“Imperative of revisiting the operational risk control architecture in public sector
banks (PSBs) in India: a qualitative analysis”
A. Shivakanth Shetty [Link]
[Link]
AUTHORS Nagendra B. V.
Jeevananda S.
Divakar G. M.
A. Shivakanth Shetty, Nagendra B. V., Jeevananda S. and Divakar G. M. (2019).
Imperative of revisiting the operational risk control architecture in public sector
ARTICLE INFO
banks (PSBs) in India: a qualitative analysis. Banks and Bank Systems, 14(1),
137-146. doi:10.21511/bbs.14(1).2019.12
DOI [Link]
RELEASED ON Wednesday, 27 February 2019
RECEIVED ON Saturday, 29 September 2018
ACCEPTED ON Wednesday, 06 February 2019
LICENSE This work is licensed under a Creative Commons Attribution 4.0 International
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JOURNAL "Banks and Bank Systems"
ISSN PRINT 1816-7403
ISSN ONLINE 1991-7074
PUBLISHER LLC “Consulting Publishing Company “Business Perspectives”
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© The author(s) 2021. This publication is an open access article.
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Banks and Bank Systems, Volume 14, Issue 1, 2019
A. Shivakanth Shetty (India), Nagendra B. V. (India), Jeevananda S. (India),
Divakar G. M. (India)
Imperative of revisiting
BUSINESS PERSPECTIVES
the operational risk
control architecture
in public sector banks (PSBs)
LLC “СPС “Business Perspectives”
Hryhorii Skovoroda lane, 10, Sumy,
in India: a qualitative
40022, Ukraine
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analysis
Abstract
The banking sector in India has contributed to economic growth, parity and equity
while equally keeping focus on profit and social objectives. The successive prudential
and regulatory reforms introduced in the banking sector have made it more robust and
stronger to withstand the bubbles and external shocks. Still, the Indian banking sector
in general and public-sector banks (PSBs) in particular have been suffering from the
bank frauds. This study endeavors to cover the increasing incidences of banking frauds
in PSBs and probes the weaknesses and chinks in the operational risk architecture at
Received on: 29th of September, 2018 the PSBs in India. This study selects Punjab National Bank as a true representative
Accepted on: 6th of February, 2019 of PSBs and treats it as a critical case study to apply the learning and findings to the
PSBs in India. This qualitative analysis of the study revealed that the chinks in the op-
erational risk control mechanism and lax corporate governance are the main reasons
behind the increasing incidences of frauds at PSBs. The findings of the study showed
that a strong corporate governance and compliance framework, robust risk manage-
ment architecture, investment in people, technology and systems will go a long way
in achieving tighter control and supervision, streamlining processes and, most of all,
© A. Shivakanth Shetty, adhering to a culture of checks and balances.
Nagendra B. V., Jeevananda S.,
Divakar G. M., 2019 Keywords management, prudential measures, banking frauds,
internal control, operational risk
A. Shivakanth Shetty, Ph.D., Associate JEL Classification F30, G10, G21
Professor, Institute of Management,
Christ University, Bangalore, India.
Nagendra B. V., Assistant Professor,
Institute of Management, Christ INTRODUCTION
University, Bangalore, India.
Jeevananda S., Ph.D., Associate The reforms introduced in 1991 in the banking sector in India have
Professor, Institute of Management, contributed to economic growth, parity and equity while equally
Christ University, Bangalore, India.
keeping their focus on profit and social objectives. The successive pru-
Divakar G. M., Assistant Professor,
Institute of Management, Christ dential and regulatory reforms introduced in the banking sector have
University, Bangalore, India. made it relatively more robust and stronger to withstand the bubbles
and external shocks.
Irrespective of the progress achieved in the prudential and regulato-
ry realms, the Indian banking sector in general and PSBs in particu-
lar have been suffering from the poor corporate governance and un-
ethical practices resulting in banking frauds. As per the Reserve Bank
of India (RBI) report, public sector banks have witnessed as many as
This is an Open Access article,
distributed under the terms of the 8,670 loan fraud cases amounting to Rs. 61,260 crores over a period
Creative Commons Attribution 4.0 of last five financial years up to March 31, 2017. A rare and occasional
International license, which permits
unrestricted re-use, distribution, banking fraud can be considered as the cost of doing business, but the
and reproduction in any medium,
provided the original work is properly
repetitive and massive frauds happening in PSBs depict the deep hid-
cited. den weaknesses in the risk management of PSBs.
[Link] 137
Banks and Bank Systems, Volume 14, Issue 1, 2019
The problem with the PSBs stems from the relative negligence of the risk management function by their
boards and top management. The inability of the bank to control operational risk and the inattentive-
ness of all stakeholders to notice the signs of slackness over a long period of time have brought colossal
loss of reputation for the banking system. The recent spate of arrests of top bankers working in Public
Sector Banks by the investigative agencies for frauds highlights the utter lack of operational risk man-
agement and disregard for corporate governance. More than the amount of money involved and lost the
negativity and skepticism these scams generated in the global financial community are more harmful in
the long run for the country. The iterative and massive banking frauds weaken the faith of Indian public
and international investors in the banking system.
Therefore, this study endeavors to understand the reasons for increasing incidences of banking frauds
in the PSBs and probes the weaknesses and chinks in the operational risk architecture at the PSBs. This
study also aims to provide recommendations to prevent banking frauds at PSBs. The rest of the paper
is divided as follows. The first section covers the detailed review of available literature on bank frauds
across the world in general and India in particular. The second section of the paper explains the justi-
fication for the adoption of qualitative methodology for the study and its relevance to the phenomenon
of banking frauds at PSBs. The third section uses the qualitative tool of the 5W2H method to uncover
the anatomy of fraud at Punjab National Bank, which is treated as a critical case study of PSBs in India.
It also makes a critical review and analysis of the existing risk management practices and architecture
in the public-sector banks in India. The fourth section presents the research results. It also highlights
and presents the case for revisiting the risk management architecture to prevent banking frauds in PSBs.
The last section concludes.
1. LITERATURE REVIEW. a situation where situational pressure and op-
portunity for fraud are high, combined with low
THEORETICAL personal integrity of the individual (Albretch,
BACKGROUND 1984). Wolfe and Hermanson (2004) added one
more element to the fraud triangle theory, that is
RBI, the regulator of banks in India, defines fraud capability. They found that a smart, knowledge-
as “A deliberate act of omission or commission by able, influential person and in a powerful posi-
any person, carried out in the course of a bank- tion can either coerce or bully his subordinates
ing transaction or in the books of accounts main- or colleagues to commit a fraud or be a partner
tained manually or under computer system in in fraud willingly or unwillingly. The triangle
banks, resulting in wrongful gain to any person of external pressure, personal financial needs
for a temporary period or otherwise, with or with- and financial target has contributed to risks in
out any monetary loss to the bank”. On the other bank frauds (Skousen & Wright, 2006). The lesser
hand, Basel Committee (2006) asserts that frauds probability of employee gets exposed or caught
are losses that originate from failed internal pro- increases the chances of him committing a bank
cesses, people and systems or from external events. fraud (Chen et al., 2007). Hogan, Rezace, Riley,
and Velury (2008) believe that the fraud triangle
1.1. Reasons for bank fraud theory helps in the detection, control and pre-
vention of the fraud. Crime or fraud is often done
The three factors like pressure, opportunity and with cohorts but in isolation. The personal goal
rationalization (the triangle of fraud) function of achieving an individual financial target and
as enabling factors for the occurrence of a fraud external pressure of achieving a particular target
within the organization (Cressy, 1973). The dis- may also influence the tendency of bank frauds
gruntled employees are more likely to break the (Hasnan et al., 2008). Murdock (2008) reported
rules, irrespective of their age and position to that the employee who is under pressure be it fi-
equate with the perceived inequalities (Holliger nancial or non-financial is vulnerable for com-
& Clark, 1983). The fraud is likely to happen in mitting a bank fraud.
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Banks and Bank Systems, Volume 14, Issue 1, 2019
Source: Brumell Group (2015).
Figure 1. Fraud triangle theory
Omar and Mohammad Din (2010) reported that of the frauds, but it is the way audit committees
main conspirator will manipulate the feelings of operate and function within the organization
the colleagues or co-workers or subordinates to (Alleyne & Howard, 2005). A person with low
be a part of the fraud by bullying them or by in- personal integrity is more vulnerable to com-
fluencing them for the utilization of their skills in mit a fraud than the person with high person-
committing a fraud. The individual cognitive bias- al integrity (Dorminey et al., 2010). The act of
es, conditions and heuristics influence the employ- outsourcing the recruitment process of bank
ees to get into the acts of bank frauds (Anandrajan employees to the third parties may result in
& Kleinman, 2011). Kaseem and Higson (2012) bank losing the full control of recruitment pro-
found that a lot of frauds are orchestrated by the cess, resulting in morally corrupt and dishon-
people with right knowledge and right capabilities. est employees entering into the banking system
The employee under internal or external pressure (Newenham & Kawindi, 2011). The employees
is likely to commit the bank frauds (Dellaports, who lack in ethical values tend to commit brib-
2013). The dishonest employees will eventually ery and corruption (Chen et al., 2013). The or-
infect a portion of the honest employees within ganizations having an independent board of di-
the organization and make them commit frauds rectors are more effective in the prevention of
(Wells, 2014). The technical expertise and the con- frauds, and these organizations will have lower
fidence to pull off the fraud without being exposed incidences of frauds (Agrawal & Chadha, 2005).
or get caught motivate the employees to indulge Thus, the following hypothesis is proposed.
in bank frauds (Wolfe & Hermanson, 2004). Thus,
the following hypothesis is tested. H2: The lack of compliance and lax corporate
governance result in banking frauds in PSBs
H1: The presence of three factors like pressure, in India.
opportunity and rationalization (the trian-
gle of fraud) are enabling factors for the oc- 1.3. Operational risk procedures
currence of a fraud within the public sector and bank frauds
banks in India.
The operational risk emerges from the lack of regu-
1.2. Corporate governance lar independent checks in performance, inadequate
and bank frauds organizational control methods, and inadequate
methods of communication, unauthorized access
It is not presence and existence of the audit and physical control of assets, records, computer
committees, which will prevent the occurrence programs or data (Jeffords, 1992). The inadequate
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Banks and Bank Systems, Volume 14, Issue 1, 2019
internal control, ambiguity in job roles, failure to the internal control, improper supervision, lack of
counsel when the performance levels or personal management approval and improper separation of
behavior fall below the acceptable level, and inade- duties of employees open the door for employees
quate operational review are some of the factors re- to engage in bank frauds (Sanusi et al., 2015). Thus,
sulting in frauds within the organizations (Bologna, it is expected that there is a positive relationship
1994). The limited separation of duties, false docu- between the inherent weaknesses in risk manage-
mentation, and inadequate control account for more ment architecture and lax corporate governance
than half of the frauds (Calderon & Green, 1994). resulting in banking frauds in PSBs. Thus, the fol-
Fraudsters are opportunists who identify the chinks lowing hypothesis is tested.
within the internal control mechanism and embez-
zle the bank to their benefits (Smith, 1995). H3: The inherent weaknesses and chinks in the
prevalent risk management architecture pro-
Haugen and Selin (1999) reported that there are vide the opportunity for potential fraudsters
many reasons for employee fraud ranging from to commit banking frauds in public sector
revenge, overwhelming personal debt, substance banks in India.
abuse and pressure. Sharma and Brahma (2000)
indicated that one of the main reasons for the This study endeavors to cover the increasing inci-
perpetration of fraud is laxity in following the in- dences of banking frauds in the PSBs and probes
ternal control mechanism and procedures by the the chinks in the operational risk architecture in
supervising staff. Fraudsters commit the fraud by PSBs. Based on the analysis and findings, it also
exploiting the laxity on the part of the supervis- aims to revisit the risk management architecture
ing officials in observance of safeguards set by the in PSBs and provides recommendations to prevent
Reserve Bank of India (RBI). The lack of supervi- the incidents of frauds in PSBs.
sion, surveillance, monitoring and the lacunas in
the internal control practices provide the oppor- 2. RESEARCH EXECUTION
tunity for potential fraudsters within the organ-
ization (Ramos, 2003). A fraud-friendly environ- The research methodology consists of primary
ment is noted by lax corporate culture, deficit or and secondary research questions, which are as
near absence of risk control, staff apathy and over- detailed below:
confidence (Harris & William, 2004).
A) Primary research question:
The failure of Barrings Bank revealed that failure in
management supervision, lack of compliance, ab- What are the reasons and factors contributing
sence of risk management procedures and weak op- to the frauds at PSBs in general and at Punjab
erational control are the main reasons for the fraud National Bank in particular?
and eventual breaking down of the Barrings Bank
(Wilson, 2006). The weakness in the internal control B) Secondary research questions:
mechanism results in bank frauds by the bank em-
ployees (Rae & Subramanian, 2008). • To study, probe and deconstruct the fraud at
the PNB as a critical case study to draw the
The lack of training, overburdened staff compe- lessons for the PSBs in India.
tition and low compliance level are some of the
main reasons for the bank frauds (Khanna & • To critically evaluate and revisit the prevalent
Arora, 2009). The chinks in the internal control operational risk management and corporate
mechanism create the opportunity for fraudsters governance practices at the PSBs in India.
and this opportunity created will enhance the mo-
tivation of an employee to commit the bank fraud • To offer remedial suggestions for course cor-
(Vona, 2012). A stronger internal control helps the rection in the prevalent risk management
organizations to identify the problems and sit- framework and corporate governance of PSBs
uations, which could be potential cases of frauds to reduce operational risk and resultant bank
(Nyakarimi & Karwirwa, 2015). The weaknesses in frauds.
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An Inductive Reasoning Approach has been adopt- (1989), allows for multiple level analyses within a
ed for the current study. Inductive Reasoning, ac- single setting and focuses on the dynamics of a
cording to Leedy and Ormrod (2010), “begins particular scenario. Moreover, a critical case study
not with a pre-conceived truth or assumption, approach allows the researcher to explain the sit-
but instead with observation. With the Inductive uations, which are too complex to measure or un-
Reasoning Approach, people use specific instanc- derstand through research instrument or survey.
es or occurrences to draw conclusions about en- The method of critical case study was adopted in
tire classes of objects or events”. Hence, this study this study as the bank frauds are happening at an
treats the scam at the PNB as a critical case study alarming rate across PSBs in India. The reason for
and attempts to draw inferences and recom- selecting the Punjab National Bank (PNB) is that
mendations to the entire public sector banking. it is the second largest public sector bank repre-
Therefore, an Inductive Reasoning Approach is senting all the problems associated with PSBs in
appropriate for this study. India. Moreover, the CIBIL website shows that
PNB is having the highest number of willful de-
This research paper assumes the form of a quali- faulters as well as the highest amount of outstand-
tative study. According to Peshkin (1993), quali- ing credit in defaults. It accounts for almost 30% of
tative studies typically serve for the purposes of: the amount outstanding from nationalized banks.
Both the number of defaulters and the amount in-
• description (to reveal nature of certain situa- volved make PNB an ideal choice for critical case
tions, settings, scenarios, processes, relation- study on PSBs. Therefore, this study has adopted
ships, systems or people); the critical case study approach so that the infer-
ences drawn can be applied to the entire public
• interpretation (to provide new insights about banking sector.
a particular phenomenon, develop new per-
spectives and new concepts about the phe-
nomenon, discover the problems that exist 3. ANATOMY OF FRAUD AT
within the phenomenon);
PUNJAB NATIONAL BANK.
• verification (to allow the researcher to test the A 5W2H METHOD
validity of certain assumptions, claims, theo-
ries or generalizations within real world con- Since this study is based on scams and financial
texts); and irregularities happening at the public sector banks
in India, an attempt was made by researchers to
• evaluation (to provide a means through which collect secondary data published in various sourc-
a researcher can judge the effectiveness of cer- es like newspapers, magazines, journals, blogs
tain policies, practices or innovations). and websites, related with the subject matter. The
methodology adopted for this study is qualitative
To critically probe the increasing incidents of frauds in nature and applies the qualitative research tool
in the public sector banks, this study has decided to 5W2H. It is a quality management tool and con-
adopt the description, interpretation, verification cept used to examine the problem to get feasible
and evaluation of the phenomenon; therefore, the solutions. This qualitative tool helps us to have a
qualitative approach has been adopted. By critically holistic view of the problem (in this case, opera-
probing, evaluating and dissecting the scam at the tional risk in the public sector banks) and offers
PNB, through the information, articles, published the solutions to improve the operational risk man-
reports, interviews and opinions of the stakehold- agement in the public sector banks.
ers, the study attempts to provide the multiple per-
spectives of the phenomenon. For this reason, the This qualitative tool of 5W2H stands for 5 Ws and
quality approach has been adopted. 2 Hs. They are as follows:
A critical case study design has been adopted for 1. What is the problem?
this study. A case study, according to Eisenhordt 2. Why is it a problem?
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Banks and Bank Systems, Volume 14, Issue 1, 2019
3. Where do we encounter the problem? Bank, which is so characteristic and representative
4. Who is impacted? of most of the frauds happened in the public sec-
5. When did we first encounter the problem? tor banks of India (see Table 1). By analyzing, an
6. How did we know there was a problem? attempt has been made to draw the inferences and
7. How often do we encounter this problem? conclusions for the public sector banks in India.
The 5W2H approach has been employed to ana-
In this section, an attempt has been made to crit- lyze the efficiency and effectiveness of operational
ically analyze the fraud at the Punjab National risk mechanism in public sector banks of India.
Table 1. 5W2H qualitative analysis of operational risk management in public sector banks in India
with reference to the Punjab National Bank (PNB)
Jeweller Nirav Modi wanted to import diamonds to design high end collection. He approaches
PNB and asks for a Letter of Undertaking (LoU). Normally, the bank issuing the LoU asks for
cash margin – usually 100%. In this case, there was no scheduled credit limit and no margin was
demanded. The entries in respect of LoUs issued were not recorded in Punjab National Bank’s
(PNB) Core Banking System (CBS). Colluding officials sent SWIFT messages from one of PNB’s
Mumbai branches to overseas banks offering unauthorized LoUs. Generally, SWIFT messages
have to go through a three-layer security system: a maker, a checker and a verifier. In PNB’s
case, LoUs had been issued by the branch officials through SWIFT without the approval of the
competent authorities and the necessary documents of import. Not knowing Nirav Modi or his
credit history, the overseas bank extends credit based entirely on PNB’s LoU. In case of a default,
PNB will have to make good this amount to the overseas bank. Overseas bank remits funds to
Nostro account of PNB, backed by the LoU. In the normal course, on the due date, PNB should
have remitted the funds to the overseas banks and recovered the amount from Nirav Modi. Having
What is the used the imported stones for his jewellery business, Nirav Modi should have sold his wares and
problem? settled his dues with PNB. But in the Nirav-PNB case, LoUs kept getting roller over. According to
the reports, the money was not paid back by the Nirav Modi. By rolling over the credit, he had
ensured that subsequent LoUs repaid the dues on the earlier LoUs. The scam went on and on for
a shocking seven years, 151 LoUs were issued in 2017 alone.
On January 16, 2018, partnership firms of the Nirav Modi group approached PNB’s Brady House
branch with a request to allow buyer’s credit. The new employee at the Foreign Exchange
department denied the request and demanded 100% cash margin. The firms claimed that they
had in the past been allowed credit without margin. On scrutiny, it was discovered that the earlier
approvals had been made fraudulently. On January 29, 2018, a criminal complaint alleging fraud
and for registration of an FIR is filed; it accused bank employees – including the “maker” and the
“checker” – of fraud. In the following week, a fraud report was submitted to the RBI detailing a
total fraud of Rupees 11,394 Crore in the accounts of Nirav Modi Group and the Gitanjali Group
and Chandri Paper and Allied Products Private Limited.
While issuing the buyer’s credit, the regulatory mechanism demands the commercial banks to
insist on 100% margin money or collateral before issuing the LoUs. In case of PNB fraud, no
Margin money or collateral was insisted or received by the PNB while issuing the LoUs to the
5 Ws Nirav Modi and his associates. This is a clear and classic case of bank employees conniving
with the borrowers to commit the fraud. Generally, SWIFT messages have to go through a three-
layer security system: a maker, a checker and a verifier. In PNB’s case, LoUs had been issued by
the branch officials through SWIFT without the approval of the competent authorities and the
necessary documents of import.
The SWIFT platform was not linked or integrated with the CBS at PNB. This flaw within the PNB
was exploited by perpetrators for seven long years. As per the RBI guidelines, the buyer’s credit
Why is it a problem? should not exceed 90 days, but many of the LoUs issued by the PNB had 360 days of maturity
and duration.
PNB failed in monitoring the fraudulent transactions of LoUs from the very beginning since 2011.
If it adhered to the internal check and balance, it could have identified the fraud within 24 hours.
PNB failed miserably to adhere to the rule books.
No linkage or reconciliation of LoUs issued with the end transactions and underlying documents
for movement of goods.
Non-confirmation by overseas lending banks/branches with LoUs issuing branch of the
genuineness of LoUs, particularly when abnormally large amounts were issued.
Where do we These kinds of problems are witnessed and periodically keep on happening at most of the public
encounter the sector banks in India. The fraud at Punjab National Bank is a symptom which is similar to most of
problem? the public sector banks in India.
Public sector banks in particular and its stakeholders in particular. Customers of the bank;
Who is impacted? employees; board of directors; auditors; creditors; regulations; government of India.
On February 14, 2018, state owned Punjab National Bank (PNB) disclosed that it has discovered
When did we first $1.77 billion (around Rs. 11,400 crore) worth of fraudulent transactions at one of its Mumbai
encounter the branches. In a complaint to the Central Bureau of Investigation (CBI), the bank had named the
problem? firms and people associated with billionaire jeweller Nirav Modi to have caused this massive fraud
using the bank officials.
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Banks and Bank Systems, Volume 14, Issue 1, 2019
Table 1 (cont.). 5W2H qualitative analysis of operational risk management in public sector banks in
India with reference to the Punjab National Bank (PNB)
On January 16, 2018, partnership firms of the Nirav Modi Group approached the PNB’s Brady
House branch with a request to allow buyer’s credit. The new employee at the Foreign Exchange
department denied the request and demanded 100% cash margin. The firms claimed that they
had in the past been allowed credit without margin. On scrutiny, it was discovered that the earlier
How did we approvals had been made fraudulently.
know there was a On January 29, 2018, a criminal complaint alleging fraud and for registration of an FIR is filed; it
problem?
2 Hs accused bank employees – including the “maker” and the “checker” – of fraud. In the following
week, a fraud report was submitted to the RBI detailing a total fraud of Rupees 11,394 Crore in the
accounts of Nirav Modi Group and the Gitanjali Group and Chandri Paper and Allied Products
Private Limited.
How often do we It is mandatory to have the standard operating system of responsible and responsive banking.
encounter this Since, there is neither proper internal coordination nor any external control over the monitoring
problem? process, such problems keep on happening in the public sector banks.
4. RESEARCH RESULTS 2. Banks need to change their shallow and su-
perficial approach to operational risk and
The detailed anatomy and deconstruction of PNB accord it the same priority as credit risk and
fraud ticks all the right boxes for a classic failure in market risk.
corporate governance and operational risk man-
agement system in public sector banks. Figure 2 is 3. It is important to minimize human interfer-
a testimony of the severity of instances of frauds ence and maximize transactions in the public
in public sector banks of India as reported in the sector banks.
annual report of Reserve Bank of India for the pe-
riod of 2017–2018. 4. There is an immediate need to train line man-
agement about managing operational risks,
In this case of PNB fraud, all the pillars of over- especially those employees who are handling
sight, board, internal audit, audit and regulatory sensitive and risky portfolios.
all failed collectively. Based on the 5W2H analy-
sis of the fraud at Punjab National Bank, the fol- 5. In the mist of the PNB fraud case, there is
lowing suggestions can be made for improving the a need to have vigilant background checks
corporate governance and operation risk manage- for the employees working in financial in-
ment architecture at the public sector banks in stitutions. Assessment of economic risks
India. They are as follows: requires banking personnel who are mean-
ingfully educated, competent, insightful
1. Having a Chief Risk Officer (CRO) who is a and visionary. Unfortunately, these quali-
member of the bank’s leadership team, is a ties are hardly emphasized in the processes
standard practice worldwide. With the recent of recruitment and promotions. This needs
PNB fraud, RBI should re-visit how banks to change.
treat their risk management functions and
place less reliance on multiple layers of audits, 6. To prevent the frauds like PNB, one should
which can detect such frauds only post-facto. take distributed-ledger style technology of
Source: RBI (2018).
a. Number of fraud cases b. Amount involved (` billion)
6000
450
5000 400
Amount ( ` billion )
350
Number of cases
4000
300
3000 250
200
2000 150
1000 100
50
0 0
2010-11
2008-09
2011-12
2012-13
2014-15
2017-18
2009-10
2016-17
2015-16
2013-14
2010-11
2008-09
2011-12
2012-13
2014-15
2017-18
2009-10
2016-17
2015-16
2013-14
Figure 2. Number of frauds and amount involved in banking frauds in India
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Banks and Bank Systems, Volume 14, Issue 1, 2019
block chain combined with human supervi- 9. Bank managers should also be given appropri-
sion and monitoring, fraud controls and fraud ate incentives for making a proper assessment
analytics. of risks to avoid NPs, and avoid delay in rec-
ognition of NPAs.
7. The Board of Governance for public sector
banks (PSBs) must be strengthened with 10. Legal reforms are highly desirable to empower
modern and sophisticated risk management the RBI to fully exercise the same responsibili-
expertise. This will help the bank board to ties for PSBs as now apply to private banks and
better understand, and act upon, the risks in to ensure a level playing field in supervisory
the banks. The skills, attitude and knowledge enforcement.
of the auditors need to be improvised.
11. It is extremely important to educate all stake-
8. Besides institutionalizing a whistle-blower holders in the banking ecosystem that bank-
policy, the staff should be able to sense wrong- ing frauds are not technology frauds, but are
doings and alert the management. It is nec- process frauds. The solution lies in strength-
essary to realize that keeping the work-space ening the internal controls, checks and bal-
safe and secure is the collective responsibility ances and at the same time investing in latest
of all staff. technology and training people to use it.
CONCLUSION
Banks are public trust institutions and, therefore, the central focus of its existence should be on
having a strong corporate governance and robust risk management architecture. While the banks
can take care of internal controls to put a check on frauds or attempted frauds by the employees, it
is for the regulators, government, law enforcing agencies and the judiciary to ensure swift action
is taken to book the culprits without delay. The only solution is to not only put operational control
systems in place but also to educate every employee to improve their effectiveness as part of the
operational control system. The only invincible operational risk management is to foster the collec-
tive collaboration of staff in the long-term interest of the industry. This is not the first or last time
that a fraud has occurred. However, the right lessons and required course corrections in the risk
management framework of banks, at a systematic and specific level, must be adopted to minimize
future incidents of operational losses.
LIMITATIONS OF THE STUDY
The following are the limitations of the study.
1. The study is having few limitations, and the adoption of critical case method to analyze the phenom-
enon of banking frauds in public sector banks is one of them.
2. On the other hand, this study adopted the qualitative approach which is prone for subjectivity in
the analysis and interpretation.
3. The other limitation is that the study is not based on primary data, which has been collected by in-
terviewing with the stakeholders.
4. This study is limited to only the operational risk management of the public sector banks ignoring
the other aspects of banking risk.
144 [Link]
Banks and Bank Systems, Volume 14, Issue 1, 2019
SCOPE FOR FURTHER RESEARCH
1. The study can be further developed into an empirical study by conducting a survey and interview-
ing all the stakeholders to get a holistic view and assessment of the problem.
2. This study can be further developed by including all aspects of risk management in public sector
banks than focusing exclusively on operational risk management in public sector banks.
3. Analytical based risk mitigation methods can be explored which may serve as potential early warn-
ing signs.
4. Based on the findings of the study, a comparative study on operational risk management in public
sector banks and private sector banks can be further conducted in future.
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