India’s biggest banking fraud at ABG Shipyard—nearly double the scale of the 2018 scam involving diamantaire Nirav Modi—has once again exposed the vulnerabilities in India’s banking system.
A lack of regulation, flawed lending policies, and an inefficient fraud monitoring mechanism are among the factors that have frequently led to instances of fraud and a rise in non-performing assets (NPA).
In the past few years, the Reserve Bank of India (RBI) and the Indian government have taken steps to resolve the industry’s pain points, but clearly not enough.
A shift towards digital banking and limited use of technology to detect loopholes, especially at a time when the covid-19 pandemic has forced employees to work from home, have increased the need for concerted efforts by authorities to prevent mishandling of public money.
On Feb. 14, the Central Bureau of Investigation booked Gujarat-based ABG Shipyard, India’s largest private shipbuilding company, and its former chairman and managing director Rishi Kamlesh Agarwal, along with others, for allegedly cheating a consortium of 28 banks of 22,800 crore rupees ($3.03 billion).
The company is alleged to have diverted funds to make investments in overseas subsidiaries and transferred money to several related parties. The CBI has charged ABG Shipyard of misappropriation of funds and criminal breach of trust.
While this was an issue involving the end-use of the loan disbursed, the Modi fiasco involving the Punjab National Bank involved siphoning of funds by bank employees, in collusion with the diamantaire. They manipulated the SWIFT payments network, the electronic messaging system used for overseas funds transfer, to carry out the scam.
An RBI’s report on banking (pdf) has said fraud cases have risen to 4,071 in the ongoing financial year until September, compared with 3,499 in the year-ago period. However, the amount involved declined significantly to Rs36,342 crore from Rs64,621 crore a year ago.
In the fiscal year ended 2021, more than half of the fraud cases were reported by private sector banks, while in terms of amount, the share of the state-run ones was higher. This means public sector lenders catered to high-value loan accounts that eventually turned into non-performing assets.
Internet or card transactions accounted for 34.6% of the cases, and 47.54% were related to advances.
It is believed that a bulk of loans categorised as NPAs involve money lent to wilful defaulters or promoters who have the ability to pay back to banks but won’t.
They have political connections and deep pockets to wage a battle with lenders in courtrooms for years. Some of these businessmen are powerful enough even to buy citizenship in countries with lenient tax regimes and tough extradition laws.
In the case of ABG Shipyard, CBI has issued look-out circulars against the accused persons in order to prevent their escape from the country.
“At the time of giving a big corporate loan, banks should insist on an affidavit from the promoter about all the passports he holds. Typically, banks only insist on Indian passports, but as we have seen in all these cases, fraudsters carry multiple passports and later use them to hide from Indian laws,” Naresh Malhotra, a senior banking consultant and a former banker with State Bank of India told Moneycontrol.
During the covid-19 pandemic, a push towards financial inclusion and digitisation made both consumers and banks rely heavily on electronic channels for banking. This significantly changed the way the industry operates.
Frauds related to data theft, cybercrime, third-party-induced fraud, bribery and corruption, and fraudulent documentation have increasingly been identified as major concerns, according to the Deloitte India Banking Fraud Survey (pdf).
Meanwhile, the RBI and the Indian government have announced a variety of measures—a moratorium on loan repayments, the interim freeze on insolvency and bankruptcy code (IBC) cases, and bank loan restructuring among others—to help struggling households during the pandemic. But these only worsened the problem.
Besides, remote working models for banking, which involve handling sensitive information, added to the problem. With a significant number of bank staff working from home, banks had to provide their staff remote access to their organisation’s network and information. This forced banks to bring about significant organisational and operational changes rapidly to avoid service interruptions, thereby raising concerns over vulnerability to fraud.
New loans and extensions arising out of the government’s support to businesses, along with the RBI’s moratorium, need careful monitoring of companies’ creditworthiness and viability of businesses in changing scenarios, according to industry experts.
The Deloitte survey says the top three factors leading to higher stressed assets are limited asset monitoring after disbursement, economic slowdown, and insufficient due diligence prior to loan disbursements.
These findings suggest that banks need to overhaul their monitoring frameworks to identify red flags in a loan account, facilitate early warning signals, and assess new fraud scenarios through intelligence gathered from internal and external sources.
It is worrisome that not all banks in India have their fraud risk management (FRM) department reporting directly to the top management. Therefore, it is argued that every bank must have an independent unit to detect frauds and report to either the executive director, managing director, or CEO to avoid conflict of interest, experts suggest. Most of the scams take place with help from bank staff.
“An independent FRM unit can also help avoid delays in decision making, especially in large value frauds, and promptly bringing it to the senior management’s notice,” the survey showed.
Other than that, the bank employees need to undergo training programmes for efficient fraud detection. A zero-tolerance policy against fraud perpetrated by senior management staff is also imperative for organisations.
With remote working and staff shortages at branches, there needs to be a strategic investment in monitoring systems in the form of artificial intelligence and machine learning. Using data analytics for fraud monitoring and detection may help.
Undoubtedly, the pandemic has once again brought up the inevitable question before the Indian banking industry: is it safe?