Posts Tagged ‘Bank frauds India’

Is Privatization the Solution to Public Sector Banks?

Tuesday, February 27th, 2018

Is Privatisation the Solution to Fraud in Public Sector Banks?


Col(Retd) Bhaskar Sarkar VSM

Smart unscrupulous businessmen Nirav Modi and Mehul Choksi have managed to defraud Punjab National Bank of about Rs 11,500 croes and flee abroad. The scam came to light on February 14, 2018 when the bank informed SEBI about it. This was followed by Allahabad and associated Banks reporting being defrauded to the tune of Rs 3,900 crores by Rotomac Ltd. Next, Dwarka Das Jwellers of Delhi defaulted on about Rs 390 crores loan to Oriental bank of Commerce and are absconding. The scams have expectedly created a big stir. Some are blaming the bank staff, some are blaming the auditors. Others are blaming RBI for lax supervision while the neo-liberals are blaming our socialist economic policies and clamouring for privatization of public sector banks. Not many are blaming the unscrupulous businessmen who seem to be able to bribe bankers and politicians and loot bank deposits at will and flee to foreign lands. This article seeks to examine whether private sector banks in India and around the world are run better than our public sector banks.

Bank Failures Around the Developed World

Bank failures are surprisingly common. Only recently, the “Sub-Prime” crisis in US in 2008 led to the failure of 456 banks in the United States between 2008 and 2012. ( ). The collapse of Washington Mutual Bank with total assets of US$307 billion, 2,239 retail branch offices operating in 15 states, with 4,932 ATMs and 43,198 employees was the largest bank failure in US history. Regulators sold the bank to JP Morgan Chase. The five largest U.S. investment banks with combined liabilities or debts of $4 trillion failed. Lehman Brothers went bankrupt. Bear Sterns and Merrill Lynch were taken over by other banks. Goldman Sachs and Morgan Staley were bailed out by the U.S. government. US government-sponsored enterprises Fannie Mae and Freddie Mac with nearly $5 trillion in mortgage obligations were placed into receivership. A total of about $9 trillion was lost. US banks received over $700 billion bailout. All of them were private sector banks.

The primary cause of bank failure is lack of liquidity which can be caused by fraud, greedy and risky investment decisions or loans and excessive leveraging which result in financial loss when bubbles burst. Public sector banks are not supposed to be profit motivated. But they also make bad investment decisions in search of profits.

There are some other bank failures are worth mentioning ( Bank of Credit and Commerce, USA, established in 1972, failed in July 1991 because of widespread fraud. It was once the 7th largest private bank in the world with over US$20 billion in assets. Regulators who investigated the collapse found that the Bank had deliberately setup operations to avoid detection of fraud committed on a massive scale. It was a US$20 billion (about Rs 130,000 Crore) swindle.

The Hokkaidu Takushuku Bank Ltd, Japan, went bankrupt in 1997, during the Asian Financial Crisis. It was set up to promote development on the island of Hokkaido in 1897. In 1939, the Japanese government deregulated the Bank. The Bank became involved in risky real estate investments during Japan’s 1980s real estate bubble and failed when the bubble burst.

Long Term Credit Bank (LTCB)  was one of Japan’s top banks. In 1989 it was considered the 9th largest bank in the world. When Japan’s asset bubble burst, LTCB was holding more than $19.2 billion in bad debt. In 1998, the Japanese government nationalized LTCB, and then restructured it as a commercial bank named Shinsei Bank.

Silverado Savings and Loan Bank, USA collapsed like Indian co-operative banks. Neil Bush, son of then Vice President George H.W. Bush, gave himself and his business partners loans of over $200 million US$ without notifying the Silverado Board. He was forced to pay a $50,000 fine and banned from banking activities for his role in collapse of Silverado Bank, which cost taxpayers $1.3 billion.

Northern Rock, a UK bank got into trouble in 2007 as a result of “Sub-Prime” meltdown. It could not get required funds from institutional lenders to tide over its liquidity crunch. The Bank of England lent the bank 3 billion pounds.  It was not enough. Depositors ran on the bank after the news broke. The UK government nationalized Northern Rock in February 2008.

Bank Frauds

Forgery and Altered cheques

In this type of fraud the fraudster alters cheques to change the name or the amount on the face of cheques and deposit it in some other account. Instead of tampering with a real cheque, fraudsters may forge a depositor’s signature on a blank cheque. They would subsequently cash the fraudulent cheque through another bank and withdraw the money before the banks realise that the cheque was a fraud. This type of fraud is common but petty and do not sink banks.

Accounting Fraud

In order to hide serious financial problems, some businesses have been known to use fraudulent bookkeeping to overstate sales and income, inflate the worth of the company’s assets, or state a profit when the company is operating at a loss. These tampered records are then used to make fraudulent loan applications in a final attempt to obtain more money and delay the inevitable collapse. These frauds can cause serious loss but do not sink banks. Examples of accounting frauds include the collapse of Enron, WorldCom, Satyam and the present Gitanjali Daimond scam.

Demand Draft Fraud

Demand Draft (DD) fraud typically involves one or more corrupt bank employees. The employees remove a few DD leaves or DD books from stock and write them like a regular DD. Since they are insiders, they know the coding and punching of a demand draft. Such fraudulent demand drafts are usually drawn payable at a distant city without debiting an account. The draft is cashed at the payable branch. The fraud is discovered only when the bank’s head office does the branch-wise reconciliation, which normally take six months. By that time the money is gone. These frauds are routine and hurts customers more than banks.

Rogue traders

A rogue trader is an authorized trader at an investment bank or financial institution who engages in unauthorized trading to recoup loss he incurred in earlier trades. Out of fear and desperation, he manipulates the internal controls to circumvent detection to buy more time. This kind of

unauthorized trading activities invariably produce more losses. A few working out of institutions with lax controls were not discovered until the loss had reached well over a billion dollars. Rogue traders may not have criminal intent to defraud their employer. He may be merely trying to recoup earlier loss and save his Job. This type of frauds have sunk banks like Baring Bank, UK, Daiwa Bank, Japan, Sumitomo Corporation, Japan. Other banks which lost billions but survived are Societe Generale, UBS and JP Morgan Chase.

Fraudulent loans

One way to swindle a bank is to take a loan and not pay back. The borrower is a business entity controlled by an unscrupulous businessman assisted by a corrupt bank officer or officers. The borrower simply flees abroad and the money is gone. The borrower may provide false information or forged documents to hide a credit history filled with financial problems and unpaid loans to corporations and may use accounting fraud to overstate profits in order to make a risky loan appear to be a sound investment for the bank. This kind of fraud can be prevented if the bank does proper due diligence before granting loans.

Wire transfer fraud

Wire transfer networks such as the international SWIFT interbank fund transfer system are tempting as targets as a transfer, once made, is difficult or impossible to reverse. These networks are used by banks to settle accounts with each other. Banks are expected to have checks and balances in place to prevent fraud. But insiders may use forged documents which allow money to be transferred to another bank, often an offshore account in some distant foreign country. A corrupt bank officer may approve the withdrawal. The bank or institution suffers a substantial monetary loss.

Bill discounting fraud

The fraudster gains the bank’s confidence, by posing as a genuine, profitable customer. Initially repayments are made on time. After the fraudster has gained the bank’s trust, he asks the bank to begin paying the company up front for bills. Bank management may agree or be bribed to agree. Finally, when the outstanding balance between the bank and the company is sufficiently large, the fraudster disappears with the money leaving no one to pay the bank. These frauds are rarely large and do not sink banks.

Money laundering

Money laundering is used to describe any scheme by which the true origin of funds is hidden or concealed. Money laundering is the process by which large amounts of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source. (www.en, )

Bank Frauds in India

As per article “ICICI Bank, SBI, StanChart top bank frauds list: RBI” PTI, Mar 12, 2017, Times of India,

as many as 455 fraud cases involving Rs 1 lakh and above were detected during the first nine months of 2016 in ICICI Bank. The ICICI was followed by SBI (429), Standard Chartered Bank (244) and HDFC Bank (237). The other banks which reported large number of frauds to the apex bank during the period include Axis Bank (189), Bank of Baroda (176) and Citibank (150). In all, 450 employees were involved in fraud cases in different public and private sector banks during April-December 2016, in 3,870 cases involving a total value of Rs 17,750.27 crore. It will be seen that Private Sector banks are as prone to bank frauds as Public Sector Banks. These frauds mostly happen with the involvement of insiders, the bank staff. But the errant staffs are rarely punished if at all. Publicity is avoided.

Bank Failures in India

The Article “Of unsecured loans & bank failures” by Shenoy Karun | TNN | Dec 8, 2016, Times of India, discusses bank failures in India. All the failed banks were in the private sector and most were cooperative banks. Some banks in trouble in Kerala were merged with Public Sector Banks like State Bank of Travancore and Canara Bank. 18 Indian co-operative banks were liquidated during the economic year 2008-2009.


There are very few Public Sector Banks in the Developed World. Most of the major bank failures are in the US and all of them are private banks. The US government bailed out banks and financial institutions by over $800 billion. Two banks, Northen Rock in Uk and Long Term Credit Bank, Japan, were nationalized when they failed.

It will be clear that Privatization of Public Sector Banks is no solution to the fraud problem in the banking sector. RBI, the Finance Ministry and the banks themselves must take the matter far more seriously than what they are doing at present. There has to be a balance between effective regulation by banks and ease of doing business. Bank depositors must be protected. Laws must make bank frauds criminal offences. Errant Bank employees and auditors must be jailed. RBI must fine banks heavily whenever money laundering by a bank is detected. The Government must device ways to deal with unscrupulous businessmen who loot and scoot. Businesses of wilful defaulters must be immediately nationalized and sold. This will save jobs and enable the lenders to quickly recover their money. Cases will not linger for years.