By Ananya Gupta

“Risk hai toh ishq hai!”

A famous dialogue that took social media by storm when the hit web series Scam 1992 came out. The story of a common, Gujarati boy from humble beginnings, how he grew his empire and shook the very roots of the Indian stock market. Multi-crore scams that brew under our noses but we are unable to identify, scams that often leave thousands penniless and distraught.

Bank fraud is a term that shakes every Indian’s faith in financial institutions and paints every investor’s portfolio red. Starting from the elaborate scam that Harshad Mehta pulled off in 1992, to Nirav Modi’s Rs 14000 crore heist, India’s stock market has had to surf on choppy waters quite a few times. 

“In banking or finance, trust is the only thing you have to sell.”

Patrick Dixon

Banks are the roots of every setup one can own. The banking sector is an integral part of a country that drives economic progress and financial sector activities. Today, access to banks has increased manifold. Regardless of the improvement in this sector, the main concern of customers and service providers is the impact of bank fraud. 

Billionaires like Nirav Modi, Mehul Choksi, Vijay Mallya and Lalit Modi have defrauded banks to the tune of thousands of crores. ABG Shipyard Limited, a Gujarat-based shipbuilding firm, defrauded a consortium of 28 banks and today, DHFL has entered the competition to become India’s biggest bank fraud ever. 

WHAT EXACTLY IS BANK FRAUD?

Bank fraud is defined as the act of any person who knowingly carries out or attempts to carry out a scheme to defraud a financial institution or obtain any money, funds, credit, assets, securities or other property under the management of a financial institution, using false representations.

According to the Reserve Bank of India’s annual report, fraud of Rs 60,414 crore was reported in FY22, down 56% from Rs 1.38 trillion in the previous year. However, the number of frauds rose by almost 24% to 9,103 in FY22 compared to 7,359 frauds in the previous fiscal year.

CATEGORY OF BANK FRAUDS

Phishing involves sending an email to victims to slither valuable information from the cardholder’s account. They create fake websites that are similar to the original website of financial institutions, and victims believe in the authenticity of the mailshot. Identity threat is a crime where the lawbreaker obtains all the valuable information of the victim to run an illegal activity. Viruses and Trojan horses are malicious computer programs that install themselves on a laptop or computer without the consent of the owner. ATM Skimming involves capturing magnetic strip and PIN code data on a credit or debit card for fraudulent transactions.

DHFL BANK FRAUD – A FRAUD THAT TOOK INDIA BY STORM

“Fraud is the daughter of greed.”

Jonathan Gash

India’s banking system, which is grappling with the problem of bad loan accumulation, has been hit by yet another case of bank fraud. This time the Central Bureau of Investigation (CBI) has booked the promoters of a non-banking finance company.

Dewan Housing Finance Limited (DHFL)

What is the DHFL “Scam”?

Union Bank of India alleged that DHFL had taken Rs 42,871 crore as loans from a consortium of 17 banks between 2010 and 2018.
The company said it started defaulting on loans in 2019.
The bank alleged that the promoters along with others siphoned off and misappropriated a significant portion of the funds by falsifying the books of accounts of DHFL and defaulting on the legitimate dues of the syndicate banks.

When and how was the fraud discovered?

Earlier in 2019, Cobrapost alleged that the main promoters of DHFL and their affiliates had committed “systemic fraud” to siphon public money. In response to the allegations, DHFL released a statement in their defence that the allegations were a trap to destroy their goodwill.
Following this, the lender banks in February 2019 commissioned KPMG to conduct a “special control audit” of DHFL from 1 April 2015 to 31 December 2018.

What did the KPMG audit reveal?

KPMG found diversion of funds as loans and advances to connected entities and individuals of DHFL and its directors which were used to purchase shares/debentures.

Where was the money paid?

The books showed that Rs 29,100 crore was paid to 66 entities having common features with DHFL promoters against which Rs 29,849 crore remained. DHFL and its promoters also disbursed Rs 14,000 crore as project finance but showed the same as retail loans in their books.

Bandra Books

The development of credit led to the creation of an inflated portfolio of retail loans. The retail loans, referred to as ‘Bandra Books’, were maintained in a separate database in Foxpro Software in which the loans were shown as disbursed to DHFL and subsequently merged with OLPL  (Other large project loans).

What were the predecessors of 91 companies?

They were simply a front to funnel money in their pockets. CBI got involved in this investigation and it revealed that the Wadhawans had bought expensive art and luxury properties with this money and it also seems that some of this money found its way to the underworld and Chota Shakeel.

Now that’s the point. This has been in the news cycle for a while, but why are we talking about it now?
Well, that’s because the CBI filed the case only in June. And only then did we have the official stamp of approval from the relevant authorities to call it the biggest bank fraud of all time.

Yes Bank

DHFL seems to have borrowed money from Yes Bank to work on the Bandra Reclamation Project. But the project was a charade. Instead, the money was sent to a real estate company called RKW Developer- a firm linked to the Wadhawan family.
The CBI came across a helicopter hidden in a real estate developer’s hangar-Varva Aviation.
Guess who owns a stake in this airline? The RKW Developers, of course! So now it is being claimed that this money comes from Yes Bank and the likes of Union Bank of India.
There are also allegations that former Yes Bank CEO Rana Kapoor received bribes from the Wadhawans for brokering this loan. So he knew what they were up to and yet he looked the other way as he stood to benefit from the transaction.

 It seems the DHFL saga is far from over and we have to wait and see what other gritty details emerge soon.

HOW TO IDENTIFY AND PREVENT BANK FRAUDS AND SCAMS?

It is increasingly important in this era of digitalisation that banks are prudent about their investments and recognise a bank fraud right from the first red flag. Some ways to do that are:

Due diligence at branch level and fund utilisation audits can check financial wrongdoings. Culture of accountability, zero tolerance and effective enforcement is the key for ensuring that the instances of fraud decrease, by reducing the gap between occurrence and detection of frauds.

RBI’s directives on increasing monitoring of loans as well as imposing requirement of increased forensic audits seem to be a step in the right direction.

Banks shall integrate emerging technologies in their system that is exactly the game changer for businesses across the world. They should leverage on the advancements in AI & ML technology to analyse patterns and learn from historical cases. Adopt screen public records of the applicants to ensure their credit worthiness. There are several sources, verified by the government that can contribute towards assessing their financial status and creditworthiness. They can incorporate an additional layer of preventive actions by analysing the financial patterns of the entity or individual. Tax filings (ITR or GST filings) are a good indicator of the business health and validity of an entity. Screening the entities for any negative news that might have been published in a given time period against the applicant.

To Check frauds and push big-ticket spending : Banks seek time-bound data sharing from CEIB. Lenders have worked out a 20-point standard format to seek information on borrowers from the Central Economic Intelligence Bureau prior to sanctioning big-ticket loans. AIM-To reduce delay in getting such information on economic offences. The IBA is working to expedite the information sharing process. According to the finance ministry’s guidelines on timely detection, reporting and investigation relating to large-value bank frauds, lenders need to ask for a report from the CEIB on prospective borrowers at the pre-sanction stage itself

HOW TO SAVE YOURSELF FROM BEING CAUGHT IN THE CROSSFIRE?

• Keep a check on your account activity regularly and set strong passwords and PIN. This may be the single most effective strategy you can employ to secure your account.
• Report any discrepancies to your financial institution immediately. Switch to using only secured mailboxes and connections.
• Use of anti-virus protection software, firewalls and spywares reduces your vulnerability to cyber-attacks and fraud attempts.
• Your bank will not call requesting your credentials, they already have this information. It is easy for scammers to rig convincing email and hence avoid clicking on the links embedded in e-mails. Instead, type in the bank’s web address in your browser and navigate from there.
• Make sure to also keep your computer updated with the most recent security patches. 

While it is impossible for banks to operate in a fraud-free environment, proactive measures such as risk assessments of operations and policies can assist them to mitigate the risk of fraud-related losses. Lapses in the system make it easy to dupe banks.

Nonetheless, time has come to address the banks’ security concerns on a priority basis.

“Banking is very good business if you don’t do anything dumb.”