Column: Scamming 101

If you dont let a bank use its judgement to decide whom to lend,ask it to still push credit and then look with suspicion at its plans to set up specialised subsidiaries to syndicate loans,what do you get?

If you dont let a bank use its judgement to decide whom to lend,ask it to still push credit and then look with suspicion at its plans to set up specialised subsidiaries to syndicate loans,what do you get? A CBI raid to chase employees who have used intermediaries to meet targets and,as an aside,pocketed the incentive from the middleman.

The raids by the CBI on Wednesday,and conceivably by other agencies like income tax soon,are a reflection of a system that refuses to let the banks grow up into financial conglomerates that know their job. In that space,we instead get financial chai-shops surrounding the banks that offer to get things done with rudimentary checks on the process. That is why late on Thursday,it fell on the finance minister to ask banks and all financial institutions to use a magnifying glass to scan their loan books. He is the owner of these banks,but one would have thought,an entire army of bank officers had been hired to do precisely this degree of check.

In its essence,the latest fraud is simple enough. Companies like DB Realty and others need loans for their projects,which they were not sure would pass the bank managers table. They,therefore,arranged for help from Money Matters,which like various of its ilk,has shown the ability to make the files move. The incentive for the real estate companies was,of course,the loans,for the middleman was the cutback and for the bank manager the plain bribe.

The companies did not try to pass themselves off as something else as they would have done in the case of an accounting fraud. They did not dress themselves up by cooking books or take the loans through complicated channels to hide the final destination. The loans sit on the books of the banks as real estate loans.

The procedure is so simple; it does not even qualify as a dirty trick. It is on display regularly for instance,at all municipal offices in every Indian city when one walks in to get any certificate,including the sale deeds for properties.

Except that banks were supposed to be more valuable and dependable entities,far removed from such elementary stuff. There is nothing value add like the Satyam manufacturing of invoices to shore up receivables or the filing of multiple share applications like in the case of the IPO scam.

The shock of this bank scam is therefore not the scale,which many banks chairmen have rushed in to describe as puny. The shock is the level of simplicity of the scam. The systems of checks and balances is so easy to fool,it turns out.

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It is this ease with which the system can be fooled that should serve as a wake-up call for the banking regulator and the government.

The scamsters were sure they did not need to do anything elaborate to pass the multiple levels of project appraisal in each bank. Instead,a well-packed envelope would be enough to break down any objection.

As an aside,Indian banks do not approve any disbursal if even one person,in the chain through which the loan application moves,files an objection. So these loans were certainly cleared by everyone involved. Does this mean,there are several thousand crore rupees worth of apparently standard loans,waiting to be written off? That will be too naïve an assessment.

The problem in the guided banking system that India runs is the neglect of the build-up of a strong credit appraisal system. Senior executives of the larger public sector banks will tell you why its impossible to block a loan application from a well connected industrialist. For those who are lower down the chain,the chai-shops come in handy to convince the banks.

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The process is just a shade removed from that of a couple of decades ago when Indian industry used connections to get loans leaving the banking industry,especially the development financial institutions sitting on massive non-performing assets.

For finance minister Pranab Mukherjee the CBI raids on some of the banks on Wednesday,must be giving a feel of déjà vu. Just before he took over as finance minister in 1982,Indira Gandhi had nationalised 7 more banks,apparently to prevent this sort of cosy camaraderie. For the shades of the same developments to return to haunt him in 2010,must be galling. Despite whatever has happened,there is precious little reason to imagine that bank fraud has peaked.

But the stringent control regime only creates a conducive environment of shortage. Loans to the real estate sector is always a troublesome process,where this scam has occurred,but the Indian banking sector is under restriction on loans to the power sector,exposure to group entities and also for financing mergers and acquisitions.

These are also the sectors where the demand for credit is high. There are already reports that many banks have resorted to giving loans to special purpose vehicles of companies,whose only job is to channel money for power projects. It will be churlish to blame the banksthe problem lies in our lack of trust in their ability to run an efficient financial entity.

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Writing about the savings and loan industry fraud in the US,the regulator for the sector,William Black titled his book,The Best Way to Rob a Bank is to Own One. There is a lot of good stuff to gather from that book.

subhomoy.bhattacharjee@expressindia.com