CVC Analysis on Banking Frauds

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

1. modus operandi
2. amount involved
3. type of lending (consortium or individual)
4. anomalies observed
5. loopholes that facilitated perpetration of the fraud concerned
6. 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 -

1. have questionable credentials
2. have been negligent in their professional duties (or)
3. 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