“RBI’s latest mantra to Check, Re-Check, Cross-Check to unmask layering of fictitious loans in banks through remote intrusion shall be a real game-changer for Indian economy.”
The inauguration of Unity Small Finance Bank, floated by a consortium of Centrum Financial Services and Resilient Innovations, an arm of the digital lending platform Bharatpe, is a momentous occasion in the banking history of India. The entirely digitized bank was opened four months after receiving an in-principle nod from RBI for the specific purpose of taking over the scam-ridden Punjab & Maharashtra Cooperative( PMC)Bank. PMC has been under moratorium and direct RBI control since mid-2019.
Bank launching synchronizes with the setting up a comprehensive Data Centre by RBI that can directly access data from operating systems of commercial banks throughout the country. Leveraging the Artificial Intelligence technology, RBI will soon digitally monitor the compliance by banks of various transactions. The step would mitigate and avoid situations like the camouflaging and masking of fraudulent transactions that failed the PMC Bank. The fictional borrowal accounts in the Punjab and Maharashtra Co-operative Bank, belonging to HDIL had been ‘masked,’ to hide from the bank’s Core Banking system.
Due to layering, the loan default scam perpetrated in the bank went unnoticed despite successive audits. Though access to other loan accounts was available to the employees of the bank as well as auditors, access to the aforesaid fraud accounts was masked by using unique encrypted passwords. The masking was done to hide non-refunded loans disbursed to the promoters of HDIL, facilitating siphoning of Rs.2145.62 cr.
The RBI Data Centre of Direct Access to Bank Systems, will help prevent scams, where data is masked by using dummy accounts.The Regulator will deploy analytical functionalities on data from supervised entities to improve the functioning of Banks and enhance data purity and integrity. The expanded data center with ultramodern technical functionalities is presently testing system-to-system integration with selected banks. The RBI shall commence direct intervention into data of commercial banks initially. The vigilance shall be extended into urban cooperative banks soon.
In recent years, there has been significant advancement and evolution in unmasking the layering of transactions by installing testing methodologies at both banks and regulators. Central banks continue to devote precious resources to enhance the Compliance testing of regulated institutions, with most supervisory testing exercises carried out annually.RBI plans to make it online now on a real-time basis. Bank boards have been initiated to make improvements to their governance structures to develop transparent transaction portals. Essential tasks for banks are strengthening data quality, granularity, integrity, & efficiency to enable the Regulator to access remotely.
In advanced economies of the Americas and Europe, remote vigilance technology is an innovative tool by supervisory agencies to encompass supervision. It helps supervisory agencies to digitize reporting and regulatory processes, resulting in more efficient and proactive monitoring of risk and compliance at financial institutions. The data availability improves existing supervisory tools and customize the same as per the IT ethos of target banks.
Such remote access technology is currently found in two areas of applications: data collection and data analytics.
Within data collection, applications are used for supervisory reporting, data management, and virtual assistance. The applications pull data directly from banks’ IT systems, automated data validation and consolidation, and chatbots to answer consumer complaints while collecting information that could signal potential areas of concern. Within data analytics, applications are used for market surveillance, misconduct analysis, and micro-prudential and macro-prudential supervision. The activity covers detection of insider trading activities, money laundering identification, monitoring liquidity risks, layering ad masking, and forecasting housing market conditions.
Expected benefits include enhanced effectiveness, reduced costs, and increased capability. In the area of data analytics, remote access applications can turn risk and compliance monitoring into a predictive and proactive process.
Remote access by RBI is evolving as a result of the emergence of advanced technologies in the economy. These technologies have led to new technology-oriented business models in the financial industry, including new products and services. The efficiencies that these technologies offer are harnessing the support compliance with financial regulation and conduct of financial supervision.
Regulatory supervisors will be using innovative ways to implement a risk-based approach to supervision effectively. Risk indicator dashboards, centralized data warehouses for supervisory reports, and early warning systems will become surveillance tools across the Indian banking system.
There are many reasons why the RBI is accelerating. Post-crisis regulatory reforms have led to an upsurge in reporting requirements. The step increases the need for efficient and effective monitoring to benefit from the resulting boost in data availability. Next to more data, better data are also a catalyst for taking the Indian GDP to $ 5.0 trillion economy.
The step shall achieve the objective of promoting trust by investors in financial institutions and markets. The proposed tools of supervision can adapt more quickly in response to a constantly evolving environment. Innovative technologies are applied at the design stage of new regulations to assess the potential impact of policy proposals. The applications may not replace human judgment but serve as input for supervisors to evaluate whether further investigation or enforcement is necessary.
Enhanced effectiveness, financial discipline, transparency of transactions and reduced costs, and improved capabilities replacing physical audits with remote surveillance of banks are the most often cited motivations for developing such applications. The results will be excellent if these solutions operate and apply in Rural lending with a more straightforward financial system that may not yet burden legacy IT systems.
In the light of the increasing misreporting of NPAs by banks, a complete overhaul is also meaningful in the Indian economy to create further trust in the financial world. For solutions related to data analytics, the emergence of innovative technologies allows supervisory agencies to improve their analytical capabilities while enhancing effectiveness significantly. The step of RBI to directly access the IT system of each bank is the right step to bring financial semblance.
Rightly said: “Suffer the pain of discipline or suffer the pain of regret. Discipline the bankers now so that prison guards do not have to do it later.”
About the author
Mr. Hargovind Sachdev is an Ex-Banker, GM(Retd) of State Bank of India. Has over 39 years of experience in banking, having occu-pied senior positions in UCO Bank, United Bank of India,State Bank of Patiala, State Bank of Travancore & State Bank of India where he headed the Central European Credit Desk at Frankfurt,Germany from 2006 to 2011 covering 15 countries of Central Europe.Has undergone International Banking Training from Asian Institute of Management, Manila, Philippines in the Year 2003 and a Multi-currency lending-technique training at the Euro Money Institute, London in 2009.
He has specialisation in Credit, Foreign Exchange,Vigilance, Monitoring & appraisal of Corporate Loans, MSME Credit,Gold Loans, Agricultural Loans & NRI Business Management in assets & liabilities. As a Forensic Auditor, he has conducted various Transaction Audits allotted by Banks.
He was felicitated by the Central Vigilance Commissioner , Sh. C.V Chowdhry for winning first prize for best article on Preventive Vigilance in 2015. He is also an accomplished Public Speaker hav-ing conducted multiple Motivational Seminars for institutions like ONGC, National Housing Bank & Bank of Baroda. He is an Inde-pendent Director & consultant to various big entities in corporate sector at present.
hargovindsachdev@gmail.com
