The report on top 100 bank frauds submitted by the Central Vigilance Commission (CVC) to RBI, ED and CBI has shed light on various aspects that facilitated the perpetration of the fraud in the Indian banking system.
The report, that is a thorough analysis of the top 100 frauds, studies carefully the modus operandi, amount involved, type of lending, anomalies observed and loopholes involved in these frauds, besides providing guidelines to improve the system.
One key finding highlighted by the report is the existence of serious loopholes in the system that enables large scale frauds. The report classified various frauds in to 13 sectors, i.e. gem and jewellery, manufacturing and industry, agro, media, aviation, service and project, discounting of cheques, trading, information technology, export business, fixed deposits, demand loan and letter of comfort.
Here are the key findings from the analysis:
Gem & Jewellery Sector
The jewellery sector has been in news after the fraud conducted by Nirav Modi and Mehul Choksi came to light. According to the report, fraud activities in the sector often showed a pattern. Companies deliberately inflated the valuation of diamonds. The banks, in turn, often purchased unpaid export bills, leading to disruption of cash flow after the firms informed that they were unable to make payments due to disruption of cash flow from foreign customers. This was often backed by various reports and bills submitted by defaulters which were often manipulated.
As per the report, these frauds can only be controlled by bringing improvements that will guarantee genuineness of the companies.
In this category, firms usually started availing credits in form of working capital under consortium arrangement led by one of the banks. Often they would submit manipulated bills such as fraud shipping bills to cheat the banks or show inflated turn over bills. This would often be followed by diversion of funds to other areas.
According to the report, ‘Due diligence of major debtors should be carried out by direct visit, direct balance confirmation, engaging agencies and comparing the realization of receivables as per stock/BD statements with routing of funds through lending banks to ascertain diversion through non lending banks.’
According to the report, in order to tackle frauds in the agro sector, a strict assessment of working capital limit should be done based on bank guidelines. The analysis of VAT returns, stock records and sales register should be carried out even while increasing the credit limits.
One key feature of frauds in this sector was the large scale diversion of funds provided by the lender to other accounts. There was also the practice of submitting inflated and fabricated invoices.
As per the report, banks besides carrying out thorough review and the past track record of the borrower, should also scrutinise the objective of forming different companies for similar activities by these firms.
In the aviation sector, firms cheated the bank by ‘suppressing facts in the financial statements and diverting the funds to related entities for the purpose other than those for which finance was made.’ In order to tackle this , the banks should examine the role of third parties such as chartered accountants, advocates, auditors and rating agencies that figure in accounts related to bank frauds and put in place strict punitive measures for future deterrence.