The alleged fraud in Bank of Baroda is no small matter, even though the amount that is reported to have been remitted abroad illegally has been scaled down by the bank from an earlier estimate of Rs 6,100 crore to Rs 3,500 crore. There are many reasons why this fraud could have happened. First, the bank does not appear to have made a loss in this matter - one reason, perhaps, why officials concerned could have been lulled into complacency. This is all the more an issue at a time when public sector banks are being asked to pull up their socks and take care of their troubled bottom line. The modus operandi of the perpetrators of the fraud appears to have been simple enough - send out small amounts which do not require immediate reporting to the Reserve Bank of India as advance remittance for imports, which were eventually never made.
The key issue that arises is: what happened to the bill of entry prepared by the Customs indicating that the goods had actually come in? Established banking procedures required that a document must be submitted to the bank handling the transaction in the case of advance remittances. Obviously either these were forged or not submitted at all. All this points to palpable negligence on the part of the bank officials concerned. Their job is not just to follow the rules but also to ask questions on seeing suspicious behaviour. For example, why should innumerable small transactions be put through over a period adding up to a sizeable sum? Most importantly, due diligence does not appear to have been done in the case of both the bank's customers, the importers, and the exporters in Hong Kong.
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Apparently, fictitious addresses were given when the accounts of importing companies were opened. Banks have well-established drills, which if followed would have identified the misleading actions. Equally important is the guarantee that the banker to the importer has to take from the banker to the exporter in cases where advance remittances are made, in order to ensure that a genuine exporter is in fact exporting the goods. Also, the remitting bank should have asked why the importer was transferring rupee funds to the remitter from his accounts in other banks when those banks should have come forward to grab a part of the lucrative remittance business. True, the fraud was detected by the bank's own auditors but this still keeps open the question of adequate supervision of branches by controlling offices and proper systems and processes being in place and followed. The latest fraud reiterates the well-known truth that frauds in banks do not take place unless the dealing officials in them are complicit and controlling offices are sleepy.
The fraud poses troubling questions for the government, which is after all the owner of the bank. It was left headless for 14 months. What does this do to internal morale and discipline? What does the fraud do to the morale of other public sector banks? Its impact on the public sector banks' lending operations could be adverse as more officers would now be wary of their actions. There is also the issue of Prime Minister Narendra Modi's electoral promise to bring back huge amounts of black money. The amount declared under the government's scheme in question is pathetically low - and now there is a massive fraud which points to big money still going out.
