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Bank scams: Tip of the iceberg?

  The country’s banking system has been hit hard by a variety of scams and frauds, even as it grapples under stress and NPAs. Close on the heels of the Nirav Modi-PNB scam comes the ICICI-Videocon-Chanda Kochhar allegations. In this article, we explore these matters in greater detail.  

Dr Suresh Srinivasan

The flood of bank scams over the last few months has been quite embarrassing for the Narendra Modi-led BJP government. With almost daily frequency, newspapers and TV channels air episodes of fraud that run into thousands of crores. Fraudsters and tricksters apparently effortlessly swindle cores of rupees from the government and taxpayers, and conveniently flee the country, leaving the government and the investigating authorities red faced. With the government already battling problems related to non-performance assets and weak banking financials, such episodes are a serious concern!

The Nirav Modi episode — that cost Punjab National Bank (PNB) close to `12,000 crore — wiped out a large part of PNB’s net worth, and made absconding liquor baron Vijay Mallya’s actions look quite small in comparison. Other stories of bank fraud too have been constantly in the news; Vikram Kothari’s fraud through Rotomac, again running into thousands of crores, also recently surfaced. There has been a huge outcry at the apparent ease and regularity with which public monies are being swindled by the rich and powerful who are proximate to regulators and the government.

However, the damage is not restricted to the public sector banks. Private banks too have been caught in the storm; the recent investigations into conflict of interest allegations against ICICI Bank CEO Chanda Kochhar in extending financial assistance to the Videocon group also brings to table how vulnerable the entire banking system is today!

Credible reports have surfaced where, in a single year, more than 3,000 cases of bank fraud have been detected. Not only public sector banks, private sector banks too, as well as their employees, appear to be deeply entrenched in such frauds. Thousands of cores of the taxpayer’s hard-earned monies are being lost every year to such frauds and scams.

PNB, Rotomac and others

In the Nirav Modi case, mid-level officials designated as deputy general managers at PNB’s Brady House branch in Mumbai issued letters of undertaking to banks outside the country, empowering them to extend ‘foreign currency’ credit to Nirav Miodi’s suppliers. Ideally, such transactions need to be authorised and promptly recorded in the bank’s electronic and accounting systems, so that such liabilities are recognised and honoured as they come up for payment.

It has been alleged that Nirav Modi, in collusion with the bank’s employees, concealed such transactions and the resultant liabilities, while the funds were released by many well-known public sector banks that include Allahabad Bank, UCO Bank, State Bank of India and Union Bank. As and when such transactions came to light, Nirav Modi and other key officials of Gitanjali Gems fled the country, and they continue to remain untraceable. A clear case of another Vijay Mallya episode emerging!

In a similar case reported a month ago, the CBI has issued lookout notices against the promoters of the Dwarka Das Seth International, a jewellery company that used a modus operandi similar to Nirav Modi’s, to defraud Oriental Bank of Commerce to the extent of around `400 crore.

In the Rotomac case, Vikram Kothari and his son Rahul Kothari were arrested by the CBI for defrauding a consortium of banks for close to `4,000 crore. The promoters diverted several crores of loans taken for Rotomac to other businesses and ventures against the very purpose for which such loans were sanctioned.

There are other numerous cases of frauds apart from the high profile ones discussed above. Last year, a few people opened close to 400 bank accounts with Syndicate Bank and defrauded the bank to the extent of exceptionally large sums using fake checks, letter of undertakings and insurance policies.

Lack of control?
Looking at all these cases of fraud and collusion, it is evident that there is a lack of internal control mechanisms within such large banks. Lower and mid-level employees are not aligned with the senior management, and cases of collusion between the bank employees and customers are clearly visible. Internal control lies at the heart of risk management within banks, and is the most important factor to secure the interests of the deposit holders in a bank. Unfortunately, this is exactly what stands to remain compromised!

One can, of course, argue that public sector banks are inefficient, and that their large scale makes it difficult for them to be managed perfectly, leading to the near-ubiquitous instances of frauds. Unfortunately, recent reports show that private sector banks too have been plagued by a number of cases of fraud and financial loss. These include banks like ICICI Bank, HDFC Bank, Standard Chartered Bank and a number of other private sector banks.

Scams don’t necessarily relate to direct financial misappropriation. There are other means through which the deposit holder and shareholder monies are at risk. Take for the example the case, currently under investigation, of ICICI Bank’s CEO extending financial assistance to the Videocon group.

The ICICI case
The Videocon Group, which is headed by Venugopal Dhoot, secured a loan of around `3,000 crore from ICICI Bank. Subsequently, Dhoot set up a company with three people at the helm — Deepak Kochhar, Chanda Kochhar’s husband, and two other relatives of hers. 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 Kochhar.
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 can be viewed in a very different light — as a loan given out by ICICI which could have been unduly influenced by the MD, as the eventual beneficiary is the MD’s husband. More importantly, part of the transaction is merely routed through an intermediary corporate that is Videocon; this could have easily been designed so that Videocon would be an off-the-book beneficiary for having been an intermediary. Such questions and doubts, therefore, put the entire original loan of around `3,000 crore at risk.
This transaction was flagged by an activist investor, who questioned the ICICI MD’s motive in this transaction. ICICI Bank and its board immediately set up an internal committee that investigated and gave a clean chit to the MD. But the issue started gaining traction, prompting regulators to step in and open up investigations into the entire transaction to ascertain the presence, if any, of foul play.

Chanda Kochhar’s involvement
The stature of Chanda Kochhar is massive, her achievements in scaling ICICI Bank awesome, and she comes with an ethical track record that is impeccable. However, given the circumstances, there is clearly a point of contention with respect to a conflict of interest in this transaction, and it is one that needs to be ruled out.
There have been several clarifications along the way that ‘technically’, Kochhar may not have actually committed any wrongdoing. For example, under Section 20 of the Banking Regulations Act 1949, a director is not required to disclose a transaction that is provided to a related party, whereas the Companies Act 2013 has very strong requirements to flag such conflict of interest in a timely manner when it relates to a ‘related party’. Hence, if the allegations are proved right, although Chanda Kochhar may technically be on the right side, given her stature, her actions might not have been ethical, given the positions that she holds.
Given all of these, the Reserve Bank of India (RBI), the key stakeholder that provides oversight on the commercial banks in the country, as well as the bank boards have their work cut out for them to sort out such a big problem that is plaguing the Indian banks!