On 30 December, the Mumbai Police’s Economic Offences Wing arrested an executive of Bank of India who had been on suspension in connection with a 2014 fraud case.
The banker was allegedly involved in giving loans against fixed deposits. Indeed, money was kept with Bank of India in the form of fixed deposits, but it seems that this gentleman was not careful in his due diligence when the fraudster approached the bank posing as a representative of government organizations that had kept fixed deposits with it and asked for the so-called cash credit facility against such deposits, using forged documents. It is not known as yet whether the banker failed in his appraisal of loan proposals based on fake papers or he was also a partner in the fraud.
The arrest took place a few days after the Central Bureau of Investigation filed its chargesheet against two employees of another large public sector bank, Bank of Baroda, for serious offences, including criminal conspiracy and cheating in connection with alleged illegal remittances of at least Rs.6,000 crore made to around 350 accounts in Hong Kong and Dubai from one of its branches in New Delhi.
In its first information report, the investigation agency has alleged that 59 current account holders and a few unidentified bank officials conspired to send overseas remittances mostly to Hong Kong for imports that did not exist through 6,255 transfers between May and July 2015.
There were irregularities at three levels. First, the accounts were opened in fictitious names, violating the so-called know your customer or KYC norms; second, the accounts were manipulated to facilitate foreign exchange transfers, and third, the source of money that was being transferred from other accounts to these accounts is suspect.
Suddenly, the spotlight is on the rising frauds in the Indian banking system. The banking regulator has taken note of this and set up a central fraud registry. The prime minister’s office also had met with the regulator in 2015 to review the fraud-detection system.
Replying to a question in Parliament, minister of state for finance Jayant Sinha recently said that 861 bank frauds involving Rs.1 lakh and more were reported in the first half of the current fiscal year. The total money involved in such cases was to the tune of Rs.4,920 crore. In the last fiscal year, 1,651 such cases were reported, involving Rs.11,083.11 crore.
The myth that the rise of frauds in the banking sector is related to the swell in the pile of banks’ bad loans has been busted by the findings of onlineRTI.com, a Bengaluru-based start-up that helps citizens file queries under the Right to Information (RTI) Act. Between fiscal years 2014 and 2015, money involved in bank frauds almost doubled—from Rs.10,170 crore to Rs.19,361 crore—even as the rise in banks’ bad loans was far lower in percentage terms during this period.
Incidentally, Maharashtra and West Bengal account for more than 50% of the loss that the banking system has suffered from frauds. Bank branches in Maharashtra witnessed a 150% rise in frauds—from Rs.2,445 crore in 2013-14 to Rs.6,115 crore in 2014-15—while West Bengal saw a staggering seven-and-a-half-times rise, from Rs.773 crore to Rs.5,930 crore.
Two public sector banks that have seen the maximum rise in fraud cases are Punjab National Bank and Central Bank of India. While Punjab National Bank has lost Rs.2,310 crore, Central Bank of India’s loss has been marginally lower at Rs.2,150 crore. Overall, the public sector banks’ share in the money lost in frauds is lower than their market share of business; for private banks, it has been higher.
While the incidents of fraud have been on the rise, there is no clear trend as both the nature of the frauds as well as the reasons behind them are diverse. For instance, a few years ago, when a news portal claimed to have unearthed a money laundering racket across many large banks, the employees of these banks were implicated for violations of KYC norms, anti-money laundering rules and other basic banking norms. They might have done so in their over-aggressiveness to acquire customers and meet stiff business targets given to them. Around the same time, the chairman of a public sector bank was arrested for taking a bribe. He was sanctioning loan to a particular company that was probably not eligible for such a loan.
The story behind the Rs.6,000 crore Bank of Baroda fraud is entirely different. Many companies are believed to have been taking advantage of various concessions in the form of subsidies offered to exporters by producing fake export bills. They receive money from overseas, faking exports. How would they return the money? By faking imports.
I will not be surprised if many more instances of such foreign exchange remittance fraud surface as the companies that have been enjoying export concessions would resort to fake imports to complete the second leg of transactions that they opened by faking exports.
While the money involved in corporate frauds is large, the frauds in the retail banking segment always outnumber the corporate frauds. The reasons for this are many, ranging from the lack of oversight by the line managers to the senior management’s liberal approach on deviations from the existing processes and the pressure to meet stiff business targets. And, of course, lack of integrity.
A new dimension is added with the change in the business model of many banks. Almost all banks have been using their branches to generate liabilities (deposits) and fee income by selling financial products, while assets (loans) are built by the back office, based on information sourced at the branches. The fraudsters take advantage of the absence of human intervention in granting loans. A few banks are planning to change their business model by empowering employees to take decisions on retail loans at branches.
