Bank frauds rising: Double to Rs 6,212 cr in 2012-13

Mumbai,Ramkumar :BL ;Nov. 22: 2013 

Public sector banks main victims of poor appraisal systems

Bank loan frauds almost doubled in 2012-13 adding up to Rs 6,212 crore against Rs 3,183 crore in the previous year. Public sector banks accounted for a chunk of these frauds. In terms of numbers, 349 cases of fraud of over Rs 1 crore were reported in 2012-13 up 28 per cent over the previous year’s 273 cases.

A fraud is an act or omission intended to cause wrongful gain to one person (in this case, the borrower) and wrongful loss to the other (the bank), either by way of concealment of facts or otherwise. 

In a recent presentation, RBI Deputy Governor K. C. Chakrabarty said poor credit appraisal and low level of promoter equity have led to a jump in the number of loan related frauds, especially diversion of funds. Loan related frauds accounted for 64 per cent of the money misappropriated followed by technology related and know-your-customer (mainly in deposit accounts) frauds.

There has been a 15-fold rise in large value fraud cases involving amounts of Rs 50 crore and above, from three cases in 2009-10 (involving an amount of Rs 404 crore) to 45 cases in 2012-13 (Rs 5,335 crore).

Chakrabarty observed that loan appraisal standards are lax for bigger loans both at the time of sanction and restructuring even as the assessing standards are stringent for smaller borrowers.

Loan appraisal must focus on the quantum of equity brought in by the promoters, the source of the equity, and the contingency planning in respect of infrastructure projects. According to Chakrabarty, “Increase in cases of large value fraud in accounts financed under consortium or multiple banking arrangements, involving even more than 10 banks at times, is a newly emerging, but unwelcome trend in the banking sector. Another glaring issue in this context is the considerable delay in declaration of frauds by various banks in cases of consortium/ multiple financing.”.

He pointed out that the RBI has come across cases where there is a lag of 12-15 months in declaration of the same case as fraud by different banks. This not only enables the borrower to defraud the banking system more, but also gives him time to erase the money trail and queer the pitch for the investigating agencies.