Can Blockchain save Indian banks ?
I have been tracking the Blockchain based cryptocurrency technology innovations for the past couple of years with great interest because of the depth of business and technology innovation that it personifies today.
Last week, I got a frantic telephone call from an an ex-employee. His voice was desperate. “Sir, I have lost everything. Do you know anything about the PMC Bank ? All my life’s savings are in there. Can you please find out anything ?”
After messaging a friend at India’s central bank — Reserve Bank of India (RBI), I got confirmation of a major problem at the 36 year old bank PMC (Punjab & Maharashtra Co-operative Bank Ltd). RBI’s press release pointed to “ major financial irregularities, failure of internal control and systems of the bank and wrong/under reporting of its exposures under various Off-site Surveillance reports to RBI that came to the Reserve Bank’s notice recently.”
A newspaper carries an incredible admission by the ex-Managing Director of PMC that they had hidden the extent of their Non-Performing Assets (NPA) by a large borrower to the RBI for the past many years. By the ex-RBI governor’s own statement to Parliament, it has become impossible for them to monitor over one hundred thousand bank branches all over India.
It is obvious that no country can survive such massive ongoing banking frauds or losses. It will lead to economic and social chaos and societal breakdown. Hence, it is imperative that the RBI uses advanced proven technologies to prevent such mishaps. Blockchain is one such technology solution.
RBI’s own research publication, describes Blockchain as a tamper-evident ledger shared within a network of entities, where the ledger holds a record of transactions between the entities. It further highlights the use of Blockchain in Fraud Detection as follows : As Blockchain Technology is built on the concept of sharing information across parties and consensus during transactions; it saves on reconciliation cost between banks and prevents losses because of documentary frauds.
India has seen 10 bank frauds happening daily between 2015 to 2018 with a total loss of over INR 75,000 crores (USD 10 Billion Dollars). This is in addition to the bad loans of over INR 9.34 Lakh Crores (USD 133 Billion Dollars) as on March 2019. Right from the Harshad Mehta scam in the early eighties to the Nirav Modi Punjab National Bank (PNB) fraud, the methodology has remained the same. To use un-reconciled entries between manual systems to fool the regulators. In PNB’s case, un-reconciled entries between 2 automated systems — Swift & CBS were done. In PMC’s case, loans advanced to a single large borrower to the extent of over 73% of their total deposits in violation of banking guidelines were not reported for years.
As mentioned in all the RBI Blockchain reports above, these frauds can be prevented using Blockchain.
As a country with a huge talented IT base, we should not loose out on the opportunity to use the most advanced digital technologies for serving our 1.3 Billion consumers with trust. It is precisely for protecting the general public from banking frauds such as these that Satoshi Nakamoto had the ingenuity and foresight a decade ago to create Bitcoin based on the rock solid transparent blockchain technology.
Today every business organization in India has to do periodic regulatory reporting to GST, Income Tax & others. These filings are done using digital signatures which are a key component of storing data on the blockchain. So, the usage of digital signatures is widespread. India also has the world’s cheapest mobile networks along with a high speed data communications infrastructure that has been widely deployed across India’s six hundred thousand villages today. So, we have the digital eco-system to handle this.
Uday Kotak, who heads one of India’s largest private sector banks says that he keeps wondering at night as to whether he will have a bank the next morning or whether some technology company be doing banking without needing a bank. He does run one of India’s finest banking organizations. However, for the others to survive the technology onslaught and minimize frauds, it is high time for the RBI to adopt Blockchain’s Distributed Ledger Technologies immediately.
On 31st December 2017, in a response to a public tweet of an Indian government bureaucrat questioning the tangible value of Bitcoin, I replied “Bitcoin acts as a global Medium of Exchange, Store of Value & Unit of Account. Tangible is the asset creation difficulty mathematical process & guarantee that when you send me a bitcoin, you have not made a private copy for yourself.”
The Hon’ble Supreme Court of India is currently hearing litigation on crypto currency matters. It is hoped that the distinction between Bitcoin and Blockchain becomes fully clear in the minds of regulators and they allow Blockchain to help achieve the government’s target of a USD 5 Trillion Dollars economy in the next few years. It would be a great Diwali gift for the nation.
PS : In the roughly 5 minute time to read this post, the Blockchain based Bitcoin network would have already processed over a thousand global transactions reliably and immutably. Watch the network’s progress here.
Background : In March 2017 at Singapore, I had the good fortune to meet and briefly interact with two of the leading global minds in this space. First, Andreas Antonopoulos who is a leading global expert in the Blockchain space.
And next, Vitalik Buterin who is a co-founder of the Ethereum Cryptocurrency network which is the second largest after Bitcoin in terms of market capitalization. He also is one of the most innovative brains in this space.
All of us need to influence our law makers to usher in an era of low cost trustworthy banking for the masses. I welcome your thoughts on the same.