Presense0218 by Prime Point Srinivasan

Spreading Positive Vibrations Issue No 132 – February 2018 Published by Prime Point Foundation

Cover Story of the Month

In This Issue:

Editorial – Good Character – Need of the Hour

Cover Story 1: PNB Scam – Has the Government Lost Control Over the Banks?

Cover Story 2: PNB Scam Opens Another Pandora’s Box

Sansad Ratna Awards – Jury Meeting

P10

Prince Cartoon

P11

Rabies is 100% Preventable

P15

MMA Annual Convention 2018

Contact editor@corpezine.com www.corpezine.com www.digitalpresense.com

From the Desk of Editor-in-Chief Greetings from all of us @ The Editorial Team to our readers. A recent fiasco in the banking sector has startled and appalled most of us. It has drawn so much speculation, so many theories and debates, all of which has given way to more speculation, theories and debates. We have included this hot subject as our cover story for this month, but we have been cautious not to inform what has already been informed. Instead we discuss some of the deficiencies that could have enabled the manipulation and the fraud. Even then, there can be no fool proof system against misdeeds if character and ethics are compromised. This is what the Editorial touches upon. When the Madras Management Association held its annual Convention recently, your ezine, PreSense had the privilege of associating with the event as Ezine Partner. We have included a brief on the event. With the Parliament currently in its concluding session, it is time to identify the top performers among the Parliamentarians for the annual Sansad Ratna Awards. We carry a report on the preparatory meeting that the Sansad Ratna Awards Sub-Committee had with the Jury Panel in New Delhi in early February. The threat and risk of the Rabies disease has been an understated issue and we felt it important to bring awareness about it in the Health column this month. We hope that this article will help promote awareness and sensitisation about the gravity, and the importance of caution and care against it. Our mascot, Prince continues to amuse us. I hope you will enjoy this edition. Please share editor@corpezine.com. Your feedback is important to us.

your

feedback

with

PreSense is pleased to announce that the third edition of the PreSense Digest titled â&#x20AC;&#x2DC;PreSense 130â&#x20AC;&#x2122;, will be released shortly. We will announce the date of release in our site www.corpezine.com. The Digest will be released as a hard copy and will also be available in downloadble PDF format, after release. This edition includes select articles published by us in the first 130 editions. Editorial Team

Editorial Good Character â&#x20AC;&#x201C; The Need of the Hour The news of the PNB scam, the Rotomac default case and the scaling corporate NPAs of banks is quite disturbing, no doubt. A committed citizen and a true banker with a discerning passion in banking, will naturally feel highly perturbed by these developments. While this issue is discussed in detail from the national view-point, from the perspective of a systemic failure and an administrative bungle-up in our cover story, it is the ethical aspect or the moral attribute in these cases that makes us profoundly concerned. Not that frauds, crimes and illegal activities like cheating are new to mankind or an evolvement of this century. In fact, crime, they say, is as old as mankind. Psychologists say that the fraud triangle viz. Pressure (arising out of greed or need), Opportunity and Rationalisation instigate a crime. While Greed or the Need aspect of the triangle is an age-old attribute of the human kind, the other two aspects, viz. Opportunity and Rationalisation deserve some attention and discussion. Why do these banks provide the opportunity and, why or how do the defaulters/fraudsters rationalise their misdeeds and justify their act of illegality and immorality? Is it that there has been degradation of values, erosion of ethical standards, and degeneration of societal principles, so that people today are involved deeply in their materialistic pursuit, wanting to make money by hook or by crook, and more money in the quickest time possible? Or is it that man is able to justify his actions and misdeeds with the argument that whatever he is doing is nothing new as there have been so many others before him who have done the exact same misdeeds and got away scot-free? Or is it some misguided or lopsided conviction that drives man to commit the crime? These misdeeds cannot be justified by any reasoning or excuse, and the society has a role to play here. It is time we stopped eulogising and deifying people with money power, treating accumulation of wealth as the sole criterion for respect and awe. In a traditionally and culturally rich nation like India, I can say that singing paeans of a person and giving a larger-than-life image to a person because of his immense wealth was never regarded with approval. It is time that we got back to those basics of giving due importance to morale and values first. The fundamental principles of lending for a bank were once described by three Cs viz Capital, Capacity and Character. Along with business knowledge or Capacity and finance or Capital, the borrower should also have good intention or Character to repay. If a borrower chooses not to repay, or justifies his non-repayment, or is disinclined to pay back, he then lacks the Character to re-pay. In such a case, having both Capacity and Capital is redundant. We must therefore have sterner laws and the certainty of stringent punishment to act as deterrents to dissuade such intentions to default in repayment. By V.Rajendran, Editor

Cover Story 1 PNB Scam – Has the Government Control Over the Banks? Customers Demand Probe by Joint Parliamentary Committee The recent Punjab National Bank (PNB) Scam of Rs.11,400 crore ($1.8 billion) has opened up a Pandora’s box. Every day, media reports alarming updates, which threaten the basic credibility of Indian banking system. The claim by the PNB Management that the entire scam of Rs.11,400 crore (Rs.114 billion) was carried out by two junior officials since 2011 has not found any takers in the nation. The Editorial Team of PreSense spent hours discussing this issue with many former and current senior level bankers, software developers, political leaders, and others in the related professions. Everybody in a single voice affirms that the entire scam could not have happened without the knowledge of the past and current authorities and top management officials of the bank. “If two junior bank officials can defraud the system of huge money continuously for the past 7 years, as claimed by the PNB management, then what is the safety of public money in banks?”, questions a senior banker, who preferred to be anonymous. Current Status of the Banking Industry The banking industry is saddled with huge NonPerforming Assets (NPAs), most of which are contributed by a few borrowers in corporate sector. As per an RBI report, the Gross NPAs of all Public Sector Banks stood at Rs.7.34 lakh crore (Rs.7.34 trillion) as at end-September 2017. But Trade Union leaders say that it should be more than Rs.12 lakh crore (Rs.12 trillion). It is also reported that around 75% of this NPA is contributed by major corporate houses. Due to ‘write off’ of NPAs, the Indian Public Sector Banks have lost much of their capital base. The Indian Government had to ‘bail out’ these banks by giving Rs.2.1 lakh crore (Rs.2.1 trillion) last year as capital infusion. The Public Sector Banks have declared a net loss of Rs. 18000 crore (Rs.180 billion) during the third quarter of FY 2017-18. These huge NPAs and loss are attributed to corruption at the political and bank levels. Many of the Bank Chairmen ‘oblige’ their political godfathers. Out of 21 Public Sector Banks, 10 banks have declared more than 15% of Gross NPA at the end of December 2017 Both the opposition and the ruling parties blame each other for the deterioration of the Public Sector Banks. The current ruling party too cannot shirk its responsibility on this. The tax payers’ money of Rs.2.1 lakh crore (Rs.2.1 trillion) was used to ‘bail out’ the banks last year. In 2017, the Government introduced a bill in the Parliament known as Financial Resolution and Deposit Insurance (FRDI) Bill 2017. If this bill is passed, depositors’ money

would be used to ‘bail in’ the loss, sustained by these banks due to their corruption and inefficiency. Today, the banking industry is at crossroads to prove their credibility. “The only solution is to remove the entire team right from the Finance Minister, the Finance Ministry officials, RBI senior officials and the Bank Chairmen of the tainted banks, and conduct a fair enquiry to bring all the culprits to book. The Government should introduce tough measures to prevent the recurrence of such scams”, says Mohammed Iqbal, an angry depositor of PNB. PNB Fraud – Manipulation of SWIFT In PNB, nearly 150 Letters of Undertaking (LoUs) to the extent of Rs.11400 crores (Rs.114 billion) issued through SWIFT (The Society for Worldwide Interbank Financial Telecommunication) are outstanding. Letters of Undertaking (LoUs) are allegedly manipulated by PNB employees to let the diamond merchant, Nirav Modi channel the money illegally. Such transactions seemed to have been going on since 2011. The PNB management puts the blame on two junior officials. SWIFT is a messaging system used by banks and financial institutions the world over for transferring money between banks, particularly foreign currency funds and also for communicating non-fund based commitments, undertakings and guarantees to facilitate trade made on behalf of buyers and sellers participating in trade transactions. The messages are sent via an encrypted channel to ensure that the transactions remain secure. SWIFT messages are transmitted and received via a SWIFT gateway software, generally provided by SWIFT Alliance itself. According to software experts, the SWIFT Gateway is generally integrated with the banking operating software systems like the Core Banking System (CBS), Trade Finance Software and Treasury Management Software. This integration provides for CBS and other software to generate SWIFT messages and automatically send them to the SWIFT gateway for transmission. The SWIFT gateway also provides a manual option to create a SWIFT message directly into the gateway. This manual option can be used without making necessary backing entries, whether fund-based or non-fund-based, in the bank’s operational systems. It is this manual option that is usually exploited, as in the case of PNB. This kind of fraud is not new in the banking industry and has occurred several times in the past two decades in many banks. It is surprising how such frauds happening for several years, escaped the attention of everybody involved in the process of verification/audit. Once the LOU or LOC (Letter of Commitment) is obtained from a bank like PNB, a company can use this LOU to borrow from a bank or a supplier (getting a credit) abroad. The funds obtained from such borrowings need not necessarily be credited to the account which the company has with the bank that issued the LOU. The funds can be parked in a bank account with another bank and hence the LOU issuing bank may not witness huge fund flows into their Nostro accounts. It is understood that many of the banks have not integrated SWIFT with their Core Banking Software (CBS), even though there is a provision for it. Many banks seem to prefer bypassing the CBS and doing the transactions through SWIFT directly. It is also feared that such frauds may be of a larger magnitude, if a proper probe is conducted. This fraud prompted our Team to probe further into the purchases of software for the banks. Our Cover Story 2 deals exclusively on the software purchases made by the banks. By K. Srinivasan, Managing Editor

Cover Story 2 PNB Scam Opens up Another Pandora’s Box – Software Purchases of All Banks Must be Probed Opening up Another Pandora’s Box The PNB Scam prompted the Editorial Team to look into the software that is being used in the Indian banking industry. The PreSense Team discussed the issue with many experts and professionals in this field, including bankers. Since software is considered by many as a big Maya as many people cannot understand the logic, and political muscle and money power that is used in the purchase of banking software at a high cost. This incurrence of the cost is passed on to customers by way of hidden charges. If an independent and impartial probe is made, the country may get many shocking revelations. Before analysing further, let us understand the way the Indian banks began using the technology. Automation in Indian Banks Banks started ‘branch banking’ using Advanced Ledger Posting Machines (ALPM), Total Branch Automation (TBA), etc in the mid-1980s. ‘Branch banking’ went on till 2000 and even to the initial years of the millennium. Branches migrated from manual operations to branch automation. Many of the small private sector banks migrated to core banking early in the nineties itself. Banks like IndusInd opted for core banking platform from Midas Kapiti (Equation). Finacle by Infosys was developed as a ‘branch banking’ software in Canara Bank. After Y2K, most of the banks started core banking automation. Corporation Bank was the first public sector bank to have 100% core banking automation in 2003, with software developed by Laser Soft Info Systems in COBOL (common businessoriented language). Finacle branch banking was upgraded by Infosys as a CBS platform and many private players like ICICI Bank adopted it. TCS did not have a core banking of their own and they purchased a core banking product which was in COBOL, from the Australian company FNS. Finacle (Infosys product), BaNCs (TCS product), Flexcube (developed by iFlex and later acquired by Oracle) were the main players. Using these three solutions all the banks in the country got their CBS platform. Core banking platforms in India are relatively new as compared to the banking platforms in USA. Big Players Dominate the Banking Market Although there is no regulatory guideline from RBI about the platform to be used for banking software, RBI auditors, during their audits, have raised issues if the In the process, small players have been application was not on RDBMS systematically eliminated from the scene by (Relational Database Management imposing a minimum turnover of Rs.500 System). This forced banks to move to crores to be eligible for bidding. Thus, only big brand software like Finacle, BaNCs big players got to dominate the market and and FlexCube. SBI, SBI associates and provide solutions at very high purchase many large Public Sector Banks using cost and annual maintenance charges TCS solution, use COBOL-based software, but use Oracle’s RDBMS for storing banks data.

In the process, small players have been systematically eliminated from the scene, by the imposition of a minimum turnover of Rs.500 crores to be eligible for bidding. Thus, only big players got to dominate the market and provide solutions at very high purchase costs and annual maintenance charges. Small vendors are compelled by Indian banks to deliver more and earn less in return. Big players get away with deficient and incomplete deliveries. If the Core Banking Request For Proposal (RFP) records are verified for the functional deliveries made by the big vendors, we will be opening a big box of worms. Corporation Bank Story For example, Corporation Bank, which was using legacy software in all their 2400 branches successfully at a low cost since 2003, suddenly signed up in 2015 for Finacle software costing 20 to 25 times more than the existing cost. According to a senior official of the Bank, who wanted to remain anonymous, the upgradation of the existing legacy core banking software to RDBMS-based software could have cost them barely an additional purchase price of around Rs.10 to 15 crore with annual maintenance cost of around Rs.10 crore. In spite of this, the Bank wanted to buy new Core Source : Corporation Bank Officersâ&#x20AC;&#x2122; Organisation site www.cboo.org Banking software. It is also reliably learnt that the existing vendor who provided the core banking solution and who was willing to offer at low price was not even permitted to participate in the tender for RDBMS software. According to the sources, the Bank paid more than Rs.500 crore for the purchase of new Finacle software. The annual maintenance would cost the Bank more than Rs.100 crore in future. Their existing vendor would have quoted one-twentieth the price of the branded software. Ironically, the same vendor rejected by Corporation Bank was entrusted with the task of developing core banking software for Reserve Bank of India for the quality and the cost. RBIâ&#x20AC;&#x2122;s core banking is more complicated than the CBS of the commercial banks. This software is running in RBI successfully till date. Even after two years, Corporation Bank is not able to successfully migrate from the old software, thus causing inconvenience to

customers and staff members. The Bank’s Officers’ Organisation, fearing the risk of security breach, has been complaining about this persistently. In another leading Public Sector Bank, which has very high NPAs and net loss, the Chairman was forced to buy a big brand software at a cost of Rs.900 crore, when their existing core banking software itself could have been updated for a lower price. In USA most of the large banks have their own customised banking platforms, developed mostly on COBOL and have been using these platforms successfully for 25 to 30 years. Type of Banking Software Needed for India Even though cost is an important consideration to compare between software purchase options for a bank, more important considerations would be the functional coverage that decides the:   

IT support a software provides to the bank and its staff, the quality of design that reduces the time taken to provide banking services to customers (like context sensitive online help, reduced number of key strokes/ mouse clicks, etc) and more importantly, reducing the operation risk in banks.

When Corporation Bank or any other bank spends much more money on a new CBS implementation, they are expected to get better software, meeting the requirement from all the above angles. If that is not the case, then the higher investment cannot be justified. The Indian banking industry has very large banks, medium-sized banks, small banks and even micro finance organisations. All these organisations have their own affordability and IT investment capacity, depending on their size of business. Hence, among IT providers too, we need both the big and small players. If small players are eliminated, smaller institutions will find it difficult to obtain IT products and services at a reasonable price. A small Private Sector Bank is paying Rs.100 crores as annual maintenance charges for a leading software brand. They earn almost just enough profit to pay to the software company. Product comparison does not happen in India, even though we claim to be a software country. A product from a big company does not guarantee a great product. For example, when we go to a hospital, we go because of a good doctor and not because the hospital is big or small. If we go to a big hospital because it is big, we end up spending more money than necessary. Small companies have been systematically eliminated because of the Rs.500 crore turnover clause, thus taking the cost of acquisitions high. The Central Vigilance Commission (CVC) guidelines themselves that were supposed to curb corruption, have been used to increase the levels of corruption. The banking industry executes around 500 million transactions per day. Indian banking handles both class banking and mass banking. Cost is around 5 paise per transaction through legacy software products. Presently, it costs Rs.2/- per transaction due to the heavy cost of acquisition and maintenance. More than Rs.20,000 crore is spent by banks annually towards IT operations cost, maintenance and updation enhancements. This can be reduced to Rs.625 crore, if the cost of acquisition and maintenance are fixed optimally.

Suggestions The PNB type of fraud through SWIFT is not new in the banking industry. Such scams have happened in the past, involving leading Public Sector and Private Sector Banks. In spite of this, no preventive measures have been taken by RBI and the banks. Although there are provisions for integration of SWIFT with Core Banking, many banks seem to have disabled that option for reasons well known to them. In many banks SWIFT is operated as a ‘standalone’ system, by-passing the CBS, leading to great risks. None of the Indian banks use ‘Release Control Mechanism’ when they use SWIFT. Using this exclusive automated software, the transactions put through SWIFT can be checked for authenticity, accounting, including the verification of blacklisted payees, etc both for fund-based and non-fund-based transactions. If there are any deficiencies, the software will not allow the transaction to be put through. Most of the foreign banks use this ‘Release Control Mechanism’. When banks call for tender, they use RFP. When the software is delivered, most of the banks do not conduct ‘RFP Audit’ to ensure that the delivery matches their proposal. Most of the vendors are reported to be not complying with RFP requirements as per the tender conditions. Shockingly, payments are made to the vendors without any proper audit. The design of the software is important, particularly when millions of financial transactions are put through. No bank conducts ‘Design Audit’ for the software.

PNB scam has opened up our eyes. There should be a thorough overhauling of the Finance Ministry, Reserve Bank of India and scam tainted Banks and a probe by a Joint Parliamentary Committee. This will restore the credibility of the banks.

RBI’s Gopalakrishna Committee Report advised all the banks to conduct a ‘System Audit’ every year and publish the report in their Annual Balance Sheet. The Banks conduct the audit with their known auditors and there seems to be no seriousness. Six years ago, when the author was the President of Cyber Society of India, he suggested to RBI to empanel all the eligible system auditors and to allot to banks at random, (like they do for financial auditors) to get the realistic position. Till date, RBI has not taken any action.

The PNB scam has opened up our eyes. There should be a thorough overhauling of the Finance Ministry, Reserve Bank of India and scam-tainted banks and a probe by a Joint Parliamentary Committee. This will restore the credibility of the banks. By K. Srinivasan, Managing Editor, PreSense

Nation Sansad Ratna Awards 2018 – Jury Committee Meeting The Sansad Ratna Awards is one of the initiatives of this eMagazine PreSense. Prime Point Foundation jointly with PreSense, has been honouring top performing Parliamentarians every year since 2010. The 9th edition of the Sansad Ratna Awards event will be held at IIT Madras in the first week of June 2018. Top performing Parliamentarians will be honoured with the Sansad Ratna Awards, based on their cumulative performance in various parameters till the end of the Budget Session of 2018.

Meeting with Shri Hansraj G Ahir

Shri Anand Rao Adsul (5th time MP), Shri Hansraj G Ahir (MOS Home) and Shri Arjun Ram Meghwal (MOS, Parliamentary Affairs) are the Jury Committee Members. They were the

recipients of the ‘Sansad Maha Ratna” Award for their outstandingly consistent performance in the 15th Lok Sabha. The Jury Committee meeting was held at Delhi on 8th and 9th February 2018 to discuss and finalise the parameters for selection of the Awardees for the 2018 Awards. This year onwards, a Standing Committee of Parliament will be honoured for outstanding performance. Parameters will be announced in the site www.sansadratna.in shortly.

Meeting with Shri Anandrao Adsul and Shri Arjun Ram Meghwal

By K. Srinivasan, Managing Editor

On 8th Feb 2018, the Sansad Ratna Awards Committee members met Hon’ble Shri Pranab Mukherjee, Former President of India at his residence at Delhi. The team briefed him about the Sansad Ratna Award Scheme.

Health Rabies, a 100% Fatal Disease That Is 100% Preventable

Rabies is a zoonotic disease (a disease that is transmitted from animals to humans), caused by the rabies virus. With the exception of Antarctica, rabies is endemic in all continents. Official reports from the World Health Organisation (WHO) put the global estimate of rabies deaths at 55,000 and India accounts for 36% of the deaths (about 20,000). This figure from India is also feared to be under-reported as many of the deaths are not declared as caused by rabies. This is a grave picture for India.

99% of the human rabid deaths are from dog bites. 40% of these deaths are children below 14 years of age. This is because children are weak to resist the attack due to their short stature, and also because of their curiosity with the animals, and their ignorance about the threatening consequences of bites. They therefore, do not report them to elders. Only mammals can get rabies. Birds, fish, reptiles and amphibians do not carry or get rabies. Among the mammals, the most common carriers of rabies among the wild are bats, foxes, racoons, coyotes and skunks. Among the domesticated animals, dogs, cats and some farm animals like the cattle are the common carriers of rabies. In India, domestic dogs are reported as the most common reservoir of the virus, with more than 95% of human deaths caused by dog-mediated rabies. Infection, Symptoms and Diagnosis The virus is transmitted in the saliva of rabid animals and generally enters the body in the virus-laden saliva from a rabid animal into a wound such as a bite or a scratch or by direct exposure of the mucosal surface (lining of a body opening like the nose, mouth, etc) to the saliva from an infected animal (during licking). The virus cannot infiltrate intact skin. The incubation period for rabies is normally 2-8 weeks but can go up to a few years, depending on factors such as the location of virus entry and viral load (concentration of the virus). The initial symptoms of rabies include fever with pain and unusual or unexplained tingling, pricking, or burning sensation (paraesthesia) at the wound site. Once the virus reaches the brain, it further replicates, resulting in the manifestation of clinical signs in the patient. As the virus spreads to the central nervous system, progressive and fatal inflammation of the brain and spinal cord develops and death is certain within 10-14 days. There are two forms of the disease:  

Furious rabies exhibits signs of hyperactivity, excitable behaviour, hydrophobia (fear of water) and sometimes aerophobia (fear of fresh air). Death occurs in a few days due to cardio-respiratory arrest. Paralytic rabies accounts for about 30% of the total number of human cases. This form of rabies runs a less dramatic and usually longer course than the furious form. Muscles gradually become paralysed, starting at the site of the bite or scratch. A coma develops, and eventually death occurs. The paralytic form of rabies is often misdiagnosed as a neurological infection as encephalitis or meningitis, contributing to under-reporting of the disease.

Unfortunately, the current diagnostic tools available are not equipped for detecting the rabies infection before the onset of the clinical disease and the rabies-specific symptoms of hydrophobia or aerophobia are presented. By then, it would be too late to treat the disease as it has then become 100% fatal. But the silver lining in this morbid series of bad news is that this dreaded disease is 100% preventable. Treatment The World Health Organisation (WHO) has classified ‘animal contact’ into three categories and recommended the corresponding Post Exposure (bite) Prophylaxis (treatment) or PEP for the treatment.