Why in news?
The Central Vigilance Commission (CVC) recently released a first-of-its-kind analysis of the top 100 banking frauds.
What is the report on?
- The banking frauds were classified and analysed for 13 sectors.
- It included gem and jewellery, manufacturing and industry, agriculture, media, aviation, service and project.
- Besides these, discounting of cheques, trading, fixed deposits, information technology, export business, demand loan and letter of comfort were also covered.
- The analysis focussed on the
- modus operandi
- amount involved
- type of lending (consortium or individual)
- anomalies observed
- loopholes that facilitated perpetration of the fraud concerned
- the systemic improvements required to plug the gaps in the system and procedures
- CVC shared its findings with the RBI, ED (Enforcement Directorate) and CBI (Central Bureau of Investigation) among others.
- The names of borrower accounts or entities, and the names of the banks have not been disclosed in the report.
- However, steps are being taken for investigation by the premier investigative agencies, fixing staff accountability and recovery measures.
What is the significance?
- The latest Financial Stability Report of the RBI highlighted the bank frauds scenario in India.
- The Indian banking system reported over 6,500 instances of fraud involving over Rs.30,000 crore in the last fiscal.
- It is in this context that the Central Vigilance Commission's analysis of banking frauds gains significance.
- It is a preventive vigilance measure to minimise the occurrence of such type of frauds in the future.
- It will help improve the general understanding of banking frauds and make aware the field functionaries on the existing lapses.
What are the key findings?
- Companies in the jewellery business inflated the value of imported diamonds to avail of a higher amount of loans.
- They took credit on the pretext that their export bills remained unpaid due to the financial difficulties faced by overseas buyers.
- They found ways to take credit from one bank before shipping products to overseas buyers and from another after shipping.
- The credit facilities to this sector increased manifold within a short span of time, as an effort by banks to increase their credit dispensation.
- Companies also manipulated the paperwork to dupe the lenders.
- Likewise, a manufacturing company showed an audited balance sheet with a net profit of around Rs.23 crore in a particular year.
- It thus got credit facilities from a consortium of banks.
- However, without informing the lenders, it later revised its balance sheet and the profit shrank to Rs.0.34 crore.
- So clearly, the books were manipulated with an intention of cheating banks.
- In a notable fixed deposit (FD) fraud, the fraudster presented himself as a bank representative to companies and government organizations.
- For banks, he became a financial advisor of those organizations and managed to mobilize large bulk deposits.
- He gave fake term deposit receipts (TDRs) to depositors.
- He later opened loan accounts in the name of the depositors by giving fictitious documents and original TDRs and took the money away.
- Based on these findings, various industry specific suggestions for systemic improvement have been given in the final report.
What are the suggestions made?
- Strengthening of standard operating procedures (SOPs) and the monitoring system was suggested.
- Having some segment related limits on credit exposures was also emphasized.
- The FD fraud shows the poor level of checks and balances in the banking system.
- Therefore, banks will need to improve their due diligence capabilities in disbursing loans.
- This will lead to better credit appraisal and also help contain non-performing assets (NPAs).
- Banks can also setup fraud monitoring agencies to be better prepared to avoid frauds.
- It is also important that banks leverage technology to detect frauds and improve the sharing of information.
- However, law enforcement agencies should not end up creating an environment of fear, affecting the flow of credit to productive sectors.
- Besides these, accountability of third-party service providers such as auditors and lawyers should also be fixed.
- India needs a system where auditors and other professionals examining fake documents are not able to escape.
- CVC noted that bank must immediately delist such third valuers, Chartered Accountants/ Chartered engineers, Advocates etc. who -
- have questionable credentials
- have been negligent in their professional duties (or)
- have caused financial loss to the bank by their wilful acts of omission/ commission/dishonesty
- In all, Indian banks need significant improvements in operation and governance standards.
- Both the government and the RBI should work with banks to improve the overall structure.
Source: Business Standard, Livemint
