Top 100 PSU Bank frauds: Gems & Jewellery, Aviation among 13 sectors hit hard
Even as PSU Bank frauds assume focus after the recent billion dollar fraud allegedly perpetrated by diamontiare Nirav Modi, a recent report by Central Vigilance Commission (CVC) analyses top 100 frauds that has been committed in 13 sectors, including Gems & Jewellery and Aviation. While bank frauds have been in public focus due to high profile cases involving Vijay Mallya and others, the CVC report, does not name any individual or company involved in the cases it has analysed. Further, the analysis details only with frauds concerning public sector banks. The report has been submitted to the RBI. The cetral bank has acknowledged it as useful and circulated it among public sector banks. We take a closer look at what the CVC has to say about frauds in the Gems & Jewellery and Aviation sectors.
Gems & jewellery
In the Gems & Jewellery sector, the CVC analyses three cases of frauds which were committed after taking bank loans. Explaining how the frauds were conducted in the sector, CVC noted that the companies deliberately inflated the valuation of diamonds with the mala fide intention to avail higher credit facilities from the lenders and also to indicate the security coverage available with the lenders. “Export bills which remained unpaid on due date were purchased by the consortium Banks. The details of debtors submitted by the companies to the bank in order to avail credit facilities appeared to be manipulated, false and fabricated. They also resorted to availing post-shipment finance by discounting ‘Export Bills’ from one of the member banks, while pre-shipment finance was obtained from another member bank by way of Standby Letter of Credit (SBLC), leading to double financing,” noted the CVC report.
The report noted that there had been lapses on the bank’s part too, as due diligence report on borrowers were not obtained before submitting the renewal proposal. Further, no credit assessment was done for these customers. “There was no evidence for proof of delivery of the goods to customers… In the absence of any effective mechanism to monitor the movement of discounted Export bill proceeds towards liquidation of SBLCs across member banks, the companies manipulatively diverted and round tripped the funds to their shell companies,” said the CVC report. The report says that the lead bank in the lending consortium did not share the areas of concern, and did not take note of warning signals mentioned in business rating reports.
In the aviation space, CVC analyses one company, which began commercial operations in May 2005 and was a leading company with a 21% market share in domestic operations. The firm was promoted by another group which had a presence in many countries. The CVC report notes that the company under consideration, cheated the lending bank by suppressing facts in financial statements and diverting the funds to related entities for purposes other than those for which financing was done, reported The Indian Express. The company ran its operations mostly on leased aircraft for which an overseas entity (vendor) was created, which in turn created fictitious invoices with inflated bills, the daily quoted CVC report as saying. Whatever money the company owed to the leasing company would be disbursed, and the rest parked with the entity.