HPAS/Allied Mains 2022 Answer Writing Challenge Day 187: Model Answer

QUESTION: What role can RBI play in tackling bank scams? (4 marks/ 60 words)

Answer:

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Banking Regulation Act, 1949 empowers the Reserve Bank of India to inspect and supervise commercial banks, and give an impetus to prevent the scams.

The RBI can tackle bank scams in the following ways:

1. Banks should be cautious while lending to Indian companies which have taken huge loans abroad. There is an urgent need to tighten the internal and external audit systems of banks.
2. The fast rotation of the employees of the loan department should be considered.
3. Public sector banks should set up an internal rating agency for rigorous evaluation of large projects before sanctioning loans. Further, there is a need to implement an effective Management Information System (MIS) for monitoring early warning signals about business projects.
4. The credit information bureau (India) Limited (CIBIL) score of the borrower should be evaluated by the bank as well as the RBI officials. the classification and responsibilities of the lending and recovery departments is also required.
5. RBI lacks the supervisory capacity to conduct forensic audits and must be strengthened with human as well as technical resources.
6. Financial fraud can be reduced to a great extent by the use of Artificial Intelligence to monitor financial transactions.
7. The inputs from the branch on the background of the borrowers and other relevant ground realities, which are crucial in assessing the risks, should be given due importance.

RBI and banks will have to play a more proactive role in prevention with more supervisory oversight on debt management.