Fraud reporting is often a matter of perception
(My views are given at the bottrom )
The dividing line between delinquency in a loan account and fraud is very thin. The accounts which are viewed as delinquent by private banks are often viewed by public sector banks as frauds and reported as such.
August 18, 2013:
In a recent lecture, the RBI Deputy Governor, K. C. Chakraborty, said over 83 per cent of the cumulative losses of Rs 29,910 crore due to frauds occurred at public sector banks. The data given by the Deputy Governor also show that over 94 frauds involving a sum of over Rs 50 crore each were reported by nationalised banks, including SBI, in the 2009-10 to 2012-13 period.
Private sector banks, on the other hand, reported only six such cases and foreign banks, three. Chakraborty attributed this to deficient appraisal system, poor post disbursement supervision and inadequate follow-up. The implication is that private and foreign banks are far ahead in these aspects.
The statistics have to be viewed in the context of the environment in which the banks operate.
The dividing line between delinquency in a loan account and frauds is very thin. The accounts which are viewed as delinquent by private sector banks are often viewed by public sector banks as frauds and reported as such. The state-run banks come under the purview of the Central Vigilance Commission (CVC) and the CBI , whereas private and foreign banks do not.
There is, therefore, a tendency among public sector banks to report even normal delinquencies as frauds to be on the safer side of law whereas private banks are more discreet.
An account normally becomes delinquent due to one or more of the following reasons: title deeds not genuine; multiple finance against the same property; inflated security valuation reports; defective search reports; diversion of funds; shortage of stocks; and/or genuine business problems
CAPITAL EXPANSION
While the first four are undisputed frauds, the others are often open to interpretation. The Deputy Governor in his lecture raised the question as to whether diversion of funds is to be treated as frauds, and concluded that so long as the borrower does not dispute that he owes money to the bank, it may not be treated as ‘fraud’.
This is a new angle to the problem and has not been adopted by banks. Shortage of stocks may be due to sale of security without the bank’s knowledge or due to accumulated cash losses — which makes the distinction between fraud and genuine business loss.
Unplanned capital expansion is in fact another form of diversion of funds, which is normally treated as frauds by public sector banks.
As far as pre-sanction appraisal and due diligence are concerned, these are done based on the past track record of the company, past financials, future prospects, industry scenario, promoters’ reputation, integrity of the persons involved in the operations, and so on, at the time of appraisal. If any of these factors change subsequently, the account becomes delinquent. If any investigating official studies the appraisal at that time, he does a post mortem and can find sufficient loopholes in the appraisal and due diligence to treat it as fraud. In fact, if the appraisal in respect of even a well-run account is gone through with a fine-tooth comb, one can find a number of loopholes.
The Deputy Governor also lamented that frauds are reported even in accounts financed under consortium or multiple banking arrangement involving even more than 10 accounts. In consortium accounts, banks generally depend on the appraisal of the lead bank. But in a multiple banking arrangement, individual banks do their own appraisal and due diligence. It is inconceivable that so many banks would be equally lax in their appraisal and follow-up.
APPROACH MATTERS
The classification of accounts as frauds also depends on the attitude of the Chief Executive or the Chief Vigilance Officer of the Bank. This is illustrated by the fact that one small associate bank had the maximum number of cases registered with the CVC during the tenure of a particular chief executive. Are we to presume that so many officers became fraudsters during this period but reformed themselves after that?
Similar is the case of one nationalised bank whose chief executive fell on the wrong side of law enforcing agencies in the 1990s. His successor in his wisdom classified most of the accounts as frauds, referred them to CBI and more than 50 per cent of the officers were in the CBI net. It does not stand to reason that so many officers were working against the bank colluding with the chief executive.
The point to be noted is public sector banks have reported a much larger number of frauds does not necessarily mean that the officials of private sector banks are more efficient and superior in exercising due diligence than their public sector counterparts.
It only means that private sector and foreign banks are more discreet in ‘reporting’ frauds.
It is, therefore, necessary to study the system followed by various categories of banks in ‘reporting’ frauds before coming to any conclusion about the efficiency of banks.
(The author is a former Deputy General Manager of State Bank of Travancore and State Bank of Mysore.)
My Views
I fully disagree with the contention of Mr. K C Chakravorty, Deputy Governor RBI who says that public sector banks are reporting all fraud cases to Government
of India or to police or to CBI and CVC whereas private banks are not doing so honestly and perfectly .
It is wrong to say that the accounts which
are viewed as delinquent by private banks are often viewed by public sector
banks as frauds ad reported as such. The bitter truth is that public sector
banks are also not reporting delinquencies caused in loans due to sanction of
loan on fake deed, inflated land value, or multiple loans on same deed etc. as
enumerated by learned Dy governor during his address.
It will not be an
exaggeration to say here banks private or public, all are not reporting fraud
cases in toto and as far as possible are always trying to conceal such cases or
recover the dues without reporting such cases as fraud and treating such cases as normal loan delinquencies only .
This is primarily because of inhuman, biased and time consuming and time killing
treatment given by CBI or police to bank officials.This may be because of fear of ill treatment by bad borrowers and repercussion in form of beating or humiliation or killing from bad borrowers too. There is none to save bankers when they are threatened by criminal type bad borrowers.Even politicians in nexus with bad borrowers threat bank officials only , not to any miscreants sitting in courts or in administrative offices.
Normally banks in general are trying to avoid legal action or police action or CBI reporting in all types of frauds of delinquencies only to get rid of police action or
reporting to CBI or GOI only because it is open secret that these institute instead of extending
supports to lending bank in recovery of their legitimate dues from bad
borrowers start torturing bank officials. These officers start giving all possible favours to bad
borrowers because of the bitter but undeniable truth that bad borrowers remain
ready to offer bribe to inspecting officials whereas officials of banks
especially public sector banks cannot dream of spending money on bribe until
some officers trapped in fraud case become ready to do so only to save his own
service and own life from torture of offices like CBI.
DY governor is not perhaps aware that not only loan cases
involving frauds are not reported, even non-loan frauds are also not reported
.Many frauds committed by internal staff in nexus with outsiders or vice versa
are not reported if lost money is recovered by persuasion or by slight efforts from other other customers so that bank officials involved in
such frauds are not punished by their bank management and at least and good officers who detected such fraud are not
tortured by police or CBI officials.
The bitter truth is that bank officers in general and as far
as possible do not want to even file a
court case to recover their dues from normal and non-fraud related defaulters only
because they know how much torturous it is to deal with advocates, judges, and
administrative officers including officers at Debt Recovery Tribunal and District
Magistrates who are supposed to help in easy disposal of certificate cases or
who are supposed to help in ensuring easy possession of landed property of
defaulters after enforcing SARFACIA.
I will rather not hesitate here in saying that one of the
great reason of rise in bad debts in banks is that bank officials are more afraid
of courts, police and CBI but borrowers who are defaulters of banks do not fear
action under law. This is the tragedy of India that Good persons fear police and bad persons enjoy police, good
persons fear lodging a case in court of law whereas bad persons feel relaxed as
soon as a case is filed against him for his faults by any aggrieved person in
police or in any court because bad persons know the art of managing people in
court or in police or that of CBI.
Yes it is true that in some cases bank officers are also responsible
for bad loans but the fact is that as
soon as government succeeds in establishing rule of law and creating fear of
law in the minds of normal citizen banker or borrower, they will also try to stop
cheating their banks in the name of achievement of target.
The fact
is that not only bank staff but officers in other PSUs or government offices
also follow the same line of action. It is often heard that files are declared
as lost when some high profile person is trapped and is on the verge of getting
punished. Latest news is that files related to coal mining have also been
declared lost so that CBI fails to establish their charges against ministers and
high profile corporate houses.
Until Indian Government or India and ruling political class
understand the ground reality that there is no fear of legal action in the
minds of bad borrowers, they can do nothing to stop rising bad debts, they can do nothing to stop corrupt practices and they cannot give any relief to honest performers .
It is open secret that lacs of cases are
languishing in courts for decades and decades. The actual culprit may be a bank
defaulter or any crime doer, may be a businessmen or a political leader, he or she
does not get punishment if he or she has the power to manage the police and the
court or the ministers. But if the hones officers .does not having blessing of
some powerful persons he or she be transferred to remote place or suspended or
dismissed from the services by an ill-motivated top officer or by minister.
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