Decoding Dena, OBC deposit scams: Why top level bankers can't go scot-free

The quick confession of two state-run banks, Dena and Oriental Bank of Commerce, on Wednesday 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 “lower level”. Bank managements are indeed answerable.

Though not comparable with the recent scam involving another state-run lender, Syndicate Bank (where a banker was caught taking a bribe), this certainly adds to the list of wrongdoings involving government banks.

Of late, there has been an increase in instances of irregularities involving officials at state-run banks.

About Rs 436 crore is involved in the financial irregularities in these two banks. In a damage control exercise, both banks have suspended or transferred the ’erred’ staff.

The good old public sector banks have thus smartly distanced themselves from the issue, leaving the onus on a few employees in the rank of branch manager and below for all practical purposes (read CBI investigation, possible arrest etc.). Banking secretary G S Sandhu was eager to play down the whole issue, saying the scam is “veryindividual and specific”. It is not. A closer look at the series of events would give another picture.

By isolating the problem to individual employees, both the finance ministry and banks are committing a cardinal error and an opportunity to find out the root causes of recurring scams in a business that operates purely on trust.

The hard fact is that what happened in Dena and OBC - giving loans against fake deposit receipts - happens in many other banks too. It is just that rarely such instances get caught since this is a give-and-take arrangement between the banks and corporates for mutual benefit.

There are a few factors playing out here. One, the pressure on bank employees to meet business targets, two, non-compliance with the know-your-customer (KYC) norms and finally, the indispensable role of mythical middlemen in the business of banking.

Nothing happens in a bank branch on a continuous basis without the silent approval of superior officials, including the top managements of banks. Hence, it is unfair to isolate the problem to branch level employees alone in the event of procedural lapses, especially when it comes to deposits/loans involving large sums.

The modus operandi

The practice of hunting for bulk deposits and trading these for loans is a long standing practice among Indian banks - both private and public. To be sure, there are no norms that prevent banks from giving loans against third-party fixed deposits.

But, in the race for bulk deposits and the unending quest to beef up the loan books, laxity inevitably steps in. Often, government banks, with their congenital weak risk management systems and legendary sarkari style of functioning in place, get exposed and crucified, while the smarter counterparts in private and foreign banks often get away with the bounty.

Here is how it happens: Every branch manager is under tremendous pressure from their top bosses to meet specific targets regarding per branch deposits and mobilisation of loans. The barometer reads high when it comes to branches in metros.

For that reason, a promotion/transfer to a metro office is simultaneously an opportunity for a banker to go up in the ranks proving his good work, but a pain when it comes to the pressure to meet the targets.

Winning bulk corporate deposits, often running into a few hundred crores, is a dream coming true for any branch manager. Here is where our smart middleman steps into the scene. He can be a private individual, a company and in some cases even the employee of the bank.

The middleman negotiates with the corporate, offering it higher returns on bulk deposits, typically 1-2 percent interest, for a particular bank. It is a win-win situation for both the company and the bank. In the second stage, the middleman again puts on the garb of a negotiator for the same company or third-party firm(s) to make available a loan for them against the fixed deposits he mobilised for the bank.

Once again, the bank manager is a happy man looking at his expanding loan book, so is the borrowing company, who gets loans at much cheaper rate (below 15 percent) compared with the cost of money raised from the market (about 18-20 percent on an average).

The middleman accepts a commission of the loan from the client (the depositing firm or borrowing), typically 1-2 percent of the value of the money.

Nothing is illegal until this.

The middlemen have existed in the banking world ever since the business of banking began. Going by the information on the OBC website, the bank offers loans against third-party deposits 2 percent above the card rate.

The problem begins when the competition in the loan market overpowers the prudence of an average banker. In such cases, branch managers typically reach an informal understanding with the middleman to forge the fixed deposit receipts.

The depositor firm is either given a fake receipt or not given one at all. Against the original receipt the middleman-banker manages to make available a loan to a third party firm or firms.

The understanding is that the loan will be repaid to the bank before the expiry/renewal of the original fixed deposit (typically one year).

This cycle continues for years until, at some point, the borrower fails to pay back the money in time. The bank must repay the money to the depositor since the deposits come through RTGS in most cases leaving a trail.

Skeletons begin tumbling out of the closet when either the depositor firm (like JNPT in the case of OBC) or the audit divisions of the bank itself (in the case of Dena) raise the issue with the authorities. But this happens only in rare cases. The fact to be noted is that none of these happen without the knowledge of superiors at the banks.

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.

However, one thing we can surely say: the problem certainly is not limited to a few lower level bank employees.

And in the absence of bank managements acting with urgency to find out and rectify the fault lines, there will be a recurrence more such ‘scams’.