CVC analysis of bank frauds should encourage setting up of a system of checks & balances

It is not only in India that commercial banks are taken for a ride by corporate borrowers. Financial crises and scams around the world are evidence of how borrowers have cheated banks. The Indian experience is that neither bankers, regulators nor policy makers learn from the shocks that the Indian banking system suffers from time to time. A fresh scam serves as an eye opener to loopholes in the law. That is how over the years every scam has involved fake debtors, over valuation of property and inventory, over invoicing of exports, over invoicing of domestic sales or selling same goods to multiple buyers on paper or all of the above.

The Central Vigilance Commission’s analysis of top 100 bank frauds, which was given to the department of financial services and the Reserve Bank of India (RBI) needs to be circulated to different banks and a system of checks and balances should be put in place for approval of loans. Take the case of over invoicing of sales. The genuineness of sales can only be assessed by looking at tax payments, which are associated with every sale transaction that takes place because tax is either paid on raw material or on finished goods. If taxes are paid on sales then total sales figure is fine, but if the taxes have not been paid then sales being shown on the balance sheet are not genuine, they are just book entries.

Earlier, there was no centralised system to check whether taxes had been paid but things have changed now. Following the implementation of GST, there is a database and almost every sales transaction can be tracked. If a bank needs to check the sales figures being claimed by a borrower, it can ask for the indirect tax returns. The government can develop a system for banks to access tax data – maybe after paying a fee. If there is no major mismatch – let us say there is a mismatch of 5 per cent which can happen because of technical reasons – it would mean the sales are genuine. Also, banks should inform other banks about what it has found out about a borrower if these details hint at a possible fraud. This would ensure that no other bank gets caught in a trap.

The biggest positive of mandatory indirect tax returns filing would be a reduction in corruption and a process which would involve a government department where figures cannot be fudged in any case would determine collusion between bankers and borrowers as authenticity of sales. Now comes the other element, which is taking care of chartered accountants and other independent entities who play an important part in transactions between banks and borrowers. While valuations of property are a subjective issue, other elements of profit and loss account are not so. There are important elements in a balance sheet which in ideal conditions should be clear as black and white. But some chartered accountants help borrowers in creating grey areas. With regard to chartered accountants, if they are found guilty of signing a fudged balance sheet, strict action should be taken against them. It should not happen that an inquiry should take years, which is the situation today. It is important that chartered accountants be made accountable for balance sheets they sign as that would make balance sheets clean and banking cleaner.