Lok Sabha Question No. 216 (STARRED), answered on 2018-03-09
Subject: Scams in Banking Sector
Ministry: FINANCE
Asked by: MUTHAMSETTI SRINIVASA RAO (AVNTHI), KINJARAPU RAM MOHAN NAIDU

## GOVERNMENT  OF INDIA

## LOK SABHA

## MINISTRY  OF FINANCE DEPARTMENT  OF FINANCIAL  SERVICES

## STARRED QUESTION NO. *216

TO BE ANSWERED  ON THE 9 TH  MARCH  2018/ PHALGUNA  18, 1939 (SAKA)

## Scams in Banking Sector

## *216.   SHRI MUTHAMSETTI SRINIVASA  RAO  (AVANTHI): SHRI RAM MOHAN  NAIDU  KINJARAPU:

## Will  the Minister  of FINANCE  be pleased to state:

- (a) whether   scams  in  the  banking   sector  keep   hitting   the  Indian   economy   quite often,   including   the  latest   case  of  the  Punjab   National   Bank (PNB)  and  if  so,  the reasons for the scams;
- (b) whether   the  officials   of  Hong   Kong  branches   of  Indian   lenders   including Allahabad  Bank,  State Bank of India,  Union  Bank of India,  UCO  Bank and Axis  Bank are part  of the entire  Punjab  National  Bank  fraud  which  continued  for seven years  and if so, the details  thereof;
- (c) the  number   of  Letters   of  Undertaking (LoU)  issued  to  the  businessmen involved  in PNB scam from 2011-14 and subsequently  from 2014 to January  2017 and the reasons for inactiveness  of the internal/external auditors  for the last seven years  in this regard;
- (d) whether  as per guidelines,  the tenure  for the encashment  of LoUs  for the gems and jewellery  sector is usually  of 90 days  and not 365 days,  if so, the details  thereof  and the reasons for such deviation  from the usual  practice  being  missed from  the minds  of officials  working  at the Hong  Kong branches  of other  lenders  along  with  the action taken  by  the Government  against  such delinquent  officials;  and
- (e) the details  of the steps taken  by  the Government  to stem the rot in the banking system  and for strict  enforcement  for appraisal  of exposures  of all kinds  in the banking system of  the country?

## ANSWER

THE FINANCE  MINISTER (SHRI ARUN  JAITLEY)

(a) to (e):  A Statement  is laid  on the Table  of the House.

## STATEMENT FOR LOK SABHA  STARRED QUESTION NO.*216  FOR 9 TH MARCH  2018  REGARDING   'SCAMS   IN  BANKING   SECTOR'  BY  SHRI MUTHAMSETTI SRINIVASA   RAO   (AVANTHI)AND   SHRI  RAM  MOHAN NAIDU KINJARAPU,  MEMBERS OF PARLIAMENT.

(a)  to  (e):  The   Reserve   Bank of  India  (RBI)  Master   Circular on  Frauds   observes  that frauds are committed  by  unscrupulous  borrowers  by  various  methods  including, inter alia, fraudulent  discount  of instruments,  fraudulent  disposal  of pledged/hypothecated stocks, fund diversion,  criminal  neglect  and mala fide managerial  failure  on the part  of borrowers. The  Master   Circular also refers to certain other methods,   which include   forged instruments, manipulated account books, fictitious accounts, unauthorised credit facilities,   fraudulent   foreign   exchange   transactions,   exploitation of  'multiple banking arrangement', and deficiency on the part of third parties with role in credit sanction/disbursement.

With  regard  to the number  of LoUs  issued to those involved  in the PNB case, CBI has stated that  the matter  is under  investigation.

In  respect  of  involvement   of  officials   of  Hong   Kong  branches   of  Indian   lenders,   the Central   Bureau   of  Investigation   (CBI)  has  stated  that   investigation in  this   regard   is  in progress.

As  per  RBI  Master   Direction   on  External   Commercial Borrowings,   Trade   Credit, Borrowing  and Lending  in Foreign  Currency by   Authorised   Dealers et  al ,  the  maturity period  for trade  credit  for non-capital  goods is up to one year  from  the date of shipment or  the  operating   cycle   whichever   is  less.  As  per  RBI  Master   Direction   on  Import   of Goods & Services,  Suppliers'  and Buyers'  credit  (trade  credit)  including  the usance period of Letters  of Credit  opened for import  of gold in any  form,  including  jewellery  made of gold/precious   metals   or/and   studded   with   diamonds/semi-precious/precious stones, should   not  exceed  90  days   from   the  date  of  shipment.   The   Master   Direction   further provides that for import of other precious metals, viz., platinum/palladium/rhodium/silver / rough,  cut and polished  diamonds  / precious  and semi-precious  stones, the period  of Suppliers'  and Buyers'  credit  (trade  credit)  including the  usance  period   of  Letters   of  Credit   opened   for  import   of  platinum,   palladium, rhodium  and silver  and rough,  cut and polished  diamonds,  precious  and semi-precious stones  should   not  exceed  90  days   from   the  date  of  shipment.   As  regards   the  issue  of observance   of  tenure   guidelines   for  encashment of  LoUs   for  the  gems  and  jewellery sector,  as per CBI inputs,  the matter  is under investigation.

RBI has issued instructions  mandating  banks  to implement,  within  stipulated  deadlines, prescribed   measures   for  strengthening   the  SWIFT   operating   environment in  banks. Further,  it has constituted  an Expert  Committee  under the chairmanship  of Shri  Y. H. Malegam  to look  into, inter alia, factors leading  to increasing  incidence  of frauds in banks and the measures  (including  information  technology  interventions) needed to curb and prevent  it,  and the role  and effectiveness  of various  types  of audits  conducted  in banks  in mitigating  the incidence  of such frauds.

Government   has  issued  an  advisory   to  Public   Sector   Banks   (PSBs)  to  take   immediate action   as  per  extant   legal/regulatory framework   to  ensure   that   such/similar   fraudulent activity  (as reported  by  PNB) is not prevalent  in the bank.  They  have also been asked to ensure  that   robust systems   and  procedures   are  in  place  for  confirming   due  approvals, necessary  applications/documents and entry  in the bank's  system  in respect  of all Letters of Undertakings/Comfort and SWIFT messages, and ensuring  scrutiny  and reconciliation of  Nostro   accounts,   and  to  take   all   necessary   steps  to  safeguard   against   occurrence   of such frauds.  Government  has further  advised PSBs to collectively prepare   a  report   for effective management  of operational  risks,  including  technology  risk,  so as to safeguard against  occurrence  of frauds.  Government  has also asked PSBs to examine  all accounts exceeding  Rs. 50 crore,  if classified  as Non-Performing Asset (NPA),  from the angle of possible   fraud.   For  clean   lending,   banks   would   ensure   strict   role   segregation,   online processing,  clean consortium  lending  arrangements,  Stressed Asset Management  verticals for stringent  recovery,  and clean  post-sanction  follow-up  for loans  above Rs. 250 crore.