It's not a 'lower-level' problem: How to avoid Dena, OBC-like deposit scams

The fixed deposit scam in two state-run banks Dena and Oriental Bank of Commerce have brought to light a another major lacunae in the Indian banking system.

For beginners, the banks yesterday said that a few branch officials have misappropriated Rs 436 crore from their fixed deposit accounts and suspended or transferred the erred officials. The government too has ordered a forensic audit of the two banks.

The quick confession of the two banks that some of their officials indeed defrauded the customers by faking term deposit receipts in connivance with middlemen, doesn’t reduce the seriousness of the problem as something that happened at a “lower level”. Bank managements are indeed answerable.

Such fixed deposit “scams’ could happen again unless certain aspects are looked into:

For one, strengthening the KYC process of banks is critical. In most cases, the middlemen do most of the job for depositing a bulk amount in the bank, including the necessary documentation, on behalf of his client company. He does this under an understanding between the original depositor and the branch manager.

The consent from the firm to the whole process often comes through a phone call or a fax message. Here is where things go wrong. If at all middlemen is involved, he must carry the necessary proof from the firm that empower him to deal with the bank on behalf of the company. Any secondary transactions on the term deposit, such as using it as a security to give a third party loan should be done with clear understanding and involvement of the original depositor.

Two, while competition is must in banking like in any other business, putting undue targets on branch staff to generate business leads to wrongdoings, often in the form of flouting the rules of the game.

Transparency and commitment to the clients should not remain on the paper and something that preached by the chairman of the bank. Lower level employees must have an environment to follow the norms. It is the job of the bank to work out a solution and lay out strict norms.

In the cases of Dena and OBC, it is not clear yet whether the bank officials have received kickbacks (not known till this stage), in any of these transactions.

The charges raised against them are primarily procedural lapses that took the shape of financial fraud when the deposit receipts were forged for the purpose of giving loans against them, with or without the knowing of the clients and erred bank officers. The real picture will emerge only after the investigation.

Nevertheless, a relook at the KYC norms on handling of bulk deposits/ large value term deposits is critical. The reasons that led to the Dena, OBC scams applies to the whole system; hence the solution be worked out at systemic level.

The problem, certainly, is not limited to a few lower level bank employees. To understand why top-level bank managers cannot go scot-free, read this.