Investors may have been shocked when one of India’s biggest banks disclosed a $1.77 billion fraud by a billionaire jeweller, but the Reserve Bank of India (RBI) has recorded data that shows the problem runs far deeper and wider.
The central bank data, which a Reuters reporter obtained through a right-to-information request, shows state-run banks have reported 8,670 “loan fraud” cases totaling 612.6 billion rupees ($9.58 billion) over the last five financial years up to March 31, 2017.
In India, loan frauds typically refer to cases where the borrower intentionally tries to deceive the lending bank and does not repay the loan. 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 rupees in the latest financial year from 63.57 billion rupees in 2012-13, according to the data, which doesn’t include the PNB case. Punjab National Bank, 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.
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, at the same time, 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.
Bankers have been blamed for steering funds to politically connected business tycoons, such as Vijay Mallya, without due diligence, or after being pressed by government officials to steer funds to sectors it wanted to promote, such as infrastructure. Mallya stands accused in India of fraudulently palming off losses from his now defunct Kingfisher Airlines onto banks by taking out loans he had no intention of repaying, an allegation he denies.
Nirav Modi, the jeweller accused in the PNB fraud case, posed for pictures with Prime Minister Narendra Modi at the World Economic Forum in Davos, Switzerland, where he was part of India’s delegation of corporate leaders.
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