Issue

Context:

In an effort to aid investigation agencies in their probes against bank frauds, the Central Vigilance Commission (CVC) has shared its analysis report on the top 100 banking frauds in the country with the Reserve Bank of India (RBI), the Enforcement Directorate (ED) and the Central Bureau of Investigation (CBI).

About:

• The report carefully studies the modus operandi, amount involved, types of lending, anomalies observed and loopholes involved in these frauds, besides providing guidelines to improve the system.
• The report classified various frauds in to 13 sectors, i.e. gem and jewellery, manufacturing and industry, agro, media, aviation, service and project, discounting of cheques, trading, information technology, export business, fixed deposits, demand loan and letter of comfort.

The study was initiated as a preventive vigilance measure to minimise the occurrence of such type of frauds in future.

• One major conclusion arrived in the report is the existence of serious loopholes in the system that enables large scale frauds. 

Background:

• As many as 31 individuals accused of fraud and economic offences are wanted by ED and CBI.
• Among the prominent names are Vijay Mallya, who owes around Rs 9,000 crore to a group of banks,
• Nirav Modi, and his uncle Mehul Choksi, named in the Rs 12,636-crore fraud at Punjab National Bank,
• Jatin Mehta of Winsome Diamonds, who owes around Rs 7,000 crore,
• Sterling Biotech Ltd directors Chetan Jayantilal Sandesara and Nitin Jayantilal Sandesara for alleged bank fraud of Rs 5,000 crore.

Analysis

Key findings from the analysis:

Gem & Jewellery Sector

• The jewellery sector has been in news after the fraud conducted by Nirav Modi and Mehul Choksi came to light.
• According to the report, fraud activities in the sector often showed a pattern. Companies deliberately inflated the valuation of diamonds. This was often backed by various reports and bills submitted by defaulters which were often manipulated.
• Suggested Solution: Making jewellery sector units to furnish a monthly declaration to its lender banks declaring details of all transactions, financial agreement, and contracts entered into by its subsidiaries with their business associates.
• The report further says to bring control of financers on movement of stocks. “Confidential Report (CR) on all foreign buyers should have been obtained and analysed,” 

Manufacturing Sector

• In this category, firms usually started availing credits in form of working capital under consortium arrangement led by one of the banks. Often they would submit manipulated bills such as fraud shipping bills to cheat the banks or show inflated turn over bills. This would often be followed by diversion of funds to other areas.
• Suggested Solution: According to the report, ‘due diligence of major debtors should be carried out by direct visit and balance confirmation, engaging agencies and comparing the realization of receivables as per stock/BD statements with routing of funds through lending banks to ascertain diversion through non lending banks.’
  
  

Agriculture Sector

• According to the report, in order to tackle frauds in the agro sector, a strict assessment of working capital limit should be done based on bank guidelines.
• The analysis of VAT returns, stock records and sales register should be carried out even while increasing the credit limits.

Media Sector

• One key feature of frauds in this sector was the large scale diversion of funds provided by the lender to other accounts. Practice of submitting inflated and fabricated invoices was also observed.
• Suggested Solution: As per the report, banks besides carrying out thorough review of the past track record of the borrower, should also scrutinise the objective of forming different companies for similar activities by these firms.

Aviation sector

• In the aviation sector, firms cheated the bank by ‘suppressing facts in the financial statements and diverting the funds to related entities for the purpose other than those for which finance was made.’
• Suggested Solution: In order to tackle this , the banks should examine the role of third parties such as chartered accountants, advocates, auditors and rating agencies that figure in accounts related to bank frauds and put in place strict punitive measures for future deterrence.

Way Forward:

• The measures suggested should be strictly followed by the required department.
• Strengthening of standard operating procedures (SOPs) and the monitoring system should be done.
• Highlighting the role of controlling offices, so as to examine the aspect of quality of business should be taken up.

Learning Aid

Practice question:

1. Recently, CVC (Central Vigilance Commission) shared report on top 100 bank frauds with RBI, ED and CBI. In your opinion what are the reasons for increasing number of bank fraud cases in India? Also, suggest some measures to curb them.

2. CVC (Central Vigilance Commission) is often considered as a toothless tiger to fight corruption by the critics. What are the powers and the limitations of CVC? Also, suggest measures to make CVC strong to fight corruption in India.