Bad loans and the resultant losses suffered by banks in India crop up in public discussions every now and then, especially since stricter norms were mandated by RBI for recognising NPAs in 2015/16, and the provision of restructuring old loans to keep them as standard was done away with.

In its immediate aftermath, there was a spurt in big bad loans and a few of them were classified as frauds too. Timely “recognition” of the rot was an issue, undoubtedly.

Now, it is no longer possible to ever-green loans using rephasement or restructuring as a route and if there is a problem of recovery, it sees daylight soon. So, mostly, what is disclosed by banks as non-performing assets is what there actually is in their books. But, instances of gaming of the system by unscrupulous borrowers and other operators continue to be reported still.

Perhaps, we cannot completely root out frauds because money has a lure and the instinct to defraud combined with ingenuity will always try to find out loopholes somehow. So, it is always a game of catch-up between those who try to fraud-proof the system and those who emerge clever enough to outsmart it.

Reported in the media as “scams”, the poster-boys of these frauds have been the likes of Vijay Mallya and Nirav Modi, now facing trial for economic offences.

There have been books earlier about bank-related frauds but what makes ‘The Great Bank Robbery: NPAs, scams and the future of regulation,’ authored by V. Pattabhi Ram and Sabyasachee Dash, special is the format chosen to present the story. The narrative is in the form of a conversation inside a banker’s family where a senior who has seen it all, over the years, tries to deconstruct the complexities of bank frauds including 11 sensational ones to the younger ones.

Explains basic concepts

In the process, the book becomes a primer too for those who are alien to the world of banking. For instance, it explains basics like the concept of CRR and SLR, recalls the practice of Bankers Receipts (popular during the Harshad Mehta scam) and the “pump & dump” formula of Ketan Parekh, who had successfully rigged the stock market in the 1995-2001 period.

It is a fascinating running commentary on the trajectory of frauds that have shaken the Indian banking sector and with the benefit of hindsight, offers an analysis of what went wrong and how.

The distinction among public, private, and cooperative sectors (PMC Bank, for instance) in these episodes of bank frauds is not very relevant as all of them have fallen prey to fraudsters. When the cookie crumbles or the losses erode capital, the tab ultimately gets picked up by the Government/exchequer or by the public sector (GTB being a good example) as no one wants a systemic muddle to linger.

While bank frauds make for good copy, it is when we discuss solutions that the picture becomes hazy. As the authors, who are Chartered Accountants, point out towards the end of their breezy 200-page volume (under Part III -Sleeping at the Wheel) the role of auditors, board members of the institutions concerned, the rating agencies (who are mostly behind the curve) and even the regulator will all come up for scrutiny.

Free the auditors

In most of the cases, it would appear that the right kind of questions were not raised or recorded or answers/responses demanded in writing by those whose duty it was to monitor/govern/supervise the performance of these financial institutions. About auditors, the authors state: “To improve the quality of reporting, we must free the auditor from the intimidation of being fired and put in place measures to eradicate the risk of a conflict of interest. Laying down a process to ensure the appointment of auditors by an independent agency other than the management, at least in the case of public interest entities, is a key to providing independence to auditors”.

As one finishes reading this book, there are two issues which arise as a sequel. From a credit risk and loan frauds angle, what kind of legal reforms apart from the last major one like the IBC (2016) is required to put lenders firmly in control? The IBC process, though a major step forward, itself has seen interminable delays in a few cases. The recent Supreme Court judgement on affording an opportunity to borrowers accused of fraud of being heard on the principle of “audi alteram partem” is also an important development in the classification of loans as “frauds”.

The second is with regard to the onus of the utilisation of borrowed funds. Internationally it is inbuilt into loan documents (for instance, APLMA- Asia Pacific Loan Management Association format) that “No Finance Party (read Lender) is bound to monitor or verify the application of any amount borrowed pursuant to this Agreement”. In other words, the responsibility of utilising the funds only for the purpose for which it has been borrowed lies with the borrower. If misapplied, it would be a criminal offence by the borrower. In India, lenders are expected to monitor “end-use” even though in the age of electronic banking the account-access is solely in the hands of the borrower. There is definitely a need to re-look at this approach as there have been umpteen instances of bank officials being hauled up along with defrauding borrowers, for no fault of the former except having taken a decision to lend or having handled the account at some point.

About the book
Authors: V. Pattabhi Ram, Sabyasachee Dash
Publisher: Rupa Publications
Pages: 226
Price: ₹595

Check it out on Amazon

(The reviewer is a commentator on banking and finance)