28 Jun 2018 19:21 IST

Bank scams: the mere tip of the iceberg

Lack of robust systems, internal controls and poor oversight are part of the systemic problem

The floodgate of bank scams have burst open over the last few months and it has been quite embarrassing for the incumbent government. Every other day, reports in the newspapers and on TV channels reveal frauds that run into thousands of crores of rupees. Fraudsters and tricksters effortlessly swindle money and conveniently flee the country, leaving the government and investigating agencies looking like jesters.

With the government already battling a high level of non-performing assets (NPAs) and weak banking financials, such scams are a cause for serious concern.

The big fish

There has been a huge hue and cry about public monies being swindled by the rich and powerful, especially those close to the regulators and the government.

The Nirav Modi episode, which cost Punjab National Bank (PNB) close to ₹12,000 crore, (wiping out a large chunk of PNB’s net worth), made the Vijay Mallya default look quite small in comparison; then there was news of Vikram Kothari’s fraud through Rotomac, also running into thousands of crores.

In the Rotomac case, Vikram Kothari and his son Rahul Kothari were arrested by the CBI for defrauding a consortium of banks, and swindling them of ₹4,000 crore. The promoters diverted several loans taken for Rotomac to other businesses and ventures, which was against the purpose for which the money was sanctioned.

Smaller cases

Apart from these high profile cases, there were numerous other not-so-well-known ones too. In 2017, a few people opened around 400 bank accounts with Syndicate Bank and cheated it of exceptionally large sums using fake cheques, letters of undertaking and insurance policies. Credible reports have surfaced where, in a single year, more than 3,000 cases of bank fraud were detected.

Not only public sector banks, but private sector ones and their employees are also involved.

All these have manifested because of collusion, lack of robust internal control systems and poor oversight. These lie at the heart of risk management and are vital to secure the interests of deposit-holders in a bank. Unfortunately, these essential requirements are ones most compromised.

A private affair

One could argue that public sector banks are inefficient and, since they are large, cannot be perfectly managed, thereby making such frauds ubiquitous. Recent reports, however, show that private sector banks — such as ICICI , HDFC and Standard Chartered — too have reported a number of cases of fraud and financial loss.

Not all scams necessarily relate to financial deception. There are other means of duping banks where the depositors’ and shareholder monies are at risk. Take, for example, the case of ICICI Bank’s CEO, who is currently under investigation for extending financial assistance to the Videocon group.

The Videocon Group, headed by Venugopal Dhoot, secured a loan of around ₹3,000 crore from the bank. Subsequently, Dhoot set up a company with three people at the helm, all related to the MD of ICICI, Chanda Kochhar — her husband, Deepak Kochhar, and two other relatives. Dhoot gave a loan of around ₹60 crore to this newly set-up company, and then transferred the loan he gave to a trust that is owned by Deepak Kochar.

This could have well been an ‘arms length’ transaction justified by the required security norms but, given the circumstances and the people involved, the whole transaction could be viewed as a loan unduly influenced by the MD.

A part of the transaction was routed through an intermediary entity, Videocon. This could mean that those involved weren’t personally responsible if the money turned into a bad loan, thus putting the whole loan of around ₹3,000 crore at risk; something the depositors would be seriously concerned about.

The finer details

This transaction was flagged by an activist investor, who questioned the MD’s motive in this transaction. ICICI Bank and its board immediately set up an internal committee, that, after investigation, gave Chanda Kochhar a clean chit. But the issue started growing in stature and regulators are now involved. They’re looking into the entire transaction to rule out foul play.

Chanda Kochhar’s stature is massive, her achievements awesome; she comes with an impeccable ethical track record. However, given the circumstances, there is clearly a ‘conflict of interest’ in this transaction that needs to be cleared.

Some may say she is ‘technically’ in the clear. Section 20 of the Banking Regulations Act 1949 does not require a director to disclose a related-party transaction made with a relative, whereas the Companies Act 2013 requires that such conflicts of interest be flagged in a timely manner. Hence, if the allegations are proved, although Chanda Kochar may be technically right, she may not have been ethical.

Looking at these cases, the Reserve Bank of India — key stakeholder that oversees the commercial banks — and the bank boards have a lot to work to do to sort out this big problem plaguing Indian banks.