Everything You Want To Know About Banking Frauds But Afraid To Ask

Many of us have seen different versions of a funny television ad promoting men’s deodorant brand Fogg. The settings of the ad vary from a grocery store to a hospital, café and even the India-Pakistan border but the conversation between two characters remains unchanged: "Kya chal raha hai?" (What’s new?) "Fogg chal raha hai" (Fogg is new).

Change the F word – from Fogg to fraud. This has been playing out in Indian banking and finance for quite some time. In the first week of November, the Central Bureau of Investigation (CBI) carried out searches at close to 200 locations across 16 Indian states and Union Territories. At least 1,000 officers of the agency were involved in the action, making it one of the largest coordinated searches this year, a PTI report said. The CBI did so after registering 42 fresh cases, involving at least Rs7,000 crore worth of fraudulent transactions. In at least four cases, the siphoned off funds exceeded Rs1,000 crore.

The Association of Certified Fraud Examiners, the world’s largest anti-fraud organisation which offers training to detect frauds, is observing Fraud Week between November 17 and 23 to create anti-fraud awareness. It’s time to take a close look at what’s happening on the fraud turf in Indian banking and finance.

For the record, Rs71,500 crore worth of frauds involving 6,801 cases were detected in financial year 2019 – little more than what the government of India wants to spend on the merger of Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd as well as the latest recapitalisation package for public sector banks (PSBs). Incidentally, at least 92 per cent of these frauds in value involved the PSBs that have around 55 per cent share in the volume of such frauds.

Going by numbers, it’s just about 15 per cent more than the previous year but, in value terms, 80 per cent higher. Around 73 per cent were large-ticket corporate frauds worth over Rs 100 crore each. One such case involved designer jeweller Nirav Modi and his uncle Mehul Choksi, who, with the help of Gokulnath Shetty, a retired deputy manager of Punjab National Bank’s (PNB’s) foreign exchange department at the Brady House branch in Fort, Mumbai, siphoned off Rs13,000 crore.

Of course, not all frauds happened last year. Like many other things in the financial sector, here too we see the so-called lag effect. Typically, frauds are detected on an average after two years and, going by the Reserve Bank of India (RBI) estimates, large frauds worth more than Rs100 crore each usually get detected in 54 months on an average. The PNB fraud was done over a period of at least 84 months.

So far this year, the RBI has penalised banks Rs123 crore for non-reporting or delaying in reporting 76 frauds. The list includes 11 banks that were penalised Rs8.5 crore for not complying with the norms to classify the now-defunct Kingisher Airlines Ltd account as fraud and report to the regulator despite being advised by the RBI to report the fraud "immediately" after the CBI initiated criminal proceedings.

Most frauds are related to credit; the share of frauds originating from the misuse of credit cards and internet is minuscule. In many cases but not all, “insiders” (read bank managers) played a role. The corporate-banker nexus may not be rampant but it does exist.

Let’s take a look at the various types of bank frauds in India.

# Fund transfer through RTGS and other clearing platforms: Typically, money is taken out of a customer’s account through fake/cloned cheques. It also involves, at times, fraudulent collections of demand drafts, issued by a third party.

# Dormant accounts: The branch bankers play a key role to make such accounts active by issuing new ATM cards and cheque books to perpetrate withdrawal of money from such accounts.

# Home loans: There are multiple ways of defrauding banks. For instance, the builder can sell one flat to many customers; the borrower can take a loan for a property already sold to another person; a person can be given loans more than what s/he can service either by forging earnings statement or with the help of branch bankers; the property value can also be inflated.  

# Advance against bills: Forged export bills and letter of credit help such frauds. The borrowers can also route their export proceeds through other banks.

# Gold loans: The borrowers can get higher loans inflating the value of gold pledged to the lender or even against spurious gold with the “help” of the valuer and branch bankers.

# Kisan credit cards or KCC: Such loans can be sanctioned without checking the KYC of the borrowers and the authenticity of the land records. Many a time, the borrowers are not traceable.

# ATM: Money is withdrawn using cloned ATM cards.

# Cash credit: Frauds involve falsification of the books of accounts and removal of goods and property hypothecated to the banks without their knowledge.

# Term loan: This is the biggest contributor to the frauds. The borrowers at times raise more money than they should, forging financial statements; they divert funds; they route the sales proceeds of their companies through banks outside the consortium (which has lent to them), and raise export credit through fake export orders. Among others, non-existent collaterals complete this list.

The banks are normally hesitant about talking about the frauds, fearing reputational risks. There are those odd cases when they are caught between different agencies and regulators. The Kingfisher episode is one such. The fear of being dragged into fraud cases and punished also slows down the decision-making process and credit flow.

The Central Vigilance Commission in August, in consultation with the RBI, reconstituted the Advisory Board on Bank, Commercial and Financial Frauds, renaming it Advisory Board on Banking Frauds to address this. This board will be the first stop for all large fraud cases before recommendations are made to the investigative agencies by the PSBs. It won’t deal with cases that involve senior bankers of the rank of general managers and above.

While this may encourage banks to talk about frauds and feel less inhibited to take credit decisions, tackling the frauds is a much tougher task.

This column first appeared in Business Standard / www.business-standard.com

To read the writer’s previous all previous columns, please log into www.bankerstrust.in

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd. His latest book is “HDFC Bank 2.0: From Dawn to Digital”.

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