PSU banks to RBI: Fraud worth Rs 51,000 crore tied to advances

PSU banks to RBI: Fraud worth Rs 51,000 crore tied to advances

Advance-related frauds in last 3 years adds up to about 8% of GNPAs of PSBs.

Former Congress MLA arrested for money laundering
(Representational Image)

THE CENTRE’S recapitalisation exercise could amount to throwing good money after bad, going by the rate at which public sector banks continue to bleed. State-owned banks have reported to the RBI that frauds in advances during the last three financial years and the current fiscal (up to June 2017) cumulatively amounted to a whopping Rs 51,086 crore on account of around 5,750 “Red flag” accounts.

To put that number in perspective, the advance-related frauds during the last three years adds up to nearly 8 per cent of the gross non-performing assets (GNPAs) of the public sector banks, which stood at Rs 6,41,057 crore as on March 31, 2017.

Financial frauds, more specifically advances-related, occur because of breach of contract and trust. It could be because of pledged or mortgaged assets being compromised or divested; documents being forged; funds availed being diverted or siphoned off; or documentary credit like letters of credit or guarantees being misused.

Besides advance-related frauds, banking frauds are classified as deposit-related, cyber frauds and those related to trade or documentary credit. However, not all of these fraud numbers would ultimately convert to bad loans on bank books.


Incidentally, as against just advance-related frauds in the last three years, the total frauds, including those on account of advances, deposits cyberfrauds and trade-related, reported in the four years to March 2013, was significantly lower at Rs 29,910.12 crore (the number of cases were higher though at 1,69,190).

Bank-Group wise Advance Related Frauds involving amounts of Rs 1 crore and above in value during this period was Rs 16,690.26 crore on account of 2,760 cases.

While there has been clearly a sharp surge in advance-related frauds, some of it is on account of a tightening of the reporting of these cases by banks as stipulated by the RBI. This comes even as the deposit-linked fraud, which used to be high in number though not in size, have been on the wane, thanks to improvements in cheque and payment processing, usage of technology and tightening the provisions of the Negotiable Instruments Act.

Advances-related frauds, however, continue to be the major concern for banks, especially because of their size and far-reaching implications to their financial soundness and integrity.

The reasons, according to bankers, include gaps in credit underwriting standards of banks, liberal cash flow projection at proposal stage, lack of continuous monitoring of cash flow and cash profits, lack of security perfection and overvaluation, gold plating of projects, diversion of funds, double financing and general credit governance issues in banks.

The surge in advance-related frauds numbers comes at a time when a fresh wave of potential non-performing assets (NPAs) is looming on the horizon due to sectoral issues.

Among the emerging triggers, there are at least two clear pressure points: Agri-loan waivers across states, such as Uttar Pradesh, Madhya Pradesh and Maharashtra, which have begun to impact banks’ loan books and the rising trend of state governments renegotiating power purchase agreements signed with renewable and thermal generators.

External factors such as the slowdown in recovery in the global economy and continuing uncertainty in the global markets leading to lower exports of various products like textiles, engineering goods, leather, gems etc and stress in certain sectors — iron and steel, construction, textiles and power has added to the uncertainties.

As per RBI guidelines on “Frauds – Classification and reporting”, dated July 1, 2017, banks can use external auditors including forensic experts or an internal team for investigations in accounts where fraudulent activity is suspected — “Red flag accounts.”

Further, as per RBI guidelines on restructuring, defaulters who have indulged in fraudulent activities are ineligible for restructuring under any prescribed scheme. In January 2016, the Central Fraud Registry (CFR) has also been operationised as searchable online central data for use by the banks for frauds above Rs 1 lakh.

Bad loans — or NPAs — were about 9 per cent of total loans of all Indian banks in September 2016. At public sector banks, bad loans were 12 per cent of all advances while another 3 per cent of loans in the aggregate have been restructured.

According to government officials, sector-specific measures for sectors such as roads (one-time fund infusion by NHAI in stalled projects), power sector (UDAY scheme), steel sector (Minimum Import Price) have been taken to give a boost to the sector so that stress be reduced.


Officials said the Banking Regulation (Amendment) Ordinance, 2017 has been promulgated on May 4, 2017, authorising the RBI to issue directions to any banking company to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.