Nirav Modi effect? Bank frauds more than double to Rs 412 bn in 2017-18

File photo of Nirav Modi
Even as the number of bank accounts has grown exponentially owing to the Modi government’s Jan Dhan scheme, there has been a commensurate rise in the number of banking frauds and the amount involved in these frauds.

The Reserve Bank of India’s (RBI) latest report on ‘Trends and Banking in India 2017-18’ notes that Rs 412 billion worth of frauds were committed across Indian banks in 2017-18 – a 112 per cent increase over 2014-15 when the Modi government came to power. However the RBI’s report has a caveat to justify this phenomenal jump. Without naming anyone, the report states, “In terms of amount, frauds in the banking sector increased sharply in 2017- 18 mainly reflecting a large value case in the jewellery sector.” The Nirav Modi scam estimated to have cost Punjab National Bank almost Rs 135 billion. In effect, if the Nirav Modi case were to be left out of the fraud equation, the bungling in Indian banks would have increased by just Rs 38 billion in 2017-18 as compared to the previous year. This would have been even lower than the increase in 2016-17 when the amount of frauds in India’s banking system had grown by Rs 52 billion as compared to the previous year. In 2015-16, the amount of frauds reported in Indian banks had decreased by Rs 8 billion even as the number of fraud cases had remained almost same compared to 2014-15.

The RBI warned that more than 90 per cent of the frauds could be attributable to bank credit. It outlined a similar modus operandi as used by Nirav Modi and Mehul Choksi to outline the danger faced by India’s banking system. The report notes, “The modus operandi of large value frauds involves opening current accounts with banks outside the lending consortium without a no-objection certificate from lenders, deficient and fraudulent certification by third party entities, diversion of funds by borrowers through various means, including through shell companies, lapses in credit, underwriting standards and failing to identify early warning signals.” According to the RBI, more than 80 per cent of frauds during 2017-18 involved an amount of more than Rs 500 million.

While the report outlines the dangers posed by lax lending and oversight by banks to people who divert bank credit through shell companies, there has also been an exponential rise in frauds in off balance sheet transactions in addition to cyber frauds. With Indians more frequently transacting through the internet and mobile phones encouraged by Modi government’s digital banking push after demonetisation, the amount of money people lost through cyber frauds has almost doubled during the year. In 2015-16, the last demonetisation year, India’s banks recorded just about Rs 400 million in cyber frauds, In 2017-18, two years post Modi’s digital push, banks and their customers lost over Rs 1 billion through internet banking frauds. There has also been a staggering rise in off balance sheet fraud in banks. The RBI’s report notes that off balance sheet frauds stood at Rs 163 billion in 2017-18 – a more than 250 fold growth over the previous year. These frauds are not reported by banks on their balance sheets which in effect gives a more positive picture about their financial health than it would have looked had the frauds and subsequent losses been allowed to reflect in its books.

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