The biggest banking scam in India has come to the forefront in the midst of celebrations of ‘Aazadi Ka Amrit Mahotsav’; in this case, Dewan Housing Finance Corporation Limited (DHFL) has hoodwinked a consortium of banks driven by the Union Bank of India to the tune of ₹35,000 crore through financial misrepresentation. The DHFL case was not an isolated case. In February this year, ABG Shipyard Limited of Surat had already taken a loan of about ₹23,000 crore in a fake manner.
Taking a hit
On February 1, 2019, a consortium of banks had held a meeting to take cognisance of the serious allegations of loan repayment default against the DHFL. Subsequently, a core committee of seven of the largest banks — the State Bank of India (SBI), the Bank of Baroda (BoB), the Bank of India, Canara Bank, the Central Bank of India, Syndicate Bank and the Union Bank of India (UBI) — was formed. KPMG (a ‘global network of professional firms providing audit, tax and advisory services’) was roped in as the evaluator to lead a unique survey review of the DHFL for the period April 1, 2015-March 31, 2019.
The Central Bureau of Investigation (CBI), in its first information report, has shown that the State Bank of India was the most badly hit with a non-performing asset (NPA) base of ₹9,898 crore the very sum the DHFL acquired from it. Essentially, the Bank of India and Canara Bank have been plundered to the tune of more than ₹4,000 crore each by the DHFL. Also, more than ₹3,000 crore each has been supposedly cleaned up by the DHFL from the Union Bank of India and the Punjab National Bank.
The banking system of any country is the backbone of its economy. Excessive losses to banks affect every person in the country because the amounts deposited in banks belong to the citizens of the country. The NPAs that banks incur are mainly due to bad loans and scams.
Data by the Reserve Bank of India (RBI) show that around 34% of scams in the banking industry are on account of inside work and due to poor lending practices by and the involvement of the junior and mid-level management. The data by the RBI also show that one of the fundamental problems in the way of the development of banking in India is on account of rising bank scams and the costs consequently forced on the framework. Strangely, as in a Global Banking Fraud survey (KPMG), the issue is not just for India alone; it is a worldwide issue.
An NPA projection, a list
In a Financial Stability Report released by the RBI in December 2021, there is a projection of the gross NPAs of banks rising from 6.9% in September 2021 to 8.1% of total assets by September 2022 (under a baseline scenario) and to 9.5% under a severe stress scenario. Frauds in the banking industry can be grouped under four classifications: ‘Management’, ‘Outsider’, ‘Insider’ and ‘Insider and Outsider’ (jointly). All scams, whether interior or outside, are results of operational failures. Research by Deloitte has shown that limited asset monitoring after disbursement (38%) was the foremost reason behind stressed assets and insufficient due diligence before disbursement (21%) was among the major factors for these NPAs.
There are news reports every few weeks of some fresh/new bank scam or the other which is breaking the trust of the common man in the banking system. There are many examples of bank scams: the Nirav Modi and Mehul Choksi scam involving the Punjab National Bank (₹11,400 crore), the case of businessman Vijay Mallya (₹9,000 crore) involving nearly 13 banks, the Andhra Bank fraud (₹8,100 crore), the PMC scam (₹4,355 crore), the Rotomac Pen scam (₹3,695 crore), the Videocon case (₹3,250 crore), the Allahabad Bank fraud (₹1,775 crore), the Syndicate Bank scam (₹1,000 crore), the Bank of Maharashtra scam (₹836 crore), the Kanishk Gold Bank fraud (₹824 crore), the IDBI Bank fraud (₹600 crore), and the R.P. Info Systems Bank scam (₹515 crore) to name just a few.
A high NPA also reduces the net interest margin of banks besides increasing their operating cost; these banks meet this cost by increasing the convenience fee from their small customers on a day-to-day basis.
According to the RBI data, corporate loans account for nearly 70% of these bad loans, while retail loans, which include car loans, home loans and personal loans, account for only 4%. A study by the Indian Institute of Management Bangalore has shown that poor bank corporate governance is the cause behind rising bank scams and NPAs.
Steps that need consideration
Over time, bad loans lead to higher NPAs. So, banks have to exercise due diligence and caution while offering funds. The regulation and the control of chartered accountants is a very important step to reduce non-performing assets of banks. Banks should be cautious while lending to Indian companies that have taken huge loans abroad. There is also an urgent need to tighten the internal and external audit systems of banks.
The fast rotation of employees of a bank’s loan department is very important. Public sector banks should set up an internal rating agency for rigorous evaluation of large projects before sanctioning loans. Further, there is a need to implement an effective Management Information System (MIS) to monitor early warning signals about business projects. The CIBIL score of the borrower (formerly the Credit Information Bureau (India) Limited) should be evaluated by the bank concerned and RBI officials. This must also include the classification and responsibilities of the lending and recovery departments.
Financial fraud can be reduced to a great extent by the use of artificial intelligence (AI) to monitor financial transactions. However, the adoption of digitisation beyond a point may have limits as AI provides quantitative information but does not take into account the qualitative aspects.
While the Government of India and the RBI have taken several measures to try and resolve the issue of scams in the banking industry, the fact is that there is still a long way to go. Rather than having to continuously write off the bad loans of large corporates, India has to improve its loan recovery processes and establish an early warning system in the post-disbursement phase. Banks need to carry out fraud risk assessments every quarter.
Only establishment of National Asset Reconstruction Company Ltd. (NARCL) or the ‘bad bank’ is not a real solution. These measures can help only after a loan is bad but not the process of a loan going bad.
Brajesh Kumar Tiwari, the author of ‘Changing Scenario of Indian Banking Industry’, is Associate Professor, Atal Bihari Vajpayee School of Management and Entrepreneurship, Jawaharlal Nehru University, New Delhi. The views expressed are personal. @bkt_brajesh