Indian banking caught in vicious cycle of loan fraud

Lack of adequate monitoring mechanisms and poor governance structures enable fraudsters to cheat public sector banks

Indians are no longer shocked when a government-controlled bank in India announces a multi-million/billion dollar fraud as such incidents have been on the rise in recent years. The latest one is the $2 billion loan fraud on Punjab National Bank, India’s second-largest state lender, perpetrated by a high profile billionaire jeweller Nirav Modi and his associates.

Reserve Bank of India (RBI) data, published by Reuters, shows state-run banks have reported 8,670 loan fraud cases totalling Rs612.6 billion ($9.58 billion) over the last five financial years up to March 31, 2017. In most of these cases, major borrowers have deceived banks and taken refuge in countries where extradition processes are tough. While poor lending practices and lack of regulatory compulsions on banks to disclose loan defaults have helped many major borrowers to cheat banks, political connections and long-drawn legal process and cumbersome extradition process enable them to escape justice and live comfortably in foreign lands.

Bad loans of Indian banking sector have swelled to crisis proportions in recent years. Aggregate non-performing loans (NPL) were near $150 billion at year-end. While recovery of these loans is near impossible, banks are forced to write off loan fraud losses on their balance sheets, masquerading as NPLs, periodically. When the losses surge in public sector banks, government is forced to recapitalise them with tax payer’s money. And the vicious cycle continues. Clearly banks are at fault in most cases as they lack adequate monitoring mechanisms. Their culpability is amplified by poor governance structures. The government and the central bank can’t absolve themselves of the responsibility of protecting depositors’ and investors’ money when fraudsters repeatedly use similar modus operandi to defraud public sector banks.

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