The worst seems to be far from over for ailing public sector banks (PSBs). Even as the bad loan clean-up exercise is underway, fear of frauds has gripped the sector.
On Tuesday, the Finance Ministry sent a missive to state-run lenders to examine all bad loans above Rs 50 crore for possible fraud, raising concerns that more pain could be in store.
It also gave a 15-day ultimatum to PSBs to identify and plug any operational and technical loopholes.
This comes on the heels of the Punjab National Bank reporting additional fraudulent transactions of Rs 1,300 crore, taking the total financial implication due to fraud to Rs 12,700 crore.
The government, being the owner, is well within its reach asking banks to sense-check loans, but the move subtly indicates the failed role of the banking regulator, whose core job, among others, is to make rules and prevent such occurrences.
As per RBI data, accessed by Reuters, state-run banks reported a staggering 8,670 ‘loan fraud’ cases totalling $9.58 billion in the last five financial years. The numbers are suspected to be high er as the figure includes only cases reported to the RBI involving loans of Rs 1 lakh or more.
According to former RBI Deputy Governor S S Mundra, banks tend to report an account as fraud only when they have exhausted chances of recovery. Delays in reporting frauds slow down efforts of making the modus operandi public, besides delaying action against unscrupulous borrowers by law enforcement agencies, which impact the recoverability aspects, he warned.
The central bank has a robust framework on loan frauds, including a check-list of 45 early warning signs to detect frauds like frequent change in the project scope, funds coming from other banks to liquidate the outstanding loan amount, delay in payment of outstanding dues, stake reduction by promoter/director.
In the past, the RBI and IBA decided to circulate caution advices relating to frauds, including those pertaining to loans and advances. However, setting up of a central fraud registry to enable quick information sharing is yet to be put in place. There was also a proposal whereby the CBI and the Central Economic Intelligence Bureau were to share their databases with banks, but it remained a non-starter.
As per banking norms, typically, for every loan that a bank offers, it should follow a robust appraisal and an effective credit monitoring mechanism during the entire life-cycle of the loan account. The bank’s Risk Management Group or any other appropriate group collects independent information and market intelligence on borrower’s track record, involvement in legal disputes, raids conducted on businesses etc, for loan sanctioning.
Drawing up pre-emptive action plan
- Nationalised banks get 15-day deadline to draw up pre-emptive action plan to plug loopholes, combat risks
- Each bank will form a group to do comparative assessment of its risk management practices with best practices
- Panel to suggest action points including technological solutions