Indian banking system in trouble because of frauds

The Rs 11,300 crore-Punjab National Bank scam has exposed the mess our banking system is in. And skeletons in the cupboards of public sector banks have been tumbling out ever since

Dhirendra Kumar Joshi

The Rs 11,300 crore-Punjab National Bank scam has exposed the mess our banking system is in. And skeletons in the cupboards of public sector banks have been tumbling out ever since.

In the wake of the PNB scam came the Rs 3,700 crore Rotomac fraud involving Bank of Baroda (BOB), then the Rs 390 crore rip-off of the Oriental Bank of Commerce (OBC), and then the Rs 110 crore cheating case. Now scams have become the order of the day.

Reports point out that almost every public sector bank may be involved in fraudulent loan scams, with swindlers bleeding the public institutions red. With little hope of recovery, such loans become the non-performing assets (NPAs) or bad loans of these banks. The State Bank of India and Punjab National Bank top the list of bad loans given out by PSBs in terms of quantum of loan amount.

According to official data as on September 30, the State Bank of India had the highest gross value of NPAs at Rs 1.86 lakh crore, followed by PNB at Rs 57,630 crore. The Industrial Development Bank of India (IDBI) and the Indian Overseas Bank (IOB) were also among the list of banks having very high NPAs. Data revealed that one in four bad loans was given by IDBI, while about one in five bad loans had been given by IOB. The NPAs of other public sector banks have also been steadily rising, with gross NPAs of Bank of India jumping from Rs 49,307 crore in just three months between September and December 2017.

In fact, the total amount of bad loans given by public sector banks was about Rs 7.3 lakh crore– a stupendous 370 per cent rise since March 2013, when the number stood at Rs 1.5 lakh crore. Of these, there is a big amount which will be difficult to recover as the people or companies who have taken the loans have no intention to return despite having the capacity to do so. They are called wilful defaulters.

According to official data as on September 30, 2017, more than Rs one lakh crore was owed by ‘wilful defaulters’. These bad loans by wilful defaulters have been growing over the years– the amount has quadrupled from Rs 28,417 crore to more than Rs 1.1 lakh crore between September 2013 and September 2017. Among the big time wilful defaulters are Winsome Diamonds and jewellery (about Rs 5,500 crore), Vijay mallya’s Kingfisher Airlines ( over Rs 3,000 crore), REI Agro (over Rs 2,700 crore) P K Tiwari’ Mahuaa Media and other firms (close to Rs 2,500 crore) and Zoom Developer (About Rs 2,400 crore). RBI statistics for 2016-17 show that Rs 23,903 crore was lost to fraud during the period. Of this, RS 20,56 crore (86 per cent) were linked to loans and advances.

Statistics also show that as many as 26 banks reported more than 97 per cent of their frauds as advance related. Of these banks, 15 said such frauds account for 99 per cent of total frauds, while eight said these accounted for 90-95 per cent. A disturbing fact that has come out of the PNB scam is that the scale of the fraud is double the amount of money the government infused into the bank to tide over its NPAs.

According to analysts, PNB scam may be more than Rs 13,000 crore as this will
include Rs 1,700 crore loans given to Nirav Modi-owned companies. And if all of this Rs 13,000 crore is not returned, then the total NPAs of the bank will go beyond Rs 70,000 crore, up from Rs 57, 519 crore reported in the quarter ended December. This would puff up the banks NPAs to 14 per cent of its loans, up from 12.11 per cent in December. In the Rotomac case, BOB had, in fact, classified a Rs 435-crore loan to the company as a non performing asset (NPA) in October 2015 and a fraud in December 2017.

Similar was the case of the Rs 110 crore cheating case in which Simbhaoli Sugar Ltd, one of the country’s largest sugar companies, swindled the Oriental Bank of Commerce.

The company first took a loan for Rs 97.85 crore loan which was declared fraud in 2015, and then took a corporate loan of Rs 110 crore in order to repay it. The second loan was declared NPA on November 29, 2016. The bank had complained to the CBI on November 17, 2017 but the agency registered the case only on February 22 this year after the PNB scam hit the headlines. This, in fact, has been the modus operandi of swindlers who take money from the banks and then scoot.

These scams are just the tip of the iceberg.

There is a whole mountain of bad debts with trails leading to several public sector banks


The NPAs are already giving India a bad name. The NPAs accumulated by Indian banks are higher than those of banks in most major economies, including the US, the UK, China and Japan. India ranks 5th out of 39 major economies plagued by bad loans.

These huge number of non-performing and stressed assets held by the public sector banks will restrict the ability of banks to lend, and in the process hamper investment. It’s a frightening situation that is developing and the government and banks have to do a major surgery. There is need to look afresh into the policy of dealing with NPAs of the PSU banks. A serious discipline has to be brought into the banking system.

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