The great bank robbery

Unlike many other financial fugitives, Nirav Modi’s wherabaouts are unknown, and hence extradition proceedings cannot be launched against him.

Published: 07th April 2018 10:00 PM  |   Last Updated: 07th April 2018 11:55 AM   |  A+A-

Vijay Mallya Kingfisher Airlines `9,500 cr,Vikram Kothari Rotomac Global `3,695 cr,Nirav Modi Diamantaire `13,000 cr (approx)

The Great Famine of 1866 that killed millions of people in Bengal Presidency prompted Dadabhai Naoroji, known as the father of Indian nationalism, to formulate the Drain Theory. In 1867, he put forward the ‘drain of wealth’ theory expostulating that Britain was economically draining India—an annual drain of 200-300 million pounds of revenue to Britain at the time he wrote the book in the 1870s. Ironically, the CAG of England in a 2013 audit was horrified that Britain could have raised more money from colonial India. “Huge, huge notional loss!” said the British CAG that estimated the total value of exploitation as Rs 1 trillion, that amount to around Rs 91 lakh crore at current rates over 300 years. After 70 years of Independence, India continues to be looted—this time by Indians.

Absence of credit discipline led to years of reckless lending among public sector banks (PSBs), which the government and regulator now want to contain.Gross non-performing assets (NPAs) of all banks aggregated Rs 8.41 lakh crore as on December 2017; slated to rise to Rs 9 lakh crore this year. The State Bank of India (SBI) leads as the largest lender, topping the list with highest amount of gross NPAs at Rs 2 lakh crore, followed by Punjab National Bank (PNB), IDBI Bank, and Bank of India. But bank chiefs say they are scraping the bottom of the barrel to reduce the toxic pile.“The SBI has a two-fold strategy to avoid fresh slippages and at the same time resolve existing NPAs. Apart from the RBI’s (Reserve Bank of India) list of 12 large accounts last June for resolution, we have been consciously working on accounts internally identified. Several cases are being referred to the National Company Law Tribunal (NCLT),” says Rajnish Kumar, chairman, SBI.


In fact, all other 21 PSBs too are knocking on the doors of the NCLT, which has seen a sudden surge in cases. As many as 8,457 cases were pending in the NCLT as on December 2017 and 264 in the National Company Law Appellate Tribunal. “The idea is to recover dues as quickly as possible,” adds Kumar, downplaying fears that chances of insolvency could be higher. In the absence of a resolution (which includes either roping in a new management, or finding new investors, or raising capital by selling non-core assets to repay existing debt), more accounts could become insolvent. Such a move will spell trouble for lenders, who manage to recover just about Rs 25 of every Rs 100 that turns sour.

The newly issued Prompt Corrective Action (PCA) framework by the RBI brought Dena Bank, Central Bank of India, Bank of Maharashtra, UCO Bank, IDBI Bank, Oriental Bank of Commerce (OBC), Indian Overseas Bank, Corporation Bank, Bank of India, Allahabad Bank, and United Bank of India under the framework. Collusion between bank officials, rampant nepotism and powerful political connections has allowed big business to loot India’s banking system.

The RBI classifies bank frauds into three broad categories: deposits-related frauds, advances-related frauds and services-related frauds. The year 2018 opened the lid on a Pandora’s box of bank scams. Indian banks reported a staggering 12,533 frauds, aggregating to Rs 18,170 crore in financial year 2017-18, largely due to weak internal controls. Data collated by Institutional Investor Advisory Services (IiAS), a shareholder advisory service, Bank of Maharashtra reported the highest number of frauds at 3,893, followed by ICICI Bank (3,359) and HDFC Bank (2,319). In some banks, while the aggregate quantum is low, the average fraud size is high, indicating that the sector needs to urgently revisit and strengthen its internal financial controls.

The Nirav Modi scam broke on February 14 when PNB informed the Bombay Stock Exchange of having detected around $1,771.69 million worth ‘fraudulent and unauthorised transactions’ in a Mumbai branch. PNB also complained to the Central Bureau of Investigation (CBI) against billionaire diamantaire Modi cheating it of about Rs 11,400 crore after Diamond R US, Solar Exports and Stellar Diamonds together approached PNB on January 16 with import documents and requested for Buyer’s Credit to pay their overseas suppliers.

Nirav, brother Nishal, Nirav’s wife Ami, and Gitanjali Gems owner Mehul Chinubhai Choksi are partners of the firms. The bank realised that the firms were availing of credit using fake documentation and started an investigation that revealed the makings of a Rs 1,140-crore scam. After further investigations, officials estimated the amount of the Nirav Modi fraud at Rs 12,686 crore in the first two FIRs for misusing legitimate loans and bank guarantees. This is when Modi’s personal fortune was around Rs 116 billion in 2017.Before Modi, PNB had lost Rs 28 billion thanks to various frauds in 2017 alone. Even before the bank launched the complaint, it seems Modi had got a whiff of what was in store for him after the scam was revealed. As the New Year’s dawn broke, he quietly escaped India with his family. Along with him were wife Ami, brother Nishal and relative Choksi, who would be wanted in connection with the fraud. Sources say he was tipped off by someone powerful in banking circles.

“There is no way he would have known unless he knew PNB would file a case and he would be arrested,” says an Enforcement Directorate (ED) officer. This was confirmed by one of the CBI officers aware of the case. “Modi has high-level contacts in the banking circles,” he says. Modi had been getting investors to put money in his companies by promising to open 100 stores in major international cities by 2020. His lawyer Vijay Aggarwal reportedly said that his client had assets worth Rs 5,000-6,000 crore in India alone.

Unlike many other financial fugitives, Modi’s wherabaouts are unknown, and hence extradition proceedings cannot be launched against him. According to various reports, he has been sighted in Switzerland and New York. Modi blamed PNB for having acted in a premature fashion, inhibiting his repayment ability. “Then why did he flee in January when the case was registered only in mid-February?” asks the ED official. Choksi’s location is also unknown, though he issued a statement refusing to come back on the grounds of bad health. He alleged political conspiracy, media witch hunt and threats to his family’s safety and animosity from employees, creditors and customers who have not been paid.

Following the PNB incident, based on the government and regulator’s insistence, all PSBs have internally scanned their respective LoU/LoC-related transactions, besides assessing, genuine and accounted LoUs. Further, banks have also put in place controls including creating an additional layer of approvals for all outward SWIFT messages. Those banks where integration of SWIFT with CBS is not yet done are expected to do so by April, besides deploying time restrictions for such transactions—between 9 am and 8 pm only.

Even as the PNB-Modi storm continued, India’s pre-eminent female banking icon Chanda Kochhar’s reputation began to face heat. The CBI registered a preliminary inquiry to probe an alleged deal between Kochhar’s husband, Deepak, and Videocon chairman Venugopal Dhoot, though she herself is not named. The CBI is investigating whether Deepak received crores from Dhoot for NuPower Renewables promoted by him, six months after Videocon received a Rs 3,250-crore loan from ICICI Bank in 2012. But on March 28, the ICICI Board issued a statement reposing its confidence in Kochhar’s governance and integrity. Dhoot said the allegations were unfounded. “Personal ties between two people do not always result in criminal acts,” he reportedly said.Another high-profile case is that of Vikram Kothari, chairman and MD of Kanpur-based Rotomac Global. Kothari is embroiled in a controversy for alleged loan default worth over Rs 3,695 crore taken from different state-owned banks. The CBI has registered an FIR against Kothari on the basis of a complaint by the Bank of Baroda.

This decade alone has been a calendar of banking frauds. In 2011, CBI revealed that executives of Bank of Maharashtra, OBC and IDBI Bank created around 10,000 fictitious accounts in which loans worth Rs 1,500 crore were deposited. From massive scams to willful defaulters, the list is almost endless.
* Mumbai Police filed nine FIRs against public sector firms for perpetrating Rs 600 crore fixed deposit fraud.
* Electrotherm India defaulted on a payment of Rs 436 crore to the Central Bank of India.
* Kolkata-based industrialist Bipin Vohra allegedly used forged documents to get `14 billion as a loan from the Central Bank of India.
* Ex-chairman and MD of Syndicate Bank SK Jain was arrested for allegedly receiving bribes for sanctioning loans worth Rs 8,000 crore.
* Vijay Mallya was declared a willful defaulter by Union Bank of India and SBI, and PNB followed suit in 2015.
* As on September 30, 2017, Jatin Mehta-promoted Winsome Diamonds & Jewellery Ltd and Forever Precious Jewellery & Diamonds Ltd owed close to `6,712 crore to various banks.

* Kolkata-based REI Agro, a company owned by Sandip Jhunjhunwala, owes Rs 3,871 crore

* Reid & Taylor (India) Limited & S Kumars Nationwide Limited promoted by Nitin Kasliwal owe more than Rs 5,000 crore. In 2015, it was discovered that employees of Jain Infraprojects defrauded Central Bank of India for over Rs 2 billion. A foreign exchange scam in which Rs 60 billion was sent to a fake corporation in Hong Kong by bank employees surfaced. The year 2016 next topped the cake, when it was discovered that four people opened almost 380 accounts with Syndicate Bank and stole `10 billion using fake cheques, LoUs and insurance policies.

In 2017, fugitive Mallya’s debt rose Rs 9,500 crore to IDBI and other banks. The CBI had registered FIR against five PSBs and six chargesheets were filed against Deccan Chronicle Holdings for causing a loss of Rs 11.61 billion. The same year, CBI arrested Kolkata-based promoter of Shree Ganesh Jewellery House, Nilesh Parekh, for allegedly causing a loss of Rs 22.23 billion to 20 banks by diverting money from loans through shell companies in Hong Kong, Singapore and the UAE.The CBI also filed a case against the former zonal head of the Bank of Maharashtra and a director of a Surat-based private logistics company for being involved in a Rs 8.36-billion scam. 

This year, a director of the Andhra Bank was arrested by ED for participating in a Rs 5-billion bank fraud involving a pharmaceuticals company. In February, CBI registered a case against India’s biggest sugar producer, Simbhaoli Sugars Ltd, chairman Gurmit Singh Mann, deputy managing director Gurpal Singh and others on a complaint by the OBC over a loan fraud of Rs 97.85 crore—Gurpal Singh is Punjab Chief Minister Capt Amarinder Singh’s son-in-law.

A few days before, a Rs 3.9-billion fraud was exposed in OBC, which has incurred losses to the tune of Rs 5 billion. An IIM Bangalore study found banking scams cost PSBs at least Rs 22,743 crore between 2012 and 2016. RBI data shows over 25,600 cases of banking fraud, worth Rs 1.79 billion up to December 21 last year—around 455 such cases of Rs 1,00,000 or above were detected at ICICI Bank; 429 at SBI, 244 at Standard Chartered Bank and 237 at HDFC Bank. The Central Vigilance Commission is supervising the CBI investigation into 10 big bank fraud cases.

Meanwhile, the country’s cooperative banks are most vulnerable to scamsters. Their primary objective is to assist the agriculture sector to economically empower rural India by giving financial assistance to small and medium farmers. The Uttarakhand State Cooperative Bank Ltd (USCB) is in the eye of a storm for violating norms by financing liquor contracts and sugar mills, and sanctioning loans to relatives of board members without collateral; its NPAs amount to Rs 165 crore in 2018. The bank reportedly has not filed any recovery case in 2016-17 with the total recovery being just Rs 3.11 lakh.

The system suffers due to collusion between politicians and pliable managements, which give credit to the well-connected and later would waive the repayment. Rural development lender Nabard has accused a Mumbai politician of gross financial irregularities at the Mumbai District Central Cooperative Bank involving dozens of credit cooperative societies. NPAs, bad loans and loan waiver schemes are burdening the sector. According to the National Federation of State Cooperative Banks, absolute NPAs of district central cooperative banks (DCCBs) at the end of March 31, 2016 was Rs 22,406 crore, and state cooperative banks lost Rs 5,147 crore. As of March 31, 2016, only 62,050 primary agricultural credit societies were viable out of nearly 93,367. 

The tragedy is that bad loans from these banks are passed on to large nationalised banks which are reeling under huge amounts of bad business loans. A multitude of co-op banks have collapsed over the years, and depositors mostly get only 10 per cent to 15 per cent of their money deposited after the liquidation process that could last for nearly a decade, or just `1 lakh each through the Deposit Insurance Guarantee Corporation. Fake IDs, proxy deposits and fake gold guarantees form a common pattern in such scams.

After demonetisation, vested interests used many cooperative banks to launder money. In 2016, ED started a probe into high-value transactions, some of which involved over a dozen cooperative banks in Mumbai that received deposits of Rs 1,596 crore in old notes and 205 new bank accounts opened in Allahabad into which scrapped notes were deposited. The directorate is completing investigation into a group of two dozen DCCBs in four states for money laundering. The taxpayer’s money is ultimately used for bailouts; the government will revive 23 district co-operative banks on the verge of closure with an infusion of Rs 2,375 crore.

Frauds, big or small, have financial implications. For instance, in Bank of Maharashtra, the fraud amount as a percentage of total assets were 1.02, shows IiAS data. Added to a gross NPA of 19 per cent, this means that more than one-fifth of the asset size is at risk every year due to weak controls and lack of adequate due diligence.

In November 2017, Nabard sanctioned a special limit of Rs 21,000 crore to DCCBs for agricultural credits. An RTI reply revealed in early 2017 that the RBI had no details of any irregularities or scams in the exchange of the demonetised currency notes of Rs 500 and Rs 1,000 by the cooperative banks.
However, IIM Bangalore data revealed that more than 95 per cent of fraud cases and amounts are in commercial banks, where public sector banks account for just about 18 per cent of total number of fraud cases. But the subtext is that the amount involved comes up to 83 per cent. Scams in private sector banks which record around 55 per cent of fraud cases are only worth about 13 per cent of the total amount involved.

The IIM paper noted that “the frauds may be primarily due to lack of adequate supervision of top management, faulty incentive mechanism in place for employees; collusion between the staff, corporate borrowers and third party agencies; weak regulatory system; lack of appropriate tools and technologies in place to detect early warning signals of a fraud; lack of awareness of bank employees and customers; and lack of coordination among different banks across India and abroad. The delays in legal procedures for reporting, and various loopholes in system have been considered some of the major reasons of frauds and NPAs”. Moreover, there is a difference in the assessment of NPA value between banks and the RBI. There was a difference of around Rs 23,239 crore between SBI’s NPA divergence and the RBI at the end of March 2017.

After the Nirav Modi scam broke, the Finance Ministry asked PSBs to check all NPAs amounting to over Rs 50 crore for fraud, identify willful defaulters and refer the cases to the CBI while keeping the ED and Directorate of Revenue Intelligence in the loop with a 15-day deadline.IDBI Bank has initiated a quality assurance audit (QAA) and roped in an external expert, to strengthen its internal audit. The scope of QAA includes review of the internal audit framework (policies, processes, procedures, reporting structures, formats etc) and integration thereof with risk-based supervision. Besides, it will also review branch risk rating framework to ensure that various business risk assessment parameters, criticality, risk weightages and audit observations reflect the risk severity of the branches, in terms of business performance, adherence to procedures and regulatory compliances. 

“This is expected to be completed by April and we will implement the suggestions of QAA immediately to strengthen and reinforce the internal audit system with our business goals,” observes Mahesh Kumar Jain, MD & CEO, IDBI Bank.Others such as Bank of Baroda and Bank of India too have drawn up action plans to strengthen the controls in the areas of trade finance, SWIFT, credit risk, operational risk besides cyber and IT risk. “We will be submitting our action plan with the board for approvals, following which it will be rolled out,” says a senior official of Bank of India.

The RBI has set up a panel to study rising cases of bank frauds and create a blueprint to curb them. India ranks fifth in bad loans in the world. However, as long as collusion between big business and top bankers continues in a growth-at-any-cost-fuelled economy, financial frauds are likely to continue.
“While we expect the framework is positive in the long-run, banks will see a spike in NPAs over the next couple of quarters,” notes Mitul Budhbhatti, associate director, Care Ratings. Only strict vetting procedures, monitoring and early action will end the prevalent corruption in India’s banking sector.
with inputs from Sunitha Natti


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