Banking Frauds

Extempore Topic: Banking Frauds

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GD Topic: Banking Frauds: Result is Rising NPAs; Better to Prevent now than to run after

Banking Frauds – Prevention is the only Remedy
Bank frauds swallow all the economic development and cause financial indiscipline in the country. Big defaulters like Vijay Mallya, Nirav Modi, Mehul Choksi usurp thousands of crores which not only add to sharp increase in the quantum of Non-Performing Assets (NPAs) but siphon off sizable funds that could have otherwise been used for economic well being of thousands of poors willing to become entrepreneurs with banks’ help and plan to start up their small businesses.


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Bank Frauds in India

  • A survey by FIS, a financial services technology provider, showed that 18% of Indians suffered from an online banking fraud.This was a higher percentage than any other country. In comparison, only 8% of people from Germany reported a fraud followed by 6% in the UK. 
  • According to Reserve Bank of India reports, during the past five years more than 23,000 cases of fraud involving Rs 1 lakh crore have been reported
  • In one year only, from April, 2017, to March 1, 2018, Number of Bank fraud cases has gone up to 5,152 from 5,000 in 2016-17
  • Not only high, but the highest ever amount of Rs 28,459 crore is involved in the bank fraud cases reported during April 2017 to March 2018
  • There were 5,076 Bank fraud cases involving Rs 23,933 crore in 2016-17.
  • 23,866 Bank fraud cases of Rs 1 lakh or above in each case, were reported during 2013 to March 1, 2018. An amount of Rs 1,00,718 crore was involved in all these fraud cases  
  • Banks reported 4,306 fraud cases involving Rs 10,170 crore during 2013-14; in 2014-15 there were 4639 bank fraud cases involving Rs.19,455 Crore and in 2015-16, bank fraud cases were 4693 involving Rs.18,698 crores.  
  • Top Banking fraud cases are of over Rs 13,000-crore fraud in the Punjab National Bank (PNB) allegedly committed by diamantaire Nirav Modi and his uncle Mehul Choksi, the promoter of Gitanjali Gems.
  • Vijay Mallya the Chairman of Kingfisher, United Breweries and many other companies has allegedly routed Rs. 9,000 crore (US$1.3 billion) in loans from 17 Indian Banks and has run away and is still at large.
  • Rs.600 Crore Loan Fraud in IDBI has allegedly been committed by Aircel promoter C Sivasankaran. In the aftermath, CBI has booked top officials of two public sector banks, a former CMD of the IDBI Bank, former Aircel promoter C Sivasankaran, his son and companies controlled by him in this connection
  • The CBI has named 15 bank officials who worked at senior levels at the IDBI in 2010 and 2014 when loans were sanctioned to the companies controlled by Sivasankaran in its FIR registered on a complaint from the Central Vigilance Commission. 
  • Managing Director and CEO of Indian Bank Kishor Kharat (who was then MD and CEO of IDBI Bank) and his counterpart in Syndicate Bank Melwyn Rego (then Deputy Managing Director in IDBI Bank), along with then Chairman-cum- Managing Director of IDBI Bank MS Raghavan, have been named in the FIR filed by the CBI. 
  • The gross NPAs of all banks in the country amount to Rs 8,40,958 crore in December 2017 as per Government of India Reports. The NPAs are led by industry loans followed by the services and agriculture sector loans.
  • The highest amount of gross NPAs is for the country's largest bank, the State Bank of India, at Rs 2,01,560 crore. NPA for PNB stood at Rs 55,200 crore; for IDBI Bank - Rs 44,542 crore; Bank of India-  Rs 43,474 crore; Bank of Baroda, Rs 41,649 crore; Union Bank of India, Rs 38,047 crore; Canara Bank, Rs 37,794 crore; ICICI Bank, Rs 33,849 crore. Minister of State for Finance Shin Pratap Shukla presented the data in the Lok Sabha on March 9, 2018.

Rs.13000 Crore Bank Fraud: Blow on Banking System

  • In 2016, following Bangladesh Bank heist of USD 81 million, RBI issued an advisory to all the banks asking them to ensure that their computer systems running core banking solutions (CBS) were properly integrated, wherever required, with SWIFT (Society for Worldwide Interbank) - a messaging service for interbank transactions across the globe.
  • Punjab National Bank whose Rs.13000 Crores are at stake, could not integrate its CBS with SWIFT for many years due to system upgrade process. PNB therefore could not comply with the  RBI advisory and could not detect the fraud early. The loss could not be prevented either.
  • As per the PNB estimate, the final figure of fraud can go beyond Rs.12,600 crore
  • Letter of Undertakings (LoUs) to firms linked with diamond merchants Nirav Modi and Mehul Choksi were issued to customers having no sanctioned credit limits. The follow up on these LoUs was not done despite the fact that many of them were not repayed even after expiry of prescribed period of 90 days.
  • No communication was recorded for issue of LoUs and end transactions caused by the credit assurances.
  • Inter-bank communication involving the lending overseas branch was not maintained.
  • Reconciliation and confirmation processes were not followed.

Type of Bank Frauds

  • There is difference between wilful defaulter and the defaulter due to compulsion without much of his mistake. Wilful defaulter is a criminal to the society as a whole and should not be spared.
  • A loan can be recovered by infusing more capital in case a business decision has gone wrong because that particular firm failed in the market and the loan has become NPA. But in the case of a loan fraud, it is criminal intention as in the Nirav Modi case.
  • These perpetrators of Bank Frauds misuse the banking system and disturb financial discipline making banking system vulnerable and insecure for common people dealing with banks
  • When farmers don't repay their loans, they commit suicide. If the middle class fails to pay their EMI, their homes and cars get confiscated. But the big defaulters like the corporate groups take huge loans do not repay and banks turn them into NPAs or loss assets. This is the loss of huge public money
  • These big defaulters run out of country due to timely action and arrest of them. Although, many people should have been arrested, but not a single person of the corporate group has been arrested giving wrong signals in the society
  • The Banking sector is already under stress and is approaching every now and then to the Government for re-capitalization, but these loan frauds throw cold water to all the efforts
  • Banks' financial balance sheets are stressed because of the massive buildup of NPAs and the frauds are adding to their woes
  • In December 2017, Ravi Shankar Prasad, the minister for information technology, said that there were over 25,800 cases of digital fraud in India in 2017.
  • Financial transactions in the advanced society have become more web based and electronic exchanges or use of Debit and Credit cards are the go-to mode of transactions. With this advancement, notorious hackers have found ways to beat the system and commit theft of e-money and frauds

Prevention of Bank Frauds if the only Cure

  • Most of the big corporates who have committed fraud to the tune of thousands of crores are shying away from coming back and to repay the money as they are aware that the punishment by law will still be there even if they repay. Indian Law or the Indian Government has no way to award softer punishment even if these defaulters repay the amount in full. Accordingly, it is more important to prevent a bank fraud than to run after it when it is done.
  • With the existing rules and laid down procedures most of banking frauds can be prevented, in case they are meticulously followed and bank staff is not pressurised to sanction the loan.
  • Former RBI governor Raghuram Rajan writes in his book, I Do What I Do: “Today, a variety of authorities…monitor the performance of public sector banks… It is important that we streamline and reduce the overlaps between the jurisdictions of the authorities, and specify clear triggers or situations where one authority’s oversight is invoked.” 
  • RBI is tasked with detecting infirmities, but has no authority to enforce its own orders, administer remedial measures or even deliver swift punitive action. The central investigative agencies are tasked with following up on investigations and pursuing legal recourse. The political pulls and pressures on these agencies, as well as the Indian legal system’s long-drawn processes, provides swindlers with enough escape routes and is never a deterrent. It should be looked into.
  • As a cautious bank customer, you should register your working mobile number with your bank so as to receive SMS/Email alerts regarding transactions.
  • Check the emails and messages received from the bank, regularly. In case you find any suspicious or unapproved transaction that you can't place, consult and report to the bank, immediately.
  • Never share your banking User Id, Password or OTP (One Time Password) with anyone. No bank official will ever call you for these details. 
  • Never share your Debit Card/ Credit Card Number or the numbers displayed at their back with anyone as you may end up losing money and be held responsible at the same time.

Steps: Banks should Take

  • Banks should review their systems and procedures regularly. Ethical banking practices should be preferred. Disclosures to RBI, SEBI and other regulators should be made with consistent periodicity.
  • SWIFT-CBS linking must be made mandatory for all LoUs. Confirmation from lending foreign branches must be done for each of the LoUs.
  • All internal and external audits must be completed on time at branch level. The audit reports should be shared with the government's auditors and examined by the RBI. In the PNB fraud case, the bank has told the finance ministry that the last audit by RBI was done in March 2009.
  • Only well trained bank staff suitable for the role should be posted undertaken for the skilled job.
  • Use of technology for preventing fraud should be encouraged within banking ecosystem.
  • New technology like blockchain can be used to record all banking transactions.
  • Once a fraud is detected, it should be immediately flagged by the bank and concerned agencies roped in for probe

Preventive Steps Already Taken

  • Reserve Bank of India says "The reported fraud cases are processed and action is taken according to the facts and circumstances of individual cases." But this is what is being done when the thousands of crores of Rupees have been siphoned off with very low chances of recovery
  • RBI has constituted an expert panel to examine what is ailing banking operations resulting in increasing cases of big frauds. The panel has been tasked to recommend measures to fix the systemic loopholes. The Centre is also analysing the risk management framework for banking sector.
  • As per its notification in July 2017, The Reserve Bank of India has tried to limit customers’ liability when faced with fraudulent online transactions by giving them a window of three days to report the fraud. However, this does not extend to cases where the customer knowingly gave their payment information to a third party. 
  • Indian police is also being trained to tackle cyber crime. The government of Karnataka, which instituted a cyber crime cell in 2003, plans to enroll 1000 policemen in cyber crime training programmes. In addition, the police units of Maharashtra and Uttar Pradesh are collaborating with data security and IT experts to improve their cybercrime investigation skills. 

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