Home / Opinion / Online-views /  Opinion | The anatomy of banking frauds

Fraud is a real operational risk for banks. As the latest Financial Stability Report of the Reserve Bank of India (RBI) shows, the Indian banking system reported about 6,500 instances of fraud involving over 30,000 crore in the last fiscal. Banking frauds attracted national attention when the Punjab National Bank reported earlier this year that it had been defrauded by companies related to jeweller Nirav Modi and Mehul Choksi. The state-run lender took a hit of about 12,000 crore. Several other cases of large banking frauds were reported subsequently, which raised questions about the ability of banks, especially in the public sector, to contain them. It is in this context that the analysis of the top 100 banking frauds by the Central Vigilance Commission (CVC), released this week, is important.

The CVC needs to be commended for this as it will help improve the general understanding of banking frauds. It analyzed frauds in different sectors and has also suggested measures that will help avoid such unscrupulous activities in the future. Some of the cases are worth highlighting here.

For instance, 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 because of the financial difficulties faced by overseas buyers. They found innovative ways to take credit from one bank before shipping products to overseas buyers and from another after shipping. Companies also manipulated the paperwork to dupe the lenders.

In another case, a company in the manufacturing sector showed an audited balance sheet with a net profit of 23.74 crore in a particular year and got credit facilities from a consortium of banks. However, without informing the lenders, it later revised its balance sheet and the profit shrank to 0.34 crore. It maintained current accounts with banks that were not part of the consortium. Interestingly, the company reported a significant loss in the next year on the same volume of turnover as the previous year. The books were manipulated with a clear intention of defrauding banks.

However, perhaps the most audacious among the cases mentioned was that of the 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. The miscreant later opened loan accounts in the name of the depositors by giving fictitious documents and original TDRs and took the money away.

Most frauds show that banks did not do proper due diligence, both before and after disbursing loans. The FD fraud, for example, shows the poor level of checks and balances in the banking system. Therefore, in order to check frauds, banks will need to improve their due diligence capabilities. This will lead to better credit appraisal and also help contain non-performing assets (NPAs). As the financial system evolves, expands and gets more sophisticated, banks will need to be better prepared to avoid frauds. As noted earlier in these columns, banks can also setup fraud monitoring agencies.

It is also important that banks leverage technology to detect frauds and improve the sharing of information. Further, like the PNB fraud, it is likely that in some cases bankers may have been complicit in frauds. However, law enforcement agencies should tread with care so that they don’t end up creating an environment of fear, affecting the flow of credit to productive sectors.

Aside from improving capabilities in the banking system, accountability of third-party service providers such as auditors and lawyers should also be fixed. India needs a system where auditors and other professionals vetting fake documents are not able to escape. This is necessary as large frauds can increase reluctance in the banking system to lend, affecting the flow of credit. In this context, the CVC has rightly noted: “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 willful acts of omission/ commission/dishonesty."

Some of the recent frauds and the accumulation of NPAs in the system show that Indian banks need significant improvements in operation and governance standards. Both the government and the regulator would do well to work with banks to improve the overall structure.

What should banks do to check frauds? Tell us at

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