Systems are sacrosanct

Given the speed with which bank frauds are unravelling, newspapers may soon need a separate column to report on them every day. Frauds committed on banks are not new, but still alarming and need complete analysis.

Bank frauds can be classified under loan frauds and other types. Loan frauds typically refer to cases where the borrower intentionally tries to deceive the bank by not repaying the loan. Borrowers with or without the connivance of bank staff commit loan frauds. This is nothing but siphoning of bank funds and passing it off as genuine loan default. Other types of frauds on banks include fraudulent drawing of money from deposit accounts or false remittances.

Public sector banks have reported 8,670 loan fraud cases amounting to ₹61,260 crore over the five financial years up to March 31, 2017. This is Reserve Bank of India data, which has been obtained by a Reuters reporter through Right to Information request.

Between 2013-17, 17,504 total cases of bank frauds were reported in public and private sector banks. The banks have lost ₹66,066 crore. Out of these 2,084 cases had insider involvement.

Frauds occur when there is a flaw in the system adopted by banks or when the system is not followed.

Many banks in India are more than 100 years old and have very robust systems. . However, there are loopholes like an ambiguity or inadequacy in the law , which are exploited by fraudsters. . In the Punjab National Bank fraud case, the bank’s core banking system was not linked to SWIFT system, which is contrary to RBI’s guidance, which enabled the officers to fraudulently issue letters of undertaking.

Banks usually sanction a number of car and two-wheeler loans in cities. The vehicles financed are under charge of hypothecation with banks. Earlier banks used to compel the borrowers to paint ‘under hypothecation to …Bank’. But nowadays we hardly see such markings. The same thing holds good for goods in the shops and business establishment charged to the banks. When the charge is not properly displayed, there may be double finance and loan frauds. Again this is a case of system not followed by bank officials.

The type of fraud using Letter of Undertaking by Punjab National Bank is not a new one. It is always possible for someone to use banks’ letterheads and issue a guarantee and not account for it in banks’ books.

The guarantees are normally signed at the branch level of banks and also contain a clause that the beneficiary can obtain confirmation of the guarantees from its Regional/Zonal Office etc.

Persons/Firms (beneficiaries) who are acting on the basis of bank guarantees are generally aware of this provision. They are supposed to verify the genuineness of a guarantee. But some beneficiaries may not be aware of this provision and must be entertaining guarantees that are not actually issued by banks.

It is also quite possible that banks may refuse to pay the amount based on fraudulent guarantees stating that the guarantees were not issued on behalf of banks, which may lead to litigation and arbitration.

The RBI must ensure that wider and periodical publicity is provided to educate the business community about the availability of confirmation on the guarantees issued. We may also consider establishment of a central agency on the lines of credit rating agencies to record and verify all bank guarantees with usual checks and balances to ensure confidentiality.

The present situation should be used to enhance security systems in banks and flawless adoption of prescribed systems and procedures.

The writer is a retired banker

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