Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
From UPSC perspective, the following things are important:
Prelims level: SWIFT
Mains level: RBI’s move preventing bank fraud
- Much before the scam came that to light at the PNB in 2018, the RBI had earlier cautioned the banks about the possible misuse of the SWIFT infrastructure and directed them to implement safeguards.
Society for Worldwide Interbank Financial Telecommunication
- The SWIFT infrastructure is the global messaging software that enables financial entities to send and receive information about financial transactions in a secure, standardised and reliable environment.
- In order to use its messaging services, customers need to connect to the SWIFT environment.
- Messages sent by SWIFT’s customers are authenticated using its specialised security and identification technology.
- Messages remain in the protected SWIFT environment, subject to all its confidentiality and integrity commitments until they are safely delivered to the receiver.
- It does not facilitate funds transfer, rather, it sends payment orders, that must be settled by correspondent accounts that institutions have with each other.
- On receiving this message through SWIFT, banks abroad, mostly branches of domestic banks abroad provide funds to the company.
RBI fines banks for non-compliance
- Even the PNB scam failed to wake up banks was mainly due to people and process failure not so much a technology failure.
- Despite repeated warnings, the PNB fraud, touted to be among the biggest in the industry, happened. This prompted the banking regulator to again remind banks about the possible misuse of SWIFT.
- The RBI came down heavily on the banks, imposing monetary penalty on 36 banks, including the SBI, ICICI Bank and the Yes Bank — to name a few.
- These banks failed to implement the safeguard which was mainly integrating the SWIFT infrastructure with Core Banking Solution (CBS) within a time frame.
- The Banking Regulation Act allows the RBI to impose a maximum penalty of Rs. 1 crore for a single breach.
Now, what is Core Banking Solution?
- Core Banking Solution (CBS) is networking of branches, which enables Customers to operate their accounts, and avail banking services from any branch of the Bank on CBS network.
- It is regardless of where he maintains his account.
- The customer is no more the customer of a Branch. He becomes the Bank’s Customer.
Why such move?
- One of the main reason is for not maintaining the timeline though many of them have complied with the norms now.
- Another is, since the CBS was required to be integrated with SWIFT, the question is whether CBS was equipped for this.
- It means compliance was required from third-party vendors and their lack of readiness also could have led to delays.
- Third, even if the third-party software was ready, the bank may not have used it effectively.
- And, finally, there could be some small banks who may be not have started the process.