economy and also based on the Basil III norms, additional capital will be needed, said Mr Gandhi while inaugurating the 2nd national conference on 'Financial Frauds-Risks & preventions,' organised by The Associated Chambers of Commerce and Industry of India (ASSOCHAM).
It is a continuous exercise, it is not that immediately, right now, today it is required, but going forward it is definitely warranted, he said.
It is a government's realm, we have to pursue it, and they have to bring it to the Cabinet and the Parliament, added Mr Gandhi.
He also said that if banks are capitalised well in advance, it will give them a lot of confidence.
On the issue of filling up the posts of CEO and MD at five large banks, the RBI deputy governor said, That process is on and very soon the process should conclude and these posts will be filled in, the government is very seriously pursuing that.
Talking about the restructuring under the joint lending forum (JLF), the top RBI official said, More than 200 JLF have been formed so far, it is a new system, it will take its own time to stabilise, but we are watching, we are continuously on discussion, we are monitoring, we are discussing with the banks and bankers have brought some issues that will require some tweaking of JLF, that we are working on.
He also said that though a whistleblower policy in banks from the vigilance perspective is already there, but the RBI is trying to advise the banks that they have such a policy to prevent a fraud as well.
He also said that RBI has provided the banks with list of wilful defaulters. We have given certain instructions to the banks, but if by law it is coming then it is well and good because that will be more forceful, more enforceable and it will be more binding on all the parties, that is welcome.
We have been continuously monitoring, we are sitting with them (banks), we are working with them, guiding them to bring in appropriate additional capital, make a provision, banks will have to tone up their recovery process, he added.
He also said that the root cause of financial frauds can be reduced to the failure of banks to Know Its Somebody - i.e. failure to Know Its Customer, or failure to Know Its Employee, or failure to Know Its Partner/Vendor.
If a bank has to prevent fraud, it must follow the three KY Principles. It must Know its Customer; it must Know its Employee and it must Know its Partner, said Mr Gandhi.
The RBI deputy governor further said that banks need to invest in data analytics and also intelligence gathering to make fraud detection as near to real time as possible.
Each bank should segment its customers based on their risk profile and transaction patterns and develop appropriate response systems for exceptional patterns noticed and fortify systemic level controls, said Mr Gandhi.
He also said that banks have to take extra care to have continuous vigil on their staff. Background checking for antecedents, checks and balances, periodic rotations, vigilance assessments, internal audits etc. techniques will have to be employed to know the employees better and as preventive measures.
He said that if frauds are to be prevented effectively, banks have to know their partners, agents and vendors.
In his address at the conference, ASSOCHAM president, Mr Rana Kapoor said, Global headwinds and rapidly changing technology have exposed India's economy to greater corporate and financial risks. In the last decade, developing economies lost over USD 6.6 trillion in financial frauds, with illegal outflows increasing at an average of 9.4% annually.
India must have ZERO Tolerance for frauds. Dedicated focus on building trust, transparency, consistency and predictability in business regulation, will attract both foreign and domestic investors. Further, a strong and stable regulatory and business environment will fast-track India's economy on double-digit growth path, said Mr Kapoor.
ASSOCHAM is fully committed to working closely with the Government in developing and implementing controls to address fraud risks, to position India as the most preferred business destination globally, he added.
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