In Retrospect

A Decade of White Collar Predicament

The last decade has witnessed a meteoric rise in white collar crimes – bank frauds leading the list. With India's evident vulnerability to fraudulence, the way ahead will demand robust policy decisions.

Contemporary State

The last decade has witnessed a grievous rise in white collar crimes with society being subject to constant adversity. Statistics testify the disgraceful situation of recent times – albeit countermeasures are being explored to control such hazards. However, as with any other perilous damage being hurriedly followed by measures to tackle the situation – the scenario with bank frauds resembles a homogeneous outcome. Our prevention policies have always been jeopardised, carving the way for damage and, thereby, demanding countermeasures to ameliorate the situation effectively. In some cases, our reliance is on damage control as against ensuring negligible damage – gone are the days of adhering to 'prevention before cure'.

Bank frauds have caused a mammoth loss of Rs 25,775 crore in just the last fiscal year with Punjab National Bank (Rs 6,461 crore) and State Bank of India (Rs 2,390.75 crore) leading the table, followed by the Bank of India (Rs 2,224 crore), Bank of Baroda (Rs 1,928 crore) and Allahabad Bank (Rs 1,520 crore). Interestingly, this data only involves frauds above Rs 1 lakh, as per the listing disclosed by the RBI in response to an RTI filed by Chandrasekhar Gaud. As per the RBI's response, the total value of bank frauds has gone up a frightening 1,356 per cent in the past decade and, in seven of the decades under review, nationalised banks accounted for more than two-thirds of the total amount involved in these frauds. The government has so far balanced Non-Performing Assets (NPAs) with taxpayers' money. A massive recapitalisation plan of Rs 2.11 trillion has been formulated for state-run banks to help them deal with bad debts and revive credit growth. Of the total sum, Rs 1.35 trillion will be raised through recapitalisation bonds, while the banks themselves will raise another Rs 580 billion from share sales. This sounds like a compassionate indemnity rather than a countermeasure while being miles away from resolving the underlying factors facilitating such colossal damages. As with instances of Nirav Modi and Vijay Mallya, the recognition for a framework to monitor and evaluate the banking processes lacks efficacy in desperate times. However, an important question looms over whether these monitoring units can serve a two-way purpose of also checking the tendency of an unscrupulous inside that has facilitated many such frauds.

Do banks act innocent?

While it's imperative to note that the number of perpetrators breaching sensitive data and committing frauds has risen significantly, the possibility of the same is reinforced through alleged inside hands and leaks. The odds of such monumental frauds, both in size and number, is plausible through impersonators and perpetrators having access to sensitive data. Offers such as "Lifetime free card" and the likes are floated as artifices to lure customers, persuading them to share personal information that the bank would otherwise never demand. These tactics are primarily utilised to deceit customers and capitalise on their lack of expert knowledge. The most notable way is to apply for a new card from an existing customer's account by using sensitive information amassed through Aadhaar updates, PAN card, WhatsApp/Facebook profile. Since December, there have been approximately 800 complaints lodged with the customer support across branches of a single bank with 790 of them claiming that they never applied for a new card. Further, a copy of the SIM card may be issued by the perpetrator, to gain complete access to the customer's personal information, jeopardising personal security. Often, artifices presented to trap the customers have loopholes that a layman fails to distinguish. Once they unknowingly agree to proceed with the deceit, the requirement for their documents (photo, signature, details) can be skipped – when, in reality, those are important security checkpoints to prevent the misuse of sensitive information.

That this is an inside job is validated through the modus operandi which strongly hints at fraudulence unfolding internally. Beside SIM cloning, which can be performed by anyone under the guise of anonymity, bank frauds seemingly direct towards an inside player, though negligible complaint of the same is evident in record books.

Condition of banks today

A total of 5,152 cases of fraud were reported across various banks of the country in the last fiscal. This is 76 more than the number of fraud cases reported the year before (5,076 in 2016-17).

According to the RBI, over 23,000 cases of bank fraud, worth Rs 1 lakh crore, have been reported in the last five years. Increase in the number of NPAs along with such fraud cases raises serious concerns about the industry's health.

According to a RBI report, sourced by Reuters through an RTI, state-run banks have reported as many as 8,670 "loan fraud" cases totalling Rs 61,260 crore over the last five financial years up to March 31, 2017.

PNB topped the list with 389 cases totalling Rs 65.62 billion over the last five financial years, in terms of the total amount involved.

The finance ministry has approved an infusion of Rs 11,336 crore for five state-owned lenders to help them meet the regulatory capital requirement, sources said. This is the first ever capital infusion in the current fiscal and the remaining amount of Rs 53,664 crore would be disbursed during the course of the year.

As per the plan, sources said, PNB hit by the Nirav Modi scam, will get the highest amount of Rs 2,816 crore, while Allahabad Bank will get Rs 1,790 crore. Besides, Andhra Bank will receive Rs 2,019 crore, Indian Overseas Bank -Rs 2,157 crore and Corporation Bank - Rs 2,555 crore.


The Centre, in the beginning of July '18, accepted Project Sashakt, a five-pronged strategy to resolve bad loans, with the larger ones going to an asset management company (AMC) or an alternative investment fund (AIF). Proposed by a panel led by PNB chairman Sunil Mehta, it elaborates on how bad loans of up to Rs 50 crore will be managed at the bank level with a deadline of 90 days, and bad loans of Rs 50-500 crore will have the bank enter an inter-creditor agreement, thereby authorising the lead bank to implement a resolution plan in 180 days, or refer the asset to the National Company Law Tribunal (NCLT). For loans above Rs 500 crore, the panel recom­mended an independent AMC, supported by institutional funding through the AIF. The idea is to help consolidate stressed assets. It is, however, unclear whether this project or this recommendation from the Mehta committee is helpful or just another idea that will collapse in face of the persistent NPA crisis.

Instead, the Insolvency and Bankruptcy Code, 2016 (IBC), further amended in 2018, is a better way forward for the NPA problem. It paves way for the Insolvency Resolution Process (IRP), wherein the debtor's business is assessed – if it can continue or any recovery or revival of the same is feasible. The maximum time period of IRP is 180 days with a one-time extension of 90 days making it a total of 270 days, beyond which the adjudicating authority assigns a liquidator. The liquidator activates the option to sell the assets of the debtor under liquidation. This allows for a fast recovery of the debt which also prevents their deprivation after being held for extended periods. The "going concern" or a "slump sale of assets" process allows the collective sale of all assets, enabling the liquidator to realise a greater value than what could have been by the traditional approach (selling machinery or plant) as seen in the 'Keshav Sponge and Energy' case. In the long run, the evolving IBC is a more appropriate alternative for the NPA issue provided the time breach issue of the IRP is resolved.

BLOCKCHAIN: A possible prevention

Blockchain technology is actively subject to development for the maximisation of its output and potential for global liquidity optimisation. Blockchain is a digitally distributed ledger system that records an asset's movement and ensures point-to-point tracking of information on transactions that can map its journey. The fact that it is a distributed ledger, i.e., a decentralised system, makes transacting on blockchain transparent. Decentralisation is a key aspect, as no single authority has full control over it, there is no central point of failure and the entire system operates in a state of consensus, making transactions transparent. By storing data across its network, blockchain eliminates the risks that come with data being held centrally. A key feature that can help prevent and detect fraud is the smart contract. Smart contract or digital contract is a program capable of digitally facilitating and verifying the negotiation or performance of a contract. In the recent public sector bank fraud, issuance of fake LoUs would not have been possible on blockchain as the smart contract would have identified inconsistencies based on automatic reconciliation with the core banking system. Further, following the established limits, it would have restricted the payment initiation over the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. Blockchain technology can be used to train various machine learning algorithms to identify fraudulent patterns. Further, it would be impossible to forge documents as the entire process is cryptographically secured and immutable. RBI is working with the consortium of banks along with Infosys-led Edgeverve to understand how blockchain can be implemented in securities and trade finance verticals.

As Finance Minister Arun Jaitley said in his Budget speech, "The government will explore the use of blockchain technology proactively for ushering in digital economy" – the inevitable progression towards the implementation of this technology marks a significant step in adhering to our 'prevention is better than cure policy'. Nevertheless, loopholes exist ceaselessly as a flip side of the coin and therefore, it is imperative to realise that there will be perpetrators exploiting those very loopholes. Instead of diligently convening hit-and-trials to arrive at a perfect state of this technology, covering its shortcomings will empower us to flip the coin and stay confidently secure, irrespective of the side.

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