Bank fraud: no restrictions on CBI, please!
Even as the government is making every effort to ensure that gross domestic product (GDP) – after experiencing an 8% contraction in 2020-2021 – returns to a high growth trajectory, it is concerned about the timid recovery in availability. credit which is considered to be the sine qua non of growth. According to the latest data from the Reserve Bank of India (RBI), the annual growth in non-food credit in January of this year was 5.7% compared to 8.5% in the same period last year. Credit to industry contracted, however, by 1.3% in January 2021 against growth of 2.5% in January 2020.
One of the main bottlenecks is the reluctance of bank officials to sanction loans, lest they fall under the control of investigative or prosecution agencies for making “pure business decisions”. Over the past three years (2018-20), the Central Bureau of Investigation (CBI) has recorded cases of bank fraud involving amounts worth over Rs 1,000,000 crore (in 2020 alone it recorded 200 cases involving a total of Rs 70,000 crore). The government wants to allay their fears by letting the CBI look into only certain “extraordinary” cases such as IDBI Bank-Kingfisher Airlines while specialized agencies such as the Serious Fraud Investigation Office (SFIO) of the Ministry of Commercial Affairs ( MCA) asked to investigate most of the remaining cases.
The above decision is also justified in terms of what Prime Minister Narendra Modi said at an event in December 2019 – that bank workers should not be penalized for “real business decisions” – as well as exhortation from Finance Minister Nirmala Sitharaman the same month: “Honest bankers need not fear the three C – CBIs, the Central Vigilance Commission (CVC) and the Comptroller and Auditor General of India (CAG)” . There can be no two opinions that public servants should act without fear and without any compulsion, including the possibility of coming under the magnifying glass of agencies. This is a prerequisite for creating a strong credit culture and ensuring that the availability of credit increases in line with requirements. However, this only applies to situations in which officials have performed due diligence, carefully assessed the viability of the project or business for which the loan is being considered, and have become convinced of the credibility of the borrower.
In such a situation, the risk of fraud is almost negligible. Even in the unlikely event that things go wrong and the loan becomes a Non-Performing Asset (NPA), the mere fact that the official has performed “due diligence” and taken every precaution while sanctioning it on his own should inspire confidence. On the other hand, if the official cavalierly granted a loan without doing due diligence or assessing the viability of the project or acting in bad faith for personal gain under what is called an agreement of “quid pro quo”, there is then any possibility of the loan becoming an NPA. In such a scenario of bank fraud, authorities should not even let the idea of ”keeping the CBI at bay” cross their minds.
However, fraud occurs in a systematic way and this is evident from the four main financial entities, namely; Yes Bank, Punjab and Maharashtra Cooperative (PMC) Bank, Infrastructure Leasing and Financial Services (IL&FC) and Dewan Housing Finance Corporation Limited (DHFL) have been forced into bankruptcy over the past three years only because their senior officers acted with bad faith intent while sanctioning loans.
Here are some hard facts. Between April and June 2018, Yes Bank invested Rs.3,700 crore in short-term DHFL debentures. Almost at the same time, the latter’s president “paid a bribe of Rs 600 crore” to the former’s developer and members of his family in the form of a builder loan to DOIT Urban Ventures. – a company belonging to the family of promoters. According to the CBI, although this is a short-term bond investment, DHFL has not bought back the investment from Yes Bank to date. The DHFL is said to have siphoned off Rs 31,000 crore out of a total bank loans of Rs 97,000 crore using a network of several shell companies. A questionable loan of Rs 6,500 crore was granted by PMC to Housing Development and Infrastructure Limited (HDIL) in collusion with senior officials of the bank. Likewise, tens of thousands of crore of bad loans granted by IL & FS have landed in dozens of shell companies owned by the senior officers of the former. Another brazen case involves defrauding the Pradhan Mantri Awas Yojana (PMAY) by the directors of DHFL. Under the PMAY, loans are given to people from economically weaker strata and to low and middle income groups to buy land and build houses, or buy housing, through an “interest subsidy linked to the income.” credit ”! The beneficiaries receive an interest subsidy of 3 to 6.5% payable in advance. The amount of the subsidy must be claimed by the financial institutions (FIs), which grant these loans, from the National Housing Bank (NHB) which, in turn, is reimbursed by the Center.
DHFL – an FI responsible for implementing the program created 260,000 ‘fake and fictitious’ mortgage accounts at a non-existent Bandra branch between 2007 and 2019 for a total loan of around Rs 14,000 crore. Of this total, approximately 11,750 crore rupees were deposited or routed to several shell companies. Several of these accounts were opened under the Pradhan Mantri Awas Yojana (PMAY) and an interest subsidy of around Rs 1,900 crore claimed from the NHB until December 2018, of which the latter has already repaid 540 crore of Rs. Senior DHFL officials committed the fraud in collusion with officials of the NHB, which happens to be a wholly owned subsidiary of the RBI. Being the main regulator of banks and FIs, the responsibility of the RBI is to prevent any fraud in these institutions and yet such a thing happening under its nose is unacceptable. By no stretch of the imagination, this cannot be a case of sheer negligence or a legitimate business decision gone wrong. That aside, there are countless cases of bank fraud – each running up to several crores – that fall out of the closet almost every other day. These cannot be wished for as a one-off incident. The frauds are the result of a well orchestrated game plan in which the heads of the banks / FIs are actively involved. Indeed, it is more systemic in nature, linked to a sense of fearlessness among public servants that even if they do something horribly wrong, they will get away with it.
This state of mind can only be addressed by wielding a stick. The involvement of the CBI and other agencies such as the Directorate of Execution (ED) should be seen in this perspective. In this context, a sweeping order that the CBI will only review fraud involving an amount above a threshold, say, Rs 500 crore, will send the wrong signal. It is like ignoring the wrongdoing, letting it continue unabated. It should be avoided. However, officials who do their jobs honestly and sincerely have nothing to fear – as Modi and Sitharaman rightly observed – those who are there to commit fraud can only be restrained by instilling fear. In such cases, the CBI should be allowed to do its work without hindrance.
The author is a New Delhi-based political analyst. The opinions expressed are personal.