What is the inside story of the bank frauds in India? An insight into the ‘Top 100’ bank frauds by the Central Vigilance Commission

On October 15, 2018, the Central Vigilance Commission (CVC) released a report titled, ‘Analysis of Top 100 Bank Frauds’. The report provides vital information on the modus operandi of the frauds, its sector-wise break-up, observations of loopholes/lapses and some suggestions for systemic improvement to prevent occurrence of such frauds in the future. The report mentions that an analysis of the ‘Top 100’ frauds has been done as on March 31, 2017. The analysis involves a total of 31 companies under 13 sectors. However, the time-frame during which these frauds have occurred has not been explicitly mentioned – does it involve dealings in 2017, or, does it encompass a longer duration?

It is assumed that the criterion for picking up the ‘Top 100’ frauds is based on the amount involved. The report does not mention the specific amount associated with each of the acts of corruption or the combined figure. The report mentions the modus operandi of the various frauds committed. However, since it varies from case to case, drawing a common pattern is not feasible.

The report does not provide certain vital information which could have been useful for bringing the alleged ‘fraudsters’ into public scrutiny, such as the names of the companies involved in the bank frauds or the names of the banks involved. It would have been more useful if the modus operandi had been mentioned company-wise, rather than sector-wise. In some cases, the names of the companies can be apparently inferred or seemingly presumed from the report, such as Kingfisher Airlines, from the details mentioned about the company under the aviation sector.

Sector-wise break-up of the companies analysed for bank frauds

Sl. No. Sector No. of companies  analyzed Business Category of companies within the specific sector
1. Gem &Jewellery 3 NA
2. Manufacturing 5 Pharmacy, Textile, Ferrous metals, Pharmaceuticals products and various ranges of steel products
3. Agro Sector 3 Processing of Basmati Rice, Manufacturing of Sandalwood oil and Producing of castor oil.
4. Media 2 Broadcasting on television channels, printing and publishing newspaper and periodicals
5. Aviation Sector 1 Airlines Company
6. Service/Project Sector 3 Providing corporate logistic services, Industrial and engineering projects, plants & machineries, equipment, etc. under lease agreement.
7. Discounting of Cheques and other issues* 1 Chartered Accountant Firm
8. Trading Sector 3 Coal, Pulse and Agro Commodities
9. Information Technology (IT) Sector 3


Computer peripherals, system integration/solution, data centre activity, software solution & consultancy, integration & other hardware related products and networking
10. Export Business


4 Exporting cotton bales, cotton & synthetic yarn, Agro/engineering goods and Readymade Garments
11. Fixed Deposit Fraud* 1 NA
12. Fraud Committed by Staff Member* 1 NA
13. Letter of Comfort* 1 NA

* This sector does not involve a company but an individual/group of individuals

The CVC report has pointed out several loopholes/lapses which seem to have occurred during this process of corruption. This was brought to light during the investigations. Some of the key loopholes/lapses pointed out by the CVC are listed below:

  1. Due diligence: There has been a common thread. This involves lack of proper and due diligence by the banks in case of several frauds. However, the nature of what constitutes effective due diligence varies on a case by case basis. In the case of consortium loans, no appraisal or due diligence was done by the member banks independently as they only relied on the lead bank for such decisions. It was observed that there were lapses in pre-sanction appraisal and post-sanction follow-ups during the disbursal of loans. The CVC also pointed out that there was lack of competence and skill on part of the banks to appraise the technical aspects of a project for finance from the banks, and that the banks accepted whatever was stated by the borrower.
  2. Diversion of funds: There was diversion of funds in a large scale by the promoters of companies, including the diversion of money borrowed for the companies being transferred to personal accounts, along with the use of shell companies for this purpose. It came to notice that there was use of funds for other than the stated purposes, such as, use of working capital loans for the purpose of long-term loans and vice versa. Moreover, the end use of the funds borrowed was not ensured by the banks. Several companies were involved in round-tripping of funds where they were involved in exporting and then importing the same goods, in order to raise working capital from the banks leading to diversion of funds. The CVC audit has revealed that banks failed to make an enquiry to determine the source of the funds brought by the companies to show an increase in their tangible net-worth.
  3. Fraud committed by companies: Existence of fake subsidiaries/associates was shown by the companies which virtually existed on paper without any functional or business activities. In some instances, companies were involved in opening satellite companies with their employees made as directors, which were used to transfer the NPA accounts of these companies to the satellite companies. This enabled these companies to boost their profit figures. The directors of several companies were involved in faking non-existent transactions as genuine transactions. In some instances, the beneficiaries of Letter of Credits (LCs) had re-routed the payments received through various accounts which were channelized back into the account of the borrower/company, or, one of its subsidiary/associate concern. Similarly, payments were made by the banks to the firms/companies that were not related to the business of the borrower companies.
  4. Fabrication of information: There were instances of inflated profit and loss account statements submitted by the companies. Companies had colluded with the chartered accountants in order to submit false financial statements. There were instances of submission of fake invoices and stock statements to the banks. It was also found that companies had submitted false information about their balance sheets, hiding the true state of the companies.

Based on the loopholes/lapses pointed out by the CVC, systemic improvements have been suggested which should be followed up by the banks in order to ensure that such banking frauds are avoided in the future. The key recommendations from the report are as follows:

  1. The banks should pay attention to the internal control systems and fraud prevention measures. The controlling offices should play a more active role.
  2. Banks should exercise proper due diligence before extending the loans.
  3. There should be segment-related limits on credit exposures to avoid any kind of over-exposure in a specific sector.
  4. The banks should be more vigilant of the existing loopholes and consequences of overlooking procedural aspects. This is especially important when alleged ‘fraudsters’ frequently try to submit fake documents in the banks.
  5. Banks should delist third party valuers — chartered accountants, advocates, etc. who have questionable credentials and those who have been involved in causing financial loss to the banks due to their negligence, or, deliberate acts of dishonesty. A periodic review of third-party service providers should take place.
  6. Banks should ensure that appropriate accountability is established in terms of hierarchy, including, in the case of sanctioning authority in the event of frauds, instead of putting the blame on lower functionaries.
  7. Banks should ensure proper end use of the funds, especially in the case of bank guarantees.
  8. Any irregularities in credit transactions should be analyzed closely. This can be on account of external market conditions, or, due to fraudulent activities by the borrower.
  9. Banks should scrutinize the financial statements submitted by the borrowers properly. If it is observed that short-term funds are used for long-term purpose and vice versa, then this should be further probed.
  10. Banks should pay attention to the past track record of the borrower and satisfactory association with the bank should be one of the criteria.
  11. The multiple banking arrangements (consortium banking model) needs to be reviewed thoroughly as this type of arrangement has enabled corporates to secure multiple finances from multiple banks far beyond their requirement. More information exchange should happen in case of consortium-lending.
  12. Bank policies need to be reviewed as there are gaps in the credit and risk management policies.
  13. Banks need to develop capabilities to build skills in fraud-monitoring in the financial services as a specialized area and people should be trained to investigate such cases.
  14. Centralized loan-processing hubs should be set up by the banks in order to streamline the selection of borrowers with enhanced due diligence, which would also help in delinking the sanction process at the branch level.
  15. The corporate governance of the banks needs to be strengthened.

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