Internal frauds in Banks: A Banker’s Perspective

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Internal frauds in banks committed by its employees are global phenomena. Recent research puts the cost of banking fraud at around $70bn a year – and cases involving bank insiders account for about 70 per cent of that total.

Back home in India, Reserve Bank of India declared the following data on banking frauds recently:

  1. Fraud cases referred to CBI for thorough verification in various centres and abroad are
    40 from January 2020 to August 2020 with an amount of Rs.14,429 crore as per the Forensic audit on these 40 companies.
  2. Bank frauds cases registered were 84,545 during FY 2019-20 to the extent of Rs.185,772 crore. It is heartening to note that these frauds took place in banking giants SBI, ICICI and PNB.
  3. Of the above 84,545 cases, frauds by Bank staff were 2668 cases involving Rs.1783.32 crore.

Corporate customers cheating the banks is a common phenomenon but in most of the cases, frauds take place in connivance with bank staff. All these cases are in various stages of enquiry pending for disposal.

We hereby bring you the modus operandi of the staff at some banks who defrauded the customers especially borrowers. All these having been found during one of my sudden inspections during my tenure as a bank officer.

Case Study-1

It was in 1980, a branch manager of Corporation Bank at Penumur near Tirupati in Chittor district of Andhra Pradesh was found to have defrauded more than 100 customers amounting to lakhs of rupees. He was identified as Sridhar used to work after office hours till 8 pm. He even used to accept deposits after the closure time of 2 pm and remit them the next day and give them the Fixed Deposit receipts.

His fraud came to light during his absence after he went on a 6-months long leave when a farmer approached the bank for a loan on his FD. The FD Certificate issued to the customer was not found in bank records. The staff could not trace the deposit anywhere in the ledgers, except the signature of the Manager as everything was concocted. The printed serial number of the Fixed Deposit (25 in each book) was not taken out by the staff from Security stocks inside the Strong Room.

Case Study-2

Similarly, I found another internal scam by a branch manager in Guntur rural while working for a nationalised Bank in 1990, who intelligently cheated not the bank but the innocent customers who trusted him. The modus operandi was so clever that he used to take the signature of the loanees on blank vouchers only to write blotted figures.

It was found that the manager had taken signature from the farmers of above 5 acres who come to the bank to avail fixed crop loan limit of Rs 2 lakh which was valid for three years and documents were taken accordingly, subject to conditions that each crop loan be closed within 12 months or renewed by paying interest. Some of the farmers who may get a good harvest seek to release the remaining Rs 1,00,000 in the second year. Here he plays the game by taking signatures on blank vouchers and used to draw Rs 2,00,000 from the bank but pays the farmer only Rs One Lakh as he desired.

This is a clear case of cheating the customer as he had signed out of good faith being a responsible bank officer. The fraud came to light after the bank sent them notices for loan recovery.

Case Study-3

When I was working in Nizamabad branch of Corporation Bank as sub-Manager in 1998, I came across fraud in Janata Deposit Collection scheme indulged by a deposit collector Himabindu. He was working on a commission basis of 3% on daily deposit collected from Customers from 1988. A lady doctor, who later became Mayor, used to pay Rs.1000 every day and sign the JD card issued by the bank. One day during my routine check, I found the figure mentioned was Rs 100 and Rs900 was missing in the records. Upon cornering, Himabindu literally fell on my feet for mercy. After cross-checking it with several of his other customers (daily depositors), I decided to pardon him after recovering the money from him due to pressure from the staff besides it was not a big amount. But I told them “Today, it may be 900 fraud, if not noticed tomorrow it may turn out to be huge sums”.

After 2 years of my transfer to DN Road branch in Mumbai, I received a call from few customers in Nizamabad that Himabindu was not traceable as he defrauded the bank to the tune of Rs 7 lakh in Janata Deposits accounts.

(next How Frauds take place in Corporate Accounts)

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