Corruption regarding Loan & Advances with Case Studies

Talk Synopsis

(Points to ponder on general norms and procedure of lending)

1. Purposes: Individual—Organizational—National interest (Economic purpose).
2. Regulatory framework, policy guidelines and instructions for lending.
3. Sound principles of lending i.e.
   • Liquidity (i) in terms of SLR & CRR and in terms of nature of advances.

• Profitability
• Safely
• Diversity
• Security
• National interest

Different stages of sanctioning loans and advances:

5. Availability of loan (a) short time working capital in the forum of overdraft, cash credit bill purchase (b) Long term project/Program more than 3 years.
6. Delegation of power.
7. Selection of borrower.
8. Selection of projects/Programs.
9. Assessment of credit need.
10. Securities.
11. Documentation.
12. Disbursement
13. End use with purpose.
14. Monitoring—Supervision and follow-up.
15. Recovery.
16. Rescheduling write off, Restructuring.

Scope for Irregularities and Malpractices in Loans and Advances

1. Undue/unauthorised allowing overdraft in an account (frequently).
2. Allowing overdraft in a fictitious account.
3. Extending loans and advances in benami/fictitious borrower.
4. List of borrowers submitted by chairman including fictitious names.
5. Proposals prepared and loan sanctioned to a fictitious project.
6. Loan/working capital extended without having any business installation or industry.

23. Project/Industrial loans extended without installation of machines based on fabricated business forecast and without proper evaluation of the project and on submission of false installation certificate.
24. Loans extended to a project where the owner/management have no knowledge or experiences about the project.
25. Overdraft allowed in several accounts against only one financial instrument.
26. Frequently excess over limit allowed even after expiry with ill motive.
27. Transport, loan sanctioned and disbursement allowed (against fraudently made up documents) without purchasing transport.
28. Fund diverted by the borrower without the knowledge of lending banker.
29. Loan sanctioned and disbursed against fictitious securities and false documents.
30. Loan disbursed showing over valuation of securities.
31. Advance allowed in pledge account without any pledge of goods.
32. Borrower delivered goods for pledge but quality, quantity and price are falsely shown.
33. Borrower sold the pledged/hypothecated goods without the knowledge of the banker.
34. Drawings are allowed on falsely shown D.P. (Drawing Power).
35. Insurance covered wrongly in case of pledge and hypothecation.
36. House building/Commercial building-Loan sanctioned against fictitious properties, overvaluation, without approved plan, no objection certificate, and no permission in case of govt. property.
37. Loans sanctioned and disbursed against defective mortgage of properly in respect of location, valuation, ownership etc.
38. Unauthorized advances allowed against limit not approved by competent authority.
39. Non-realization/part realization of interest on advances.
40. Issuance of guarantee without any record in the branch.
41. Packing credit allowed on false TR/RR without shipment of goods.
42. Fraudently prepared bill purchased without shipment of goods.
43. Overdraft allowed against false FDR or FDR without marking lien.
44. Rescheduling of loan violating guiding principles.
45. Interest on loan waived without any justification.
46. Proper follow-up – Monitoring not done and timely and properly recovery steps not taken.

Some references for further reading:

• (i) The Banking Companies Act, 1991 (with up to date amendments)

(Specially section 14, 22, 24, 25, 27, 28A, 33, 34, 35, 38, 39, 44, 45, 46,                  47, & 48)

• (ii) Transfer of Property Act – Gazi Shamsur Rahman – 1882.
• (iii) The Contract Act, 1872.
• (iv) The Registration Act with up to date amendment (1^st July, 2005).
• (v) The Stamp Act, 1899.
• (vi) The Limitation Act, 1908.
• (vii) Money Laundering Prevention Act, 2002.
• (viii) Money Loan Court Act, 2003.
• (ix) Bangladesh Bank guidelines for rescheduling and write off of loan.
• (x) Policy guidelines of B.B. relating to different types of loans and advances and credit information for borrowers from B.B. (CIB).

Fraud prone areas in Bank:

Fraud prone areas and their modus operandi:- To look at the fraud prone areas we will have to look into the functions of banking and the type of activities a  bank legally conducts:

Defalcation of Cash:

1. Cash is being taken out temporarily holding irregular cheque and cash debit voucher with the till money.
2. Cash is taken out by keeping of piece short in the bundles of different denominations.
3. Cash received from the cash-feeding branches and vice versa are not accounted for by the dealing officials.
4. Cash received by the Cashiers/Officers from various depositors is not accounted for.

Precautionary measures

1. Physical verification of cash should be done frequently by the controlling authority.
2. Inter-branch cash transactions of the concerned branches should be checked.
3. Balance confirmation should be obtained from the account holders and pass books/statement of accounts should be issued as per standing circulars.

Fictitious entries in ledgers

1. Fictitious debit and credit entries in selected accounts are done without any supporting vouchers and the amount is withdrawn from the account where it is credited.
2. Manipulation is being done by inflating the credit balance of particular account and subsequently the fabricated amount is withdrawn.
3. Account of a depositor is not debited or less debited with the amount than the amount of a cheque and subsequently the amount is withdrawn by another cheque in connivance with the party.
4. Amount kept in CD/SB miscellaneous account in subsequently transferred to an account other than the depositor and the money is defalcated.
5. Defalcation of money through pay slip against interest of FDR STD A/c by depositing these in the fake account instead depositing the same in the real/actual payee.
6. Intentionally excess amount withdrawn is allowed from the customers account more than the existing balance by cheque and subsequently benefit is taken from the account holder.
7. Defalcation through fake and duplicate printed cheque.
8. Obtaining chequebook fraudulently through fake indemnity and using it for withdrawals under forged signatures.
9. Defalcation of the value of pay slip, SDR, TT, DD, MT, etc. without depositing in the respective heads of accounts.
10. By increasing the amount of small valued of DD, SDR, PO, etc and making fraudulent payment.
11. Opening account by stolen cheque DD, FDD, etc. and defalcation the money after collection.
12. By debiting deferent dormant accounts (saving, current etc.) and depositing in and withdrawing from fictitious account.
13. Payment of one deceased account’s money to the fake successors without proper scrutiny of indemnity bond/succession certificate/declaration and other concern papers.
14. Defalcation through international concealment of balance while transferring the actual figure from one page to another and one ledger to another ledger.
15. Defalcation through transfer of long outstanding amount against margin, which is kept in sundry deposit account.
16. Excess interest is paid to sum selected deposit accounts on the basis of fictitious product and subsequently the amount is withdrawn in connivance with the party. On the contrary, less interest is charged on some particular loan account and subsequently the benefit is taken from the loanee.

Precautionary measures

1. Proper balancing of the ledgers as per Head Office Circulars and checking thereof by the concerned officers.
2. Checking of daily vouchers with ledger.
3. Periodical audit by audit and Inspection Division of Head Office and by R.M. Office.
4. Extra-precautionary measures should be adopted during printing of security stationary and careful preservation of stock at Head office and branch level should be ensured.
5. Alertness during posting, supervision, cancellation and releasing of cheques from the ledgers should be maintained.
6. Product sheets and respective ledgers should invariably be checked by respective officer.
7. Unused cheque leaves surrounded by customers should be effectively destroyed strictly following the procedures laid down by the bank.
8. Statements of accounts, confirmation letters and acknowledgement of stop instructions must be sent to the customers promptly.

Fixed deposit section

1. Payments of FDR are being made to third party through debit cash vouchers without obtaining the concerned instrument in possession and beyond the knowledge of the beneficiary.
2. Issuance of FDR without receiving value.