Data shows fraud problems extend far beyond PNB
Investors may have been shocked when one of India’s biggest banks disclosed a $1.77 billion fraud by billionaire jeweller Nirav Modi, but the central bank has recorded data that shows the problem runs far deeper and wider.
The Reserve Bank of India (RBI) data, which a Reuters reporter obtained through a right-to-information request, shows state-run banks have reported 8,670 “loan fraud” cases totalling ~612.6 billion ($9.58 billion) over the past five financial years up to March 31, 2017.
The figures expose the magnitude of the problem in a banking sector already under pressure after years of poor lending practices. Bad loans surged to a record peak of nearly $149 billion last year. Bank loan frauds have steadily increased as well, reaching ~176.34 billion in the latest financial year from ~63.57 billion in 2012-13, according to the data, which doesn’t include the Punjab National Bank case.
PNB, India’s second-largest state lender, said on Wednesday two junior officers at a single branch had illegally steered $1.77 billion in fraudulent loans to companies, most of them controlled by billionaire jeweller Nirav Modi. It was India’s biggest fraud ever.
“This might be the tip of the iceberg or the middle, and that is the worry,” said Pratibha Jain, partner at law firm Nishith Desai Associates, who advises on bankruptcy cases. “The fact is we don’t know what else is out there.”
The RBI did not immediately respond to a request for comment. But in June 2017 the central bank, in its Financial Stability Report, called frauds in banks and financial institutions “one of the emerging risks to the financial sector”.
The RBI has been commended for forcing Indian banks to fully disclose its bad loans, speed up their recovery, and stop hiding fraud cases as non-performing assets.
Yet to some critics, the RBI has been too guarded about publicly sharing data on loan defaults or fraudulent loans. This is partly due to legal constraints on disclosing individual cases and worries investors would pummel the affected banks, making loan recovery even harder. In fact, the numbers of loan fraud cases across India could be even higher since they only include cases reported to the RBI, which involve only loans of 100,000 rupees or more.
In its right-to-information request, Reuters sought data from 20 of India’s 21 state-run lenders and obtained 15 replies.
PNB topped the list with 389 cases totalling ~65.62 billion ($1.03 billion) over the past five financial years, in terms of the total amounts involved. Reuters was unable to obtain a detailed breakdown on the exact nature and method of the loan frauds the banks reported to RBI over the past five financial years.