'Procedural lapses responsible for bank frauds'

By Vinay Kumar

NEW DELHI, JULY 1. In a bid to keep pace with the changing times, the banking sector has diversified its business; this has caused a dent on the credibility of the system in terms of control and supervision. Many a times public funds are squandered in the guise of ``commercial decisions''.

``Replacement of the philosophy of class banking with mass banking in the post-nationalisation period has thrown a lot of challenges to the management in reconciling the social responsibility with economic viability. The casualty has been the coffers of banks,'' the CBI report said.

It recalled that the Reserve Bank of India had set up in 1992 a high-level committee, headed by Mr. A. Ghosh, the then Deputy RBI Governor, to inquire into various aspects relating to frauds and malpractice in banks.

Three major causes for perpetration of frauds were: laxity in observance of the laid down systems and procedures by operational as well as by supervisory staff, overconfidence reposed in the clients who indulged in breach of trust, and frauds committed by unscrupulous clients by taking advantage of the laxity in observance of established, time-tested safeguards.

The bank frauds can be broadly divided into two - deposits and loans and advances. While frauds in the area of deposits are accepted as clear-cut frauds by the banking community and investigative agencies, disputes and differences in opinion arise in the field of loans and advances. While frauds in loans and advances are seen as mere violations of banking regulations - decisions taken for prudent commercial reasons - the experience of the investigative agencies prove it otherwise.

According to the CBI report, bankers often exceed their discretionary powers in allowing credit facilities to certain clients, which result in non=performing assets. Quite often securities taken against these limits are neither properly verified nor the funds disbursed after taking any securities or guarantees. In such a situation, if anyone defaults, the bank is not in a position to recover any amount.

The CBI feels that factors extraneous to banking should not be allowed to influence the decision-making process of bank officials even in the case of valued customers. Since banks have clear-cut delegated financial powers, sanction of credit facilities, strictly in terms of prudent banking norms, should be ensured.

Touching upon diversion of funds for wrongful purposes, the report said that often money was diverted to personal accounts of the company directors or utilised for purposes other than the ones for which the loan was sanctioned. It is done by way of cash withdrawals or diversion of funds through issue of demand drafts and pay orders.

``This diversion of funds to personal accounts facilitates building up of personal assets or for discharging existing liabilities. The philosophy of `commercial decision making' is governed by the principle of increase in the profits of the banks and national productivity. It is therefore, very much essential that public funds are not allowed to be squandered in the guise of `commercial decisions'. Grass-root surveillance over the deployment of funds has been conspicuous by its absence,'' it said.

In the growing area of merchant banking, some companies such as the CRB Group defrauded the banks of crores of rupees by issuing refund orders in the name of bogus individuals/firms/friends/relations. Due to delay in reconciliation of accounts of various designated branches and often due to collusion of bankers, fraud has been committed in this specialised field. The CBI felt that the regulatory system of the banks undertaking merchant banking should be more transparent, and the management should not take refuge by shifting responsibility to subsidiaries for their irregularities.

The report noted while there would always be a difference of opinion between the banking community and the investigating agencies regarding the motive of the banker, no fixed guidelines could solve the problem to the satisfaction of all concerned. The difference arose only when investigating agencies termed the action as criminal and the bank terming a mere technical violation.

Suggestions made by the CBI to check frauds included implementation of the Ghosh Committee recommendations of holding quarterly meetings between the Chief Vigilance Commissioner (CVC), the RBI, the CBI and the Department of Banking, closer coordination between banks and law enforcement agencies, placing the bank CVOs under CVC supervision and preparation of client profiles as part of ``Know Your Client'' mantra.

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