Kozhikode PNB fraud: Is our money safe with banks?

According to experts, instances like this should be a wake-up call for both banks and customers. They opined that though individual customers are less prone to be victims than business entities, it is always good to remember the business law doctrine caveat emptor: let the buyer beware. Following are the reflections made by the experts with specific reference to developments related to PNB fraud in the limelight:

As long as humans are involved in bank-related work there are chances of issues like this. Some issues will be due to mistakes and negligence, while others are intentional crimes. So we have two options: reduce mistakes and negligence; equip our banking systems to curb intentional crimes.

A digitised and computerised banking system is far better than the old manual bookkeeping system. Because in the old method, the chances of malpractices are high as the review mechanism is not sound. Issues like fake signs, changing numbers and denominations by bankers are almost nil with the coming of the digitised banking system.

Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of RBI provides Rs 5 lakh insurance cover (for both principal and interest amount held by the person in the same right and same capacity 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) to bank depositors. All commercial banks (including branches of foreign banks functioning in India, local area banks and regional rural banks) and cooperative banks ( All RBI regulated State, Central and Primary cooperative banks, also called urban cooperative banks, functioning in States / Union Territories under RBI)are insured by the DICGC. As a result, even if a bank becomes bankrupt or stressed, people will have relief.

It is always better for customers to bank with those banks having a wider network of branches. Because, even if one of their branches fails or gets stressed, the authorities can manage a crisis with funds they have in the network. For instance, PNB already returned more than 10 crore to Kozhikode Corporation in lieu of the money swindled by a former employee.

Existing and new customers should consider factors like history, track record and annual profit of the banks they deposit their money with. It is always better for the customers to periodically review their bank statements. People should also keep guards up as primary cooperatives, multi-state cooperatives and nidhi companies are mushrooming in the market. The deposits there are at high risk as regulatory supervision and accountability are nowhere near scheduled banks.

We all know that individual customers get SMS/E-mail alerts for their transactions. If a huge amount is transferred or if the influx of transactions is high, then most banks give an additional alert to notify it. Because they are monitoring our transaction patterns to identify malicious activities, if any.

As per the latest reports on PNB fraud, only one person was involved. However, a cyber forensic audit will be required to ascertain if any others are involved. Similarly, the arrested will be aware of repercussions of the crime as he was a former employee. Gaming a model to do crime in a digitised banking system is difficult and it is likely some others have aided accused. On the other hand official/officials concerned with monitoring and supervision need to be held accountable.

Banks have specific rules on authorising transactions. The scale or grade of employee is a factor deciding transaction limit they can approve. In some cases one person alone cannot approve transactions and it happens at multiple levels. Apart from that, review of the transactions that happened need to be done. The objective is to find mistakes/negligence/crimes. Different banks follow different sets of rules for review including measures like random checking. Similarly, banks cannot do any transaction without customers' consent. However, it is also the customer's duty to check unauthorised transactions are happening.

Small amount transaction related frauds, malpractices with accounts of deceased individuals or accounts with no customer activity are some areas which banks should give more scrutiny. Or else employees with criminal intentions will be able to swindle money, which go unnoticed.

Indian Banks' Association is likely to issue an intimation regarding the modus of operandi in PNB case, once the probe is concluded. So banks can ensure there are no fault lines or loopholes in their banking system that compromise security.