~ 34

MINISTRY OF FINANCE
(DEPTT. OF ECONOMIC AFFAIRS,

PREVENTION OF FRAUDS IN
NATIONALISED BANKS

LOK SABRA SECRETARIAT·

NEW DELm
 THIRTY-FOURTH REPORT
ESTIMATES COMMITTEE
(1993-94)

(TENTH LOK SABHA)

MINISTRY OF FINANCE
(DEPTT. OF ECONOMIC AFFAIRS)

PREVENTION OF FRAUDS IN
NATIONALISED BANKS

Presented to Lok Sabha on 9 December, 1993

LOK SABHA SECRETARIAT

NEW DELHI

November, 1993/Agrahayana, 1915 (S)

E.C. No. 1311

Price: Rs. 14/-

© 1993 By LOK SABHA SECRETARIAT

Published under Rule 382 of the Rules of Procedure and Conduct of

Business in the Lok Sabha (Seventh Edition) and printed by the Manager,
P.L. Unit, Govt. of India Press, Minto Road, New Delhi-llOO02.
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112 11 3.97 163.97
© 1993 By LOK SABHA SECRETARIAT

Published under Rule 382 of the Rules of Procedure and Conduct of

Business in the Lok Sabha (Seventh Edition) and printed by the Manager,
P.L. Unit, Govt. of India Press, Minto Road, New Delhi-llOOO2.
 CONTENTS
PAGE
COMPOSmON OF THE CoMMrITEE ON ESTIMATES

INTRODUCfION ................................................................ (i)

CHAPTER I GENERAL

A. Introductory ........................................... . t
B. Bank Frauds ............... ~ ....................... . 1
Definition of Fraud ................................. .. 1
Magnitudinal Information .......................... . 2
Growing Incidence of Frauds ...................... . 3
Detection of Frauds .................................. . 4
Feed Back Information ............................. . 4
Conclusions / Observations ......................... . 8
Recommendations .................................... . 9
CHAPTER II A. System & Procedures ............................ . 10
Classification of Frauds ............................. . 10
Causes of Frauds ...................................... . 10
Banking Operations
(Deposit and Cash) .................................. . 12
Bills ..................................................... .. 13
Inter-Branch Reconciliation of Accounts ...... . 13
Computerisation .................. , ................... . 15
Foreign Exchange Business ........................ .. 17
Loans and Advances Portfolio ... : ............... .. 18
Advances against PledgelHypothecation of .. ..
Marchandi5e .......................................... .. 22
Bad Debts .............................................. . 23
Secrecy and Transparency .............................. . 24
Conclusions/Observations ............ '............ .. 27
Recommendations .................................... . 28
B. Staff Involvement ................................... . 34
Award of Punishment to delinquent officials .. 34
Staff Accountability .................................. . 35
Award of less punishment.. ....................... .. 36
Complaints against CMDslExecutives .......... . 36
Agreed List ............................................ .. 43
Review of Service ................................... .. 43
Reward to Vigilant Staff ............................ . 45
Training of Operational Personnel ............... . 45
Transfer Policy ........................................ .
46
Conclusions/Observations ............................ . 47
Recommendations ....................................... . 48
 PAGE
CHAPTER III Control Mechanism................................... 52
Internal Inspection!Audit........................... 53
SpeciallSpot Inspection Short Iru.pection ....... 53
Concurrent Audit...................................... 54
Quick System Audit.................................. 54
Sample Checking...................................... 55
Monitoring Internal Audit .......................... 55
Statutory Audit ........................................ 57
Audit Failure........................................... 58
Bank Audit Committee.............................. 59
Banks and C&AG..................................... 59
Vigilance Cell........................................... 60
Chief Vigilance Officer............................... 60
Vigilance and lnspection!Audit Departments.. 61
Functions of CVOs.................................... 62
No. of Vigilance Cases Finalised .................. 62
Role of the Reserve Bank of India............... 63
Monitoring by RBI.................................... 64
Special Investigation Cell (SIC) ................... 67
RBI's powers to carry out scrutinies etc......... 68
Investigation against ChairmenlExecutives..... 68
Broad guidelines for aspects to be looked into
during investigations/scrutinies .................... 68
Issue of Circulars .... ... ........ ........ ............... 68
Closing of case ......................................... 69
Snap Inspection........................................ 69
Circulation of Modus Operation................... 69
Conclusions/Observations................. ... ....... 70
Recommendations.............. ....................... 71
CHAPTER IV Investigation Conviction ............................. 74
Delay in Corrs.......................................... 78
Conclusions/Observations ....... ,.................. 81
Recommendations................................. .... 82
ApPENDIX.............................. .................. 84
ANNEXURE-I. .......................................... ·· 98
ANNEXURE-II .......................................... · 101
 COMPOSmON OF THE ESTIMATES COMMITI'EE
(1993-94)

Dr. Krupasindhu Bhoi-Chairman

MEMBERS

2. Shri Pawan Kumar Bansal

3. Shri Chhitubhai Gamit
4. Shri Parshuram Gangwar
5. Shri S.K. Gangwar
6. Shri B.S. Hooda
7. Shri Imchalemba
8. Shri Barelal Jatav
9. Shri R. Jeevarathinam
10. Shri Dau Dayal Joshi
11. Smt. Sumitra Mahajan
12. Shri Hannan Mollah
13. Shri Rupchand Pal
14. Shri B. Akbar Pasha
15. Shri Kabindra Purkayastha
16. Shri Mohan: Rawale
17. Shri Satya Deo Singh
18. Shri Rajnath Sonkar Shastri
19. Shri Vishwanath Shastri
20. Shri Syed Shahabuddin
21. Shri Manku Ram Sodi
22. Shri K.D. Sultanpuri
23. Shri C. Sreenivaasan
24. Shri K. Suresh
25. Shri P.C. Thomas
26. Shri Braja Kishore Tripathy
27. Shri Arvind Trivedi
28. Shri Laeta Umbrey
29. Shri Devendra Prasad Yadav
30. Shri K.P. Reddaiah Yadav

SECRETARIAT

1. Shri G.L. Batra Additional Secretary

2. Shri K.K. Sharma Joint Secretary
3. Shri K.L. Anand Under Secretary
4. Shri S.B. Arora Committee Officer
 INTRODUCTION
I, the Chairman of the Estimates Committee, having been authorised to
submit the Report on their behalf, present this 34th Report on the
Ministry of Finance (Department of Economic Affairs) - Prevention of
Frauds in Nationalised Banks.
2. The subject was selected for examination by the Estimates Committee
(1991-92). The Estimates Committee (1992-93) after considering the
Preliminary Material, written notes and other detailed information. took
evidence of the representatives of the Ministry of Finance (Department of
Economic Affairs), Reserve Bank of India and Central Bureau of
Investigation on 11.11.1992. The Estimates Committee (1993-94) at their
sitting held on 08.09.1993 considered and adopted the Report. The 3.
The Committee wish to express their thanks to Officers of the Ministry of
Finance (Department of Economic Affairs), RBI and CBI for placing
before them material and information desired in connection with the
examination of the subject. The Committee also wish to place on record
their appreciation for the frankness with which represt;ntatives of the
Ministry/Organisation have shared their views, perceptions and problems
with the Committee.
4. The Committee also wish to express their thanks to ail the
organisations who furnished memoranda, representations, suggestions etc.
to the Committee.
S. The Committee would also like to express their gratitude to the
Estimates Committee (1992-93) especially to the then, Chairman of the
Committee for the able guidance and right direction provided by him to
the Committee (1992-93), in obtaining information and taking evidence for
an indepth and comprehensive study of the subject. The composition of the
Committee is given at Appendix to the Report.
6. In this report, the Committee have found that Public Sector Banks
had reported a t:otal number of 24,918 cases of frauds involving an amount
of Rs. 512 crores for the period from 1976 to June, 1990. The Committee
were of the view that no serious efforts had been made to bring down the
number and amount involved in frauds, to get the recoveries affected and
guilty punished which was evident from the fact that almost all cases
reported since 1987 involving Rs. 100 lakhs and above in each case, were
at various stages of investigation and no conducive action could be taken
against the guilty persons. 'the Committee felt that it was the responsibility
of the higher authorities to ensure by periodical checks and inspections
that the prescribed procedures are strictly followed and the higher
authorities do not escape responsibility for failure to do so.

"'Minutes of the sittings form Part II of the Report.

(I)
 (ii)

7. Since the problem of frauds and forgeries in Nationalised Banks had

assumed serious proportions, the Committee have desired that the Ministry
of FinancelRBI should issue necessary comprehensive guidelines and
ensure their effective implementation.
is. The Committee have also noted with concern that of the various
categories of frauds, cheques/draft operations accounted for the maximum
number of frauds whereas loans and advances occupied the first position if
the amount involved in the frauds was taken into account. It was a matter
of concern that the amount involved in foreign exchange category which
had a limited and selected clientele is the second highest.
9. The Committee were giyen to understand that number-wise and
amount-wise fradulent encashment through forged instruments/manipula-
tion of books of accounts or through fictitious accounts and conversion of
property was the single largest, contributory factor for high incidence of
frauds perpetrated on banks which had been contributed mainly due to
laxity in observance of laid down -system and procedures by operational
and supervisory ·staff.
10. In order to strengthen the preventive measures, the Committee have
made the fo\1owing recommendations:-
(i) that independent confirmations of addresses of accounts holders
should be done in a\1 cases and not only in doubtful cases;
(ii) that a\1 incoming and outgoing instruments should be seriously
numbered and entered into the Registers at Dak stage;
(iii) that as Ia. 9S.06 lakhs entries of Inter-Branch Reconciliation of
Accounts with an amount of Rs. 3,56,650.61 lakhs as on
31.03.1991 were to be reconciled, the Committee desired that
arrears in Inter-Branch Reconciliation of Accounts which is a
highly fraud prone area and causes delay in detection of frauds
should be given topmost priority and the position should be
reviewed quarterly and corrective measures induding departmen-
tal action against delinquent officials taken. In no circumstances
entries should be a\1owed to remain unbalanced beyond one year;
(iv) that these recommendations of the Rangarajan Committee, the
Narasimham Committee and others on the computerisation and
automation on which there is difference of opinion should be
taken up with the Unions and some acceptable solution should be
found; •
tv) that any deviation on enforcing and complying with the laid down
systems and procedures for prevention of frauds in foreign
exchange business should be dealt with severely;
 (iii)

(vi) as defrauded amount involved in loans and advances portfolio

was exceptionally high due to bchest lending, internaVexternal
pressures, incomplete and inadequate credit appraisal etc.;
(vii) the Committee had recommended that all loan applications
should be scrutinised on merits and examined critically under the
laid down norms without succumbing to any kind of pressure
leaving little scope for inadequacy. Proper credit appraisal must
be done after taking into account all factors like borrower's
financial position, his capacity to pay back the loans, viability of
project and other safeguards as laid down in the Manual. Post
sanction follow-up like inspection, physical verification of stock,
actual value of stock, proper documentation etc. should be done
regularly. As soon as the payment becomes irregular the matter
should be taken up immediately. No laxity in the matter should
be allowed. The securities charged to the banks should be
properly scrutinised, evaluated and verified f.rom time to time;
(viii) in the light of experi::-.,,-,,, gained, a uniform ·not too rigid'
detailed lending policy should be formulated with \internal loan
review department;
(ix) as regards unauthorised removal of hypothecated goods, the
officers detailed for supervision and submission of stock state-
ments, should be instructed to report the matter to higher
authorities about any unauthorised activities found during the
inspection and if they fail to report the matter, they should be
held responsible for any loss to the Bank. Any tampering with
stocks hypothecated to the Banks should be made an organisable
office.
(x) that being the law making body Pari lament had every right to
have information regarding financial position and health of the
Banks and had liked the Parliamentary Committees to have
powers to scrutinise the Banks as a whole, with a view to know
the areas of weaknesses and suggest corrective measures;
(xi) that delinquent officials, found guilty, should be awarded deter-
rent punishment including imprisonment and a system of group
accountability should be evolved and awardeq sutiable punish-
ment;
(xii) since Chairman-cum-Managing Director and executives are the
main functionaries of a Bank any irregularity committed by them
or any complaint received against them shquld be taken up
immediately. If there is prima-facie substance In the complaints,
the concerned person should be asked to proceed 'on leave for
fair and speedy investigation. When charges are substantiated he
should not be allowed to resign but action should be pursued
vigorously and exemplary punishment awarded;
 (iv)

13. The Committee have noted that CBI was in favour of setting up an
Economic and Banking Division-and to have a separate Act for prosecu-
tion of economic offenders. They further noted that a proposal to set up a
separate Bureau similar to Serious Frauds Office of U.K. was under
consideration of RBI/Government. The Committee were of the view that
there was an imperative need to set up a separate division in CBI for
investigation into fraud cases more or less on the lines of Serious Fraud
Office of U.K. The 'proposed division of the Bureau should also be
empowered to investigate cases against high functionaries of the Banks.
Nobody should be kept out of the purview of the law inspite of his status.
14. As there were unusual delays in the courts of law in deciding the
cases of Bank frauds due to heavy burden/pendency which in many cases
remain pending for more than 10 years, the Committee have recommended
for the setting up of special courts/tribunals to investigate the economic
offences, because in their view any delay in awarding punishment to the
guilty persons would dilute the intensity of crime and the very purpose for
which action was initiated would be lost.
15. For facility, of reference, the observations/recommendations of the
Committee have been side-lined/printed in thick type in the body of the
Report and have also been reproduced in a consolidated form in
Appendix-II to the Report.

NEw DELHI; DR. KRUPASINDHU BHOI

November, 1993 Chairman,
Kartika, 1915(5) Estimates Committee.

·Not printed. A cyclostyled copy 'laid on the Table of the House and five copies placed in
Parliament Library,
 CHAPTER I

GENERAL

A. Introductoy
1.1 With the nationalisation of banks in 1969, the banking industry in
India has witnessed sea change both in its form and in its content. The
en tire industry has moved from "class banking" to "mass banking". When
banks were nationalised in 1969, the total number of branches of
commercial banks in the country was only 8321. By March 1992, this
number has gone up to 60528 thereby showing an increase of 727.41 %.
With the wide geographical coverage, the nationalised banks have reached
the farthest corner and hitherto unbanked areas of the country. The
working funds are also growing lhlDO.,t every year. As a result, there has
been an enormous increase in the volume of business, as well as, the
number of customers/cliente. Consequently, the number of employees
working in the banking industry has risen multifold.
1.2 With increasing volumes and significant diversification of banking
business and the emphasis on speedy customer service, the banking
industry had to face new types of challenges as well as risks. This has
thrown enormous responsibilities on banks in terms of control and
supervision. However, the control and supervisory system did not get
strengthened adequately commensurate with the growth in business of
banks which facilitated the perpetration of frauds and forgery, encashment
of forged chequeslinstrumentslconterfeit notes, embezzlement of funds,
falsification of accounts. Management weaknesses, trade union pressures,
inadequace progress in updating work technology, gross neglect in adher-
ing to system and procedures and others contributed to high incidence of
perpetration of frauds, malpractices and irregularities in banks. The frauds
have been perpetrated by insiders (employees), outsiders and by both i;n
collusion. The Public Sector Banks had reported a total number of 24,918
cases of frauds involving an amount of Rs. 512 crores, both in respect of
branches in India and abroad, for the period from 1976 to June 1990.
B. Bank Frauds
Definition of fraud
1.3 According to Section 25 of Indian Panel Code,_ a person is said to
have done a thing fraudulently if he did that thing with intent to defraud
but not otherwise. Hence fraud can be interpreted as an act of criminal
deception carried out singly or in collusion with others with a view to
deriving gains to which one is not legally entitled. The term includes,

1
 2

interalia misfeassance, embezzlement, theft, misappropriation of funds,

conversion of property, cheating, irregularities, breach of trust, manipula-
tion 'of books of accounts, fraudulent encashment, alteration of instru-
ments, unauthorised handling of receivables charged to banks etc.
1.4 Under the law of Torts, Fraud has been defined as follow:
"The making of a representation which party knows to be untrue
and which is intended or is calculated to induce another to act on
the faith of it, so that he may incur damage is a 'fraud' in law.
Fraud implies a wilful act on the part of one, whereby another is
sought to be deprived by unjustificable means of what he is entitled
to."
Magnitudinal Information
1.5 A comparative statement showing the number of frauds and amount
involved therein in PSBs (Public Sector Banks), private sector banks and
foreign banks during the years 1986 to 1990 as furnished by the Ministry in
the Preliminary Material is reproduced below:-
Ja;' in IDkhs

Year Public Sector Banks Private Sector Banks

- - --.
Foreign Banks

No. of Amount No. of Amount No. of Amount

frauds frauds frauds

1986 1854 6205.23 172 855.56 34 262.68

1987 1916 4481.60 213 306.47 16 2~.9S
1988 1854 3466.75 183 542.14 28 220.69
1989 1598 5170.08 189 1077.74 44 ·46.46
+kshslSO,OOO
1990 1639 10774.00 119 221.32 29 20.41
+ S 7500.00
+ sbs4597787

1.6 As per Ghosh Committee Report, the number of frauds and amount
involved therein, in the commercial banks during the same period, are as
under:
.
Year No. of frauds Amount (Rs.in crores)

1986 2,060 73.23

1987 2,145 48.18
1988 2,064 42.30
1989 1,773 62.84
1990 1,785 110.15
1991 1,750 69.95
 3

1.7 It has, however, been stated in a note furnished to the Committee

that:
"there cannot be any ground for comparison of incidence of frauds
in nationalised banks, private sector banks and foreign banks. After
nationalisation of banks in 1969 there has been vast expansion of
banking system. When banks were nationalised the total number of
branches of commercial, banks in the country was only 8321. By
June 1991 this number has gone upto 60190 thereby showing an
increase of 623.35%. With the wide geographical coverage, the
nationalised banks have reached the farthest comer and hitherto
unbanked areas of the country. However, the expansion could not
be matched by induction of requisite number of trained staff and
advanced technology in working in the vast network of the branches
resulting in larger incidence of frauds in nationalised banks as
compared to private sector banks and foreign banks who confined
their operations to selected areas and clientele."
1.8 A statement as furnished by the Ministry of Finance (Department of
Economic Affairs) showing the bank-wise details of number of frauds and
amount involved therein since. 1987 and upto 1991 is given at Annexure-I.
Growing Incidence of Frauds ,
1.9 When pointed out that the number of frauds and amount involved
therein are on the increase inspite of various safeguards being adopted, the
representative from RBI explained the position during evidence as under:
"If you are looking at the figures for the last five or six years, the
figures relating. to fraud which are given in the replies to the
Committee, the average is about Rs. 50 crores a year and ranging
about 1500 to 2000 frauds. In one particular year it went up because
there were major frauds, one of Rs. 19.5 crDre, Rs. 16 crore and so
on. In 1990 the figure doubled when compared to 1989, from Rs. 53
crores to Rs. 105 crores. The average, as otherwise, has been about
Rs. 50 to Rs. 60 crore per annum."
1.10 The representative further explained:
"The bank frauds occur even in most advanced countries and cannot
be eliminated altogether. In a big country like ours where thrust of
the banking is on upliftment of weaker sections of the sOciety and
where banking system has spread over the farthest and hitherto
unbanked area after nationlisation of the banks in 1969, the Reserve
Bank as also Government of India, have been able to contain the
percentage of frauds amount to working funds of the banking
industry to 0.039%, 0.030%, 0.020%, 0.027% and 0.042% for the
years 1986, 1987, 1988, 1989 and 1990 respectively, as a result of
close monitoring. Thus, the position is not very alarming though it
needs to be monitored closely."
 4

Detection of Frauds
1.11 As regards delay in detection of frauds, the following have been
stated to be the main reasons:-
(i) Supression of information by concerned officials;
(ii) non-reporting to the controlling officers in the stipulated returns;
(iii) non-detection by the inspection and audit mechanism;
(iv) lapses in admmistration and control at all levels;
(v) lack of effective supervision; and
(vi) neglect in monitoring control returns etc.
1.12 It has, however, been stated that the delay in detection of frauds
can be minimised by keeping overall vigilance and effective control and
supervision over banking operations.
Feed Back Information
1.1~ The Ministry in a note furnished to the Committee stated that the
commercial banks have been advised to submit following feed back
information to Reserve Bank of India at different periodicity in order to
enable it to review and monitor the action with regard to frauds:
(1) A statement on quarterly basis showing the number and amount of
frauds reported, closed and outstanding in different categories;
(2) A statement on quarterly basis showing the details of punitive action
taken .by the banks against their officials involved in cases of frauds!
corrupt practices;
(3) A half yearly statement showing the stage of pendency of fraud
cases outstanding with the bank;
(4) A quarterly statement showing the progress of individual cases of
frauds involving more than Rs. 100 lakhs.
(5) A half yearly review of the working of banks' vigilance machinery!
vigilance cases;
(6) An annual review of cases of frauds detected during the year.
1.14 The following periodic reports to Government are made use of in
the Banking Division to review and monitor the action against frauds:
(1) Quarterly reports on Ann~al Action Plan on anti-corruption
measures.
(2) Quarterly reports on major frauds from RBI.
(3) Quarterly reports on frauds in public sector banks from RBI.
(4) Reports from banks on frauds above Rs. 15 lakhs as and when they
occur.
(5) Quarterly reports on floppies from banks on vigilance activities like
number of vigilance disciplinary cases at different stages, suspension
cases, cases of investigation/prosecution by CBI etc.
 5

(6) First information reports and Final Reports on cases investigated by

CBI.
(7) Quarterly report from CBI about major fraud cases under investiga-
tion.

1.15 The Banking Division holds periodic meetings of Chief Vigilance

Officers to review the adequacy of action taken and to initiate necessary
action from time to time.

1.16 The role played by the Indian Banks Association on the flow of
information on attempted frauds/frauds committed, is stated to be as
follows:-

"With a view to protect the interest of member banks through

timely caution in having dealings with customers indulging in
malpractices/misdemeanours, the Association has introduced a
scheme for circulation of information on restricted basis viz. that the
communication is addressed to such member banks who are likely to
have dealings with the borrowers. As per the scheme, the local
chapters of the Association circulate such information to all member
banks in their centre. The Association has to resort to restrictive
circulation to avoid coming within the law regarding libel as no
information could be circulated till irregularitieslmalpractices com-
mitted by a borrower are established in a court of law. The
Association has been doing a good service in exchange of informa-
tion between the member banks and bringing about uniformity in
systems and procedures in all banks with an objective of healthy
growth of banking system."

1.17 The position as on 6th November, 1992 of individual cases of frauds

involving an amount of Rs. 100 lakhs and above during the period from
January, 1987 to December, 1991 is given at Annexure II.

1.18 Asked how far they are sensitive to the problem of frauds. the
Secretary, Ministry of Finance stated during evidence:

"The Government has always taken the problem of fraud in the

commercial banks as a very serious problem and jt was in
recognition of this problem and the need to do something about it,
that the Government had set up in October, 1991, a Committee;
Actually, it was at the instance of the Government, the Reserve
Bank of India had set up in October, 1991. a committee to go into
the bank frauds, under the chairmanship of the then Deputy
Governor. Amitab Ghosh. That Committee was set up to go into
various aspects relating to frauds and malpractices in the banks. The
Committee submitted its report recently. in June, 1992."
 6

1.19 To elaborate the above, a representative of the RBI further, ~tated:

"This Committee went into the entire gamut of arrangements
existing in the banks with respect to preventive monitoring of the
transactions in banks which were of sensitive nature and which had
vigilance angle. It also looked at the various instructions which have
been received from time to time by the banking division and the
RBI to the banks in order to ensure preventive vigilance. It is
conceded by al1 of us that there is no substitution for preventive
vigilance. Th~ systems and procedures which have to be placed in
banks have to be such th:1t frauds do not take place and if there is a
weakness in the systems and procedures, it is imperative that the
banks should correct them So, the Committee had addressed itself
to the question of whether there are adequate systems and
procedures enforced in fraud-prone areas which are of sensitive
nature and which could let themselves to perpetration of frauds. So,
some of the recommendations relate to the areas where preventive
vigilance needs to be tightened up. The Committee has also
examined the discovery of frauds quickly, that is, if frauds do get
perpetrated notwithstanding good systems and procedures, due to
the human angle involved in the execution of transactions, then
banks should be in a position to discover the perpetration of frauds.
It could take place either by the bank officials, staff themselves due
to disbonesty or due to the cooperation of some persons. In both
categories, discovery of frauds can take place by proper audits and
inspections, regular follow-up of those inspections, frequent visits of
the controlling officers and monitoring the performance of the
branches by the top management in the banks. Various
recommendations have been made by the Committee in the area of
discovery of frauds as soon as they take place or the earliest
possible time in the process of audit or inspection which are internal
in any bank. The Committee also addressed itself to the area of
dealing with persons who ha'd perpetrated those frauds and bank
employees acting in collusion with outside forces".
1.20 During evidence the Committee enquired as to whether there was
any formal Committee or Task Force formed after the nationalisation of
banks and prior to the setting up of tHe High Level Committee under the
Chairmanship of the then Deputy Governor of Reserve Bank of India,
Shri A. Ghosh to go deeply into the question of perpetration of various
types of frauds and suggest steps that could be taken regarding preventive
vigilance. In reply, a representative of the Rcserve Bank of India stated:
"As far as I can recollect, there was no formal Committee on the
lines of the Ghosh Committee which went into matters, rclating to
vigilance in the banks ........ It cannot be entirely correct to say that
it was not gone into normally because even the circular issued on
 7

7th or 8th September, 1991 contains a series of measures which is a

very comprehensive circular pointing out the areas which need to be
very carefully looked at by the banks. It is an on-going process and
from time to time, numerous matters of fraud prone areas have
been looked into and instructions have been issued by the RBI to
the banks."
1.21 When asked why a Committee was set up only in 1991 while the
frauds were regularly taking place; the representative of the Ministry of
Finance stated:
"Setting up systems to prevent frauds and seeing that there is
reconciliation and proper accounting and proper safety process, all
these have been in position right from the beginning, even before
1969. These instructions have all along been there. If you see what
has been recommended by the Ghosh Committee today and what
was the position prevalent over the years, there is little which the
Ghosh Committee has recommended which was not alreai:ly there.
These systems emerged as a result of the circulars of the Reserve
Bank. The Ghosh Committee was appointed to review what was
followed in the Bank already."
1.22 The representative from . RBI further clarified:-
"It is hot as if only Ghosh Committee formulated a series of steps,
which banks have to take in t£e preventive vigilance area. The first
circular was issued by the Reserve Bank to the banks prior to
nationalisation in September, 1968. It was 'a. very detailed circular
and it was about measures to prevent fr.auds imd measures to deal
with frauds if they are discovered. And, thereafter year after year
specific items of frauds. prone areas were covered in the circular
which was issued by the RBI. Different aspects have been covered
in different circulars issued by RBI. But every Bank has a very
elaborate procedural manual for all kinds of transactions right from
the opening of S.B. Account and Current Account and on the other
side what are the terms and conditions of sanction to be taken for
disbursal of funds· and monitoring operations on credit facilities.
These are all in position in the banks. And even then frauds do take
place. That is because of the human element."
1.23 When pointed out that from 1969 to 1992, about 25000 cases of
frauds had occurred involving more than 500 crores of rupees and asked to
state whether it was laxity on the part of the Ministry to allow such a
deteriorating situation to continue, the Additional Secretary, Ministry of
Finance, during evidence stated:-
"Even when very very water-tight systems exist, because of th.e large
branch network, if there is collusion at a branch between the
employees working in the branch with an outsider or within
themselves, the frauds can take place."
 8

1.24 The representative of RBI supplemented:-

"Frauds. do take place notwithstanding the fact that systems and
procedures are there. It is because Of the human element involved.
As long as people are "there, who are dishonest in the system either
out of the bank or outside the system, frauds will take place."
ConclusionslObse"atioDS
1.25 With the nationalisation of banks in 1969, there has been a
phenomenal rise in the number of branches of the banks as well as the
volume of business. The result has been that the banking industry has to
face new types of challenges as well as risks. One of the challenges before
the banking industry is the growing number of frauds and forgeries in the
banks. The public sector banks have reported a total number of 24918 cases
of frauds involving an amount of Rs. 512 crores for the period from 1916 to
June 1990. Although the consolidated figures for 1991 and 1992 have not
been furnished to the Committee, from the statistics made available, they
find that there has been no perceptible improvement in the situation. What
is really more disturbing is the fact that while the number of frauds in each
year have remained more or less constant, the amount involved have shown
a perceptible rise as is evident from the fact that while the amount involved
in frauds in 1988 was Rs. 3466.75 lakhs and in 1989 Rs. 5170 lakhs, the
same rose to Rs. 10,774 lakhs in 1910.
1.26 The Committee are not convinced with the arguments ad,'anced by
the Government that the position is not very alarming because the
defrauded amount to working funds is negligible and frauds do OCCIIf e,'en
in most advance countries.
1.27 The Committee need hardly emphasise that the assests of the banks
belong to the public and the hanks are the custodian of the public money.
So, the banks management are accountable not only to the Government but
to the countless number of people who have put in their hard earned money
by way of deposits; and it is the duty of the banks management to protect
the interest of the depositors. lIence, in view of the Committee there is no
reason for complacency in this regard.
1.28 The Committee would like to express their unhappiness over the
complacent attitude of the banks management and the Government In the
matter of frauds. In their "iew no serious ctTorts ha"e becn made to bring
down the number and amount involved in frauds, to get the recoveries
atTected and guilty punished which is evident from the fact that almost all
the cases reported since 1987, involving Rs. 100 lakhs and above in each
case, are at various stages of investigation and no conduci"e action could be
taken against the guilty persons.
1.29 The Committee are surprised to know that although frauds have
been occurring in ditTerent banks right from the time of nationalisation, it
was only i'l October, 1991 that a Committee under the Chairmanship of
 9

Sh. A. Ghosh was set up to enquire into various frauds, malpractices and
irregularities in banks and to suggest preventive measures. What is still
more surprising is that the guidelines isued by the Reserve Bank of India in
the light of the recommendations of the Ghosh Committee have also
remained more or Jess on paper and Ministry have ignored the
recommendations of the Ghosh Committee by stating that all kinds of safety
measures have already been taken and that "there is little which the Ghosh
Committee has recommended which was not already there". The least that
the Committee expected from the Government was to inform about the
measures taken by them on the recommendations of the Ghosh Committee.
The Committee cannot but take a serious view of this complacent attitude or
the GOl·t.
1.30 The Committee will examine in greater details in subsequent
paragraphs the various factors contributing to the occurrences of frauds and
the lapses in the system in recovering the losses suffered. Here, they would
only like to point out that their examination 'Of th~ subject has reve~led that
there is an urgent need to strengthening the preventive vigilance in various
banks as well as internal audit system. It has also been noticed that most of
the frauds have occurred because the laid down procedure have not been
followed. The Committee feel that it is the responsibility of the higher
authorities to ensure by periodical checks and inspections that the
procedures are being strictly followed and the higher authorities cannot
escape responsibilty for failure to do so.
Recommendations
1.31 The problem of frauds and forgeries in nationalised banks have
assumed serious proportions and the Ministry of FinancelRBI should issue
necessary comprehensive guidelines and ensure their effective
implementation for prevention bf frauds.
1.32 There is need to strengthen the vigilance system as well as internal
audit system in various banks in order to ensure that the frauds are
detected at the earliest.
1.33 Senior officers in the banks should be made personally responsible
for enforcing laid down procedures strictly and in case of failure they
should be made accountable for any loss to the bank! Government.
1.34 The use of computer and modern technology in aU banking
operations should be enhanced after taking into confidence the staff unions.
1.35 The Advances Portfolio is a highly fraud prone area. Frauds in this
area could be possible in active connivance with concerned offICials. So,
preventive action should be taken immediately after the fraud comes to light
or as soon as the recovery becomes irregular.
1.36 Suitable measures be taken to complete investigations of Jill cases of
fraud urgently. Report of investigation into cases involving Rs. 100 lakhs
and above referred to in Annexure-U of the Report be furnished to the
Committee within a period of six months.
 CHAPTER n
A. System and Procedures
Classification of Frauds
2.1 The frauds are being classified in the following categories:
1. Banking Operations (Deposits and Cash)
2. ChequelDraft Operations
3. Bills (including UCs)
4. Loans and Advances'
5. Foreign' Exchange
6. Others
2.2 As per general st\ldy undertaken, numberwise predominance of
frauds was in the following order:
1. ChequeslDraft Operations
2. Banking Operations (Deposits and Cash)
3. Loans and Advances
4. Bills (inl::luding UCs)
5. Others
6, Foreign Exchange
2.3 In amount-wise classification of frauds, the above categories are in
the following order:
1. Loans and Advam:es
2. Foreign Exchange
3. Banking Operations (Deposits and Cash)
4_ ChequelDraft Operations
5. Bills (including -UCs)
6. Others
Causes of Frauds
2.4 On being enquired about the major causes 'of frauds in banks, the
Ministry in a note submitted to the Committee stated that major causes of
frauds appeared in the following order:
1. Fraudulent encashment through forged instruments/manipulation of
books of accounts or through factitious accounts and conversion of
property.
2. Cheating and forgery.
3. Misappropriation and criminal breach of trust.
4. Unauthorised credit facilities extended for reward for illegal

10
 11

gratification.
5. Negligence and; cash shortl:ige.
6. Irregularities in foreign exchange.
7. Others.
2.5 "It has however been stated that by and large, our experience is that
the frauds have occurred in banks not on account of lacunae in the systems
and procedures but owing to non-observance of the prescribed procedure
and safeguards."
2.6 The major causes for perpetration of frauds, as observed by the High
Power Committee enquiring into various aspects of frauds and malpractices
in Banks (Ghosh Committee), are mainly attributed to:
(i) laxity in observance of the laid down systems and procedures by
the operational staff as also by the supervisory staff;
(ii) Over confidence reposed in the bank's constitutents who,
however, indulged in breach of trust, and
(iii) frauds committed by unscrupulous constituents by taking
advantage of the laxity on the part of the officials in observance
of established time-tested safeguards.
2.7 The number of frauds and amount involved therein in various
categories due to various causes as reported by 19 public sector banks to
RBI during 1990 and upto June, 1991 is as follows:
(Amount in crores of Rs.)

Category 1.1.9.Q to 31.12.90 1.1.91 to 30.6.91

No. of Amount No. of Amount
frauds involved frauds involved

(i) Fraudulent encashmentl 729 28.28 34S 8.64

manipulation of books of
accounts and coversion of
property
(ii) Cheating and forgery 215 5.70 134 4.00
(iii) Misappropriation and· criminal 162 , 4.81 89 6.04
breach of trust
(iv) Negligence and cash shortage S3 0.20 2S 0.06
(v) Unauthorised .. credit facility 18 3.12 7 0.43
extended for illegal gratification
(vi) Irregularities in foreign exchange 11 0.90 10 0.19
transactions
(vii) Others 54 S.05 S3 4.94

2.8 A representative of RBI, during evidence, informed the Committee

that they were concerned with the growing incidence of frauds even before
 12

the nationalisation of the banks which is evident from the fact that ,l-hcy
had issued a circular in 1968 suggesting various safeguards against possible
frauds.
12.9 Thereafter, RBI had issued a number of circulars on different
aspects. However, its circulars dt. 1st October, 1977 and 23rd February,
1981 contain a number of instructions in different areas of banking
operations and safeguards to be adopted for prevention of perpetrated
frauds on banks.
Banking Operations (Deposit and Cash)
Deposit
2.10 A large number of frauds is perpetrated in banks deposit accounts
through (a) opening of accounts in fictitious names, (b) irregular payment
of cheques, (c) manipulations in accounts, and (d) un-authorised
operations in dormant account.
Cash
2.11 Frauds involving shortages of cash can take place in cash balances
at counters with individual cashiers or in the aggregate cash balance of a
branch. At times, cash is misappropriated by showing it as bcing in transit
or loss is suffered on account of its theft from counters or while it is under
remittance.
2.12 Necessary safeguards in the opening of new accounts, payment of
cheques, operations in currenVsaving banks accounts, operation of
dormanVsuspense account, fraudulent withdrawals, maintenance of pass
books and many others have been enumerated in different RBI circulars.
2.13 In the cash handling the safeguards suggested include inter alia
principle of dual custody, verification of daily cash balance. maintenance of
proper records relating to cash in safe/transit, insurance of cash etc.
Cheques/Drafts Operation
2.14 Banks suffer loss by payment of forged or chemically altered
cheques, drafts. mail transfers and double payment of telegraphic transfers.
2.15 RBI has observed that when frauds have been perpetrated by a new
customer by depositing a cheque/draft fOT collection by withdrawing the
amount involved or substantial portion thereof almost immediately. the
fault invariably lies in the non-observance of essential safeguard. Some
other cases of kite-flying operations have also been noticed by RBI where
unscrupluous clients have been misusing the facility of drawal against
cheques sent in clearing. There have been occasions when the branch
managers granted permission to drawals against uncleared effccts of
cheques deposited by a company drawn on its associate were subsequently
returned unpaid.
2.16 Thefts/pilferagc of blank drafts and mail transfer forms and their
subsequent misuse have also come to RBI notice.
 13

Bills
2.17 A number of frauds involving huge amounts have been perpetrated
mostly in opening letter of credit, co-acceptance of bills, purchase!
discounting of bills withdrawal facHity against cheques sent in clearing. In
respect of opening letters of credit and co-acceptance of bills, safeguards to
be observed have been detailed in RBI's circular DBOD No. GC.SIC.BCI
97/C. 408(A)-~3 dated 26.11.1983.
2.18 In reply to a question on frauds in Bills portfolio, the ministry has
furnished the following information:
"In the area of bills purchased/discounted by the banks it is
ascertained that the bills are not accommodation bills; that they are
accompanied by LCs and RRS and relative invoices in the case of
bills purchased and accompanied by invoices and delivery challans in
the case of local usance bills discounted, that the bills drawn on
upcountry drawees are not paid locally, that the bills are invariably
sent to the drawees' bank for acceptance, that the bills are not
drawn on sister concerns of the borrower, that the bills are not
retired by purchase of fresh bills, that the bills are generally not
drawn in round sums."
2.19 RBI has been issuing caution advice about the possible forgery in
bills portfolio, such caution advice was issued by RBI even in its circular
dated 9th September, 1968 which read inter alia as under.
"Frauds perpetrated by constituents in the bills purchased accounts
by tendering forged 10rryltailwa}'l5teamer receipts or tendering
receipts issued by unscrupulous carriers without actually receiving
goods or by tampering with the receipts so as to increase the
quantity and thereby the value 'of tl-'! consignments ... ~. In this
connection we would also like to invite your attention to the
undesirable practice of adjusting bills returned unpaid by purchasing
fresh bills on the same party. We have to stress that serious notice
should be taken of any such concessions allowed to a party by a
branch agent..... It will also be desirable to impress upon the
of5cers not to accept receipts of carriers which are not on the
bank's approvt(d list."
Inter-Branch Reconciliation of Accounts
2.20 Since inter-branch reconciliation of accounts is an on-going process,
no time limit is stated to be fixed to reconcile the outstanding entries.
Some banks do the exercise of reconciling of their outstanding entries on
fortnight-1nonthl)V'quarterly basis. The position of public sector banks in
respect of entries in inter-branch accounts as on 31.3.91 as stated by the
Ministry, is as under:-
- (1) No. of banks where inter-branch reconciliation
entries are pending for 1987 and earlier years 11
 14

(2) No. of banks where inter-branch entries have been

reconciled upto 31.12.1987 7
(3) No. of banks where inter-branch entries have been
reconciled upto 31.12.1989 3
(4) No. of banks where inter-branch entries have been
reconciled upto 31.3.1990 3
(5) No. of banks where inter-branch entries have \leen
reconciled upto 31.3.1990 4

28

2.21 The position in regard to outstanding entries/amount in inter-

branch reconciliation account of all the Public Sector Banks as on
31.3.1991 is given below:-

PERIOD DEBIT CREDIT TOTAL

No. of Amount No. of Amount No. of Amount
Entries Entries Entries
(in lakh) (in Clores) (in Lakh) (in crores) (in lakh) (in crores)

Upto 3.18 4756.74 3.35 3935.87 6.53 8692.61

31.12.1987 (6.66) (2.44)
1.4.1988 to 2.56 3664.01 3.62 5254.56 6.18 8919.57
31.3.1989 (6.30) (2.50)
1.4.1989 to 6.84 21498.38 11.83 119939.85 18.67 41438.23
31.3.1990 (19.04) (11.62)
1.4.1990 to 25.48 130930.02 41.20 166671.18 66.68 297601.20
31.3.1991 (68.00) (83.44)

38.()6 160849.15 60.00 195801.46 98.06 356650.61

(1000.00) (100.00)

(Figures in bracket indicate percentage to totai)

2.22 The working group set up by RBI in March, 1992, had
recommended the following time schedule for clearance of arrears in inter-
branch reconciliation:
Entries of Financial Year To be reconciled by

1990-91 30th September, 1993

1991-92 30th December, 1993
1992-93 March, 1994
2.23 From 1993-94 onwards, no bank would be allowed, it is stated, to
keep entries unadjusted for more than 12 months.
2.24 It was stated during evidence that inter-branch reconciliation of
accounts was highly fraud prone area. Several frauds had taken place in
 15

different branches of the banks because their reconciliation was not

updated.
2.25 Asked to explain the reasons for large arrears in reconciliation of
accounts, it was stated that over a period of time, most of the banks have
slipped in keeping uptodate inter-branch reconciliation account. Further, it
was explained, unless computerisation is introduced in the banking system,
this problem will remain.
2.26 The representative of RBI elaborated during evidence:-
"Basically our problem is one of the staff- unwillingness to have
inter-branch accounts to be on the computers. Old arrears have
become intricablc and the Working Group is in the process of
making series as to how to match thc whole pending entries at the
same time that income and expenditure is properly accounted for.
The process is essentially one of willingness of the staff to have
those transactions reconciled on a day to day basis. Without
computerisation this is going to be very very difficult because lakhs
of entries are put through banks every year and each bank has got
few thousand branches and it is not possible for a bank to keep
record of these."
Computerisation
2.27 Computcrisation of data in banks helps in early detection of frauds
as the total data in a case will be available at one place and as the date can
be retrieved by any supervisory authority, keeping a check will be easy.
2.28 A committee on computerisation, constituted by RBI, had
prepared a perspective plan for computerisation of the 'public sector banks
for 5 years (1990-94). The estimated capital investment for this purpose is
Rs. 500 crores and would be aimed at achieving the following:
1. Total computerisation of 2000 to 2500 branches with heavy-work
load.
2. Computerisation of 600 Regional/ZonallDivisional Offices as well
as 25 Head Offices.
3. Introduction of All Bank Credit Cards.
4. Installation and sharing of A TMs in Bombay at strategic locations
like Airports, Railway Stations, etc.
The recommendations of the above Committee are stated to be at
various stages of implementation.
2.29 Though area-wise data on introduction of computer in different
banks is stated to be not available with the Ministry, it has been stated that
maintenance of records of account holders. at Metropolitan Centres is
being attended in large branches.
2.30 Asked whether employees unions had objected to all sort of
 16
computerisation. the RBI representative said that in the beginning the
recommendations contained in the 2nd Report of Rangarajan Committee
on mechanisation and computerisation in the banking industry was not
accepted by the unions. However, in the course of wage negotiations,
some of the recommendations have been agreed to be implemented by the
unions. But it was admitted that where the management and unions had
agreed to implemen~ computerisation in certain schemes, operations had
not been able to the put through computerisation. The reasons for non-
implementation of the agreement is stated to be restrictive nature of
agreement. The nature of agreement as explained during evidence, is
reproduced below:
"The use of the machines called the Advance Ledger Posting
Machines where th~ machines have been crippled by sipulating that
agreement with the IBM that not more than 2000 accounts would be
handled on each computers, where a machines can take entries
more than what has been agreed upon. These machines are totally
under-utilised and therefore it is in terms of cost effectiveness that
these are. not cost effective. Therefore. the banks themselves have
serious apprehensions in that which cannot be fully utilised. This
kind of a barrier on computerisation on putting restrictive use of
computers has certainly to be removed."
2.31 The Committee was informed subsequently that in certain banks
such as SBI, Indian Overseas Bank etc. the Unions did agree to
comput~risation more or less on the manner suggested by the Rangarajan
Committee. But in these banks also, the actual progress has been much
less than what it should have been.
2.32 The Committee were informed by a number of banks during their
study tours that they had to reconcile a large number of transactions in a
day. So they were not in a position to have the accounts reconciled as per
time schedule without computerisations.
2.33 In a written reply, the Ministry has stated that:
"The main areas where frauds take place are the arrears in
recoqciliation of inter-branch accounts as weJl as the inter-branch
intransactions including the account with RBI. Once these
transcaf;ons are computerised, the arrears will be within manageable
limits and any attempt at fraud will be minimised."
2.34 The Additional Secretary, Ministry of Finance explaining the need
for computerisation during evidence stated:-
"The reconciliation must be put in the computers of the Bank
Branches. There is,a Programme for doing so Some of the Banks
have agreed and some of them have not agreed, and said that
reconciliation must take place. There are arrears of reconciliation
which are very considerable.
 17

2.35 While agreeing with the need for computerisation, the Ghosh
Committee has pointed out certain risks involved in the system as listed
below:

(i) insufficient controls in programmes;

(ii) non-implementation of Access Control System covering data and

programmes;

(iii) absence of an Access Monitoring" System such as a Log covering

the activities done in the system or no scrutiny thereof;

(iv) Lack of adequate physical security for machinery, media computer

stationery, records and vouchers, etc.;

(v) Lack of understanding of systems and procedures;

(vi) apathy o(supervisory staff to learn new techniques of supervision

and control;

(vii) lack of administrative review audit;

(viii) insider abuse, collusion, etc.

Foreign Exchange Business

2.36 Frauds due to irregularities in Foreign Exchange Business are

perpetrated in the dealing room operations, documentary credits, export
import transactions, packing credits, nostro accounts etc. Some dealers
have been able to put through fictitious deals with the help of brokers
because of non-segregation of dealing operations from back-up functions,
facilitating concealment of the actual position from the higher-ups. Deals
are often put through at rates disadvantageous to the bank either with a
view to pass on business to the broker or for accommodating dealer of
another bank. Frauds are also perpetrated by putting through fictitious
transactions in their nostro accounts by discounting bogus export bills or
through negotiation of export documents not strictly in accordance with the
terms of LC in collusion with export constituents of the banks who had
submitted exports bills accompanied by documents which were not
genuine. Export constituents of the bank are also known to have availed
pre-shipment credits from banks by submission of bogus contract or
inflated stock statements. One more area has been opening of import Les
without proper checking on the overseas suppliers without incorporating in
the l.ICs safeguard clauses to fall upon in the event the relative import
documents were found to be fake, later on.
 18

2.37 Asked what control mechanism and safeguards have been adopted
for prevention of such fraudulent activities ~n Foreign Exchange Business,
the Ministry in a note furnished to the Committee stated:
"The Exchange Control Department of RBI has prescribed detailed
'IntemaVControl Guidelines for Foreign Exchange Business' which
reads as under:
From the point of view of prevention of frauds strict adherence and
enforcement of laid down systems by all operating staff is
recommended. Whenever 'complaints of nexus between dealers and
brokers are received the same should be immediately investigated
and stringent action should promptly be taken against colinquent
officers. Cases of non adherence to laid down system when observed
should be promptly looked into. Further reconciliation of Dostro
accounts should be carried out regularly to detect fictitious
transactions. The RBI issues comprehensive guidelines from time to
time relating to export finance stressing inter-alia the importance of
compilation of credit reports on exporters, which if scrupulously
followed would go a long way in prevention of perpetration of
frauds in the area of export finance. Besides, the Foreign Exchange
Dealers' Association at the instance of RBI has laid down certain
stipulations for adherence by banks while financing imports.
2.38 The Foreign Exchange Dealers' Association has issued the
following instructions to banks for compliance for financing import!;:-
(i) Letters of Credit should stipulate that shipments should be
made only by Conferencne Vessels which are on the LIoyds
approved list and which are sea worthy;
(ii) Letters of Credit should call for certificate of inspection by
well-known International Inspection Agencies;
(iii) In case of large value import contracts, the banks should
obtain credit reports on the suppliers before issue of LC;
(iv) Banks should call for certificate of origin from an
independent third party like a Chamber of Commerce;
(v) Banks should see whether taking into account the volume of
consumption demand in India for the goods ordered, the
import contract on the basis of which LCs are issued, was
reasonable.
Loans and Advances Portfolio
2.39 Before sanctioning .advances, the banks carry out credit appraisal
which includes, inter-alia, establishment of credentials and bonafides of the;
borrower. his credit needs, credit worthiness, willingness and capacity to
undertake activit)Vt>usiness. To get a complete picture of the borrower's
credit worthiness, enquiries are made about his business, trade experience,
 19

assets and liabilities etc. from various sources, which go on to establish the
identity of the borrowers. Further, the hypothecation facility (mentioned as
mortgation of stocks in question) is granted only to parties of undoubted
means with highest integrity as goods remain in possession of the
borrower. The banks, however, remain in constant touch with the
borrower by their regular follow up1nspection. The banks have note faced
problems in recovery of outstanding amounts or in initiation of legal/
recovery proceedings against the borrowers for non-identification at a
subsequent date, but the problem is due to poor credit appraisal,
complacency, lack of supervisioMollow-up collusion of bank staff.
2.40 It has, time and again been said that frauds in banks had occurred
owing to non-observance of the prescribed procedure and safeguards .. In
this connection asked to explain the deficiencies observed and difficulties
experienced in enforcing prescribed procedure in respect of presanctions
loan proposals and post sanction follow up which lead to compromising
with the quality of scrutiny.
2.41 The Ministry, in a note furnished to the Committee, explained the
position as udner:
"The deficiencies observed in following prescribed procedures can
be summarised as under:
1. Pre-sanction scrutiny of loan proposals are generally inadequate in as
much as:-
(i) identification of beneficiaries is not done properly;
ii) viability in scheme is not examined critically;
(iii) infrastructural inadequacies;
(iv) opinion reports on proprietors / partners I directors not /
completed / not compiled properly;
(v) opinion reports from existing bankers not obtained;
(vi) track record and antecedents of the applicants is not given
due weightage.
2. Post sanction follow-up
After a loan has been sanctioned, deficiencies are observed in conduct,
supervision and follow-up of accounts, viz.
(i) inspection is not carried out at prescribed intervals;
(ii) security documents not taken properly;
(iii) drawings are allowed without having regard to the availability
of adequate security;
(iv) drawings are permitted for unauthorised purposes;
(v) substandard securities are taken as cover;
 20

(vi) prescribed statements such as stock statements. quarterly

information data, audited balance sheets are not obtained!
analysed;
(vii) insurance cover is not obtained!renewed in time;
(viii) compliance of terms and conditions on which the advance is
sanctioned is poorlinadequate.
2.42 As regards enforcement of control machanism, following major
difficulties have been observed:
(i) Borrowers do not submit required datalinformation. The
audited balance sheets are often submitted with considerable
delay.
(ii) Stock statements are not submitted or submitted with
considerable delay;
(iii) Stocks are shown at inflated value/quantity.
(iv) Quarterly information data is either submitted late or not
submitted despite levy of penal interest;
(v) The borrowers do not facilitate inspection by withholding
submission of stock statements, other records. not
maintaining properly their books of accounts;
(vi) In multidivision and multilocational units, inspection becomes
difficult;
(vii) Concealment of vital information by the borrowers;
(viii) Lack of professionally trained management set-up particularly
in 6mall scale and medium scale industries.
(ix) Under target oriented lendings where cases are numerous. it
becomes difficult for· operating staff to exercise enough
control;
(x) Deficiencies in organisational structures in branches for
proper follow-up.
2.43 In the context of Govt. sponsored schemes aimed at poverty
alleviation. the banks have stated that disposal of loan applications within
a time frame often leads to dilution of presanction scrutiny in as much as
verification of antecedents of beneficiaries is not done proerly and viability
of schemes is not properly examined by the sponsoring agencies. Besides,
the loan application are sent in bunches at the fag and of the financial year
and with the time constraints involved and targets to be achieved for
sanction of loans before the end of that financial year, banks have to. at
times, compromise on the quality of presanctional appraisal and scrutiny.
All the banks have framed their own check lists for speeding up
presanction scrutiny of loan proposals and do not feel that prescribed
period of 3 months for disposal of loan proposals acts as an impediment in
 21

disposal of applications. The period is considered sufficient and will not

involve compromise on the quality of appraisal and/or deviation from the .
prescribed procedures.

2.44 The Committee referred to the Narasimham Committee Report as

also the statements made by the Bank Officer's Unions wherein it was
pointed out that one of the contributory factor to perpetration of frauds
and deterioration in banking system was Govt.lpolitical pressure and
enquired whether they ever come across to any such pressure which
resulted in fraud. The Secretary of the Ministry explained the position as
under:-

"What Bank Chairman however feel naturally is this. They receive a

large number of VIP references. That is perfectly a normal thing. It
is possible that at various times, they interpret such references as
implying that they are under pressure. I can only say that this must
be the context in which this atmosphere, this feeling is created."

2.45 The Secretary, however, said that there has been DO case which has
come to his knowledge where a Bank Chairman having given sound
reasons why he cannot do something was pressurised to reopen the case.

2.46 The observation of Ghosh Committee in regard to frauds

committed in the advances protfolio are as under:

"Of late there is a steep increase in the number and amount

involved in frauds committed in the advances protfolio both in fund
based and non-fund based limits. The unscrupulous borrowers could
commit frauds in this area mainly on account of the lapses on the
part of the officials such as misutilisationloverstepping of the
lending power, non-adherence to lending noms, failure to comply
with the terms of sanction, an inadequate and ineffective post-
sanction follow-up and supervision. Instances have come to notice
where Branch Managers and in some cases even the authorities at
the Head Office level including the Chairman have resorted to
sanction of unauthorised advances without proper credit appraisal,
beyond their discretionary powers.

The major areas of frauds reported in the advances are (i)

depriving the banks of its securities against which advances are
granted (ii) defrauding the banks by misutilisation of funds (iii)
freaudulent discount of instruments resulting in kite flying
operations (iv) gross abuse of bills facility and (v) malpractices in
the mater of opening of letters of credit, issue of bank guarantees
and co-acceptances and discount of co-accepted bills."
 22

2.47 Contributory factors to perpetration of frauds, as observed by the

Ghosh Committee, are summed up as under:
(i) Behest lending in the form of extension of credit on an
unsound basis at the instance of top management and external
pressure;
(ii) Anxiety for generating quick returns and compromise of credit
principles .by showing timidity in dealing with personalities with
influenti~ connections;

(iii) Incomplete and inadequate credit information and appraisal;

(iv) Depen~ence on oral information and lack of adequate
supervision;
(v) Technical incompetance due to vast changing banking
environments taking place in domestic and overseas markets;
(vi) Poor selection of risks by granting loan to fundamentally
unsecured project, non marketable stocks, over valuation of
securities etc,. and
(vii) Competition among banks to grab limited amount of business
available.
Advances against Pledge/Hypothecation of Merchandise
2.48 Frauds in this area have been perpetrated in a number of ways like
(i) clandestine removal of goods pledgedlhypothecated, (ii) pledging!
hypothecating spurious goods, (iii) overvaluing stocks in the stock
statements submitted to the banks and (iv) obtaining multiple finance
against the sllD)e stocks from different banks, etc.
2.49 Banks generally obtain a monthly certificate from the Branches
indicating that periodical stock statements in respect of hypothecated goods
are obtained from the concerned parties and the pledged1lypothecated
- stocks are verified by branch officials. The perpetration of frauds is made
possible due to the fact that these. certificates are treated as routine and
proper attention is not bestowed on verification thereof regarding
valuation, quality,and quantity etc. with reference to the party's books and
turnover in the accounts.
2.50' On the question of padding of project cost the Secretary, in the
Deptt. of EConomic Affairs admitted'that padding of project cost is done
by- most. He, however, added:
"We have to have a better bank appraisals of projects .... Banks will
know of such padding up of the cost if proper appraisal is made."
2.51 It was also stated by the representatives of different banks that as
per the Hypothecation Agreement executed by the customers it is possible
that they can be prosecuted for breach of trust, but in real practice it is
very difficult to take criminal action against them and on the contrary,
many a times when as per the clause of hypothecation agreement the bank
attempts to take the stocks under its custody and enters the premises,
 23

certain unscrupulous borrowers have taken action against the bank official
for trespass and for forcible removal of securities, damage etc. It was,
therefore, suggested that any tampering with stocks hypothecated to the
Bank should be made a cognizable offence. As far as frauds in borrowal
accounts is concerned, any tampering of stock statement by means of
inflated value. quantity of stocks etc. as disclosed in the Stocks Statement
with a view to defraud the Bank in case of hypothecated stocks charged to
the Bank must be made a cognizable offence.
Bad Debts
2.52 One of the reasons for sickness in private sector units is diversion of
funds. The advances raised for a particular unit or for a particular purpose
are diverted to siphon off the money. such advances in due course become
bad debts and are ultimatley written off. But due to secrecy provision,
these are not made public.
2.53 The Committee desired to know. whether bad debts could be
categorise as fraud. Explaining the difference between fraud and b'ad debts
the Addl. Secy., Deptt. of Economic Affairs (Banking Division), stated:
"There is difference between bad debts and frauds. Fraud is a thing
where somebody colludes and takes away money. Apart from civil
liability. the cirminal liability is also there. That money has to come
back to the bank. As for bad debts. it is a debt which becomes a
bad loan. We gave a loan and it became bad, in the sense the
borrower is not able to repay for various reasons which could be
genuine, like the failure of an industry etc.
2.54 In his evidence before the Committee, the RBI representative
explained the position about diversion of frauds as udner:
"There can be bad debts because of diversion of funds outside the
units which are totally malafide on the part of the borrowers. Some
times diversion takes place from the current working capital. or
acquistion of fixed assests. That also is improper but it cannot be
treatcd as fraudulent. If it is impropriety on the part of the
borrower then there is a case to be considered as to whether the
party can be notified under the law. At present there is no law
which permits to notify. Provisions are there in the enactments of
other financial institutions which contain provisions regarding
secrecy."
2.55 Secretary, Ministry of Finance (Department of Economic Affairs)
stated:-
"One of the main important reasons why the practice of siphoning
off funds continues is because the owner of the unit . takes the
money and puts it elsewhere. He does not enforce the principles
strictly. In a situation where we cannot allow such units to be closed
down, the signal that he cannot allow his unit to be sick, should be
 24

strong. Whenever a unit is in difficulty, we must provide assistance

for its revival. The motivation is a social commitment. What
happens is that any unscrupulous entrepreneur is always able to
organise the system in 'such a way that no matter what happens with
the unit, he will be profited. In other countries if a unit is going to
be sick, others come up to help it and revive. I submit that unless a
discipline is enforced striclty it is going to be very difficult to avoid
such happenings. We have suspicion of a number of cases. But
many of them may be unproveable."
2.56 He added:
"The evolution of the group approach was designed to make sure
that a pr~cess of siphoning off money from one unit by making it
sick, while continuing to get money for the other units. And' this
group approach has been in operation for some item. It needs
occasional modification here and there. But by and large we are
trying to discourage parties from doing this kind of a practice. I
think, there has been a proposal that when there is such a write off,
after it takes place, it should be publicised. We are examining that
proposal. Our view is not yet formalised."
2.57 In a written reply, the Ministry have also stated that following the
enactment of Sick Industries Companies (Special Provisions) Act, 1985 a
Board for Industrial and Fianancial Reconstruction (BIFR) has been set up
with effect from 12 January, 1987 for taking measures for revival of sick
industrial companies.
When BIFR approves a revival package, all the reliefslconcessions to be
provided by banks, financial institutions and other agencies such as State
Governments are specified.
Banks have the discretion to extend reliefslconcessions beyond the
parameters stipulated by' Reserve Bank, in individual cases, if considered
necessary, depending on merits of the case. Such rehabilitation packages
provide for funding of existing dues of banks and financial institutions with
extended period for payment thereof in phased manner, interest rate
concessions, grant of fresh term loans and fresh working capital facilities.
The types of sacrificeslconcessions expected from Government including
State Government have also been spelt out.
2.58 When asked how the grant of fraudulent advances could be
checked, RBI re-presentatives said:
"One way in which this can be taken care of the caution advice the
Chairman gets from the RBI with respect to all advances granted
fraudulently. "
Secrecy and Transparency
2.59 As per provisions of Banking Regulation Act, 1949, Reserve Bank
has the authority to collect information relating to commercial banks either
 25

by way of returns under Section 27 of the Banking Regulation Act, 1949 or

at the time of an inspt:ction under Section 35 of the Act. So far as
information furnished in returns is concerned, Section 28 of the Banking
Regulation Act provides that the Reserve Bank may publish the
information obtained by it under the Act "in such consolidated form as .it
things fit". Information obtained by virtue of statutory powers has to be
kept secret and not disclosed except in accordance with the provisions of
Section 28 of the Banking Regulatio.n Act. Therefore, the Reserve Bank
cannot divulge information relating to any individual commercial bank or
its constitutents, as furnishing such information would be contravention of
the provisions of statute.

2.60 As regards parliamentary right to information the Secretary,

Department of Economic Affairs stated during evidence:

"On the general question of parliamentary .scrutiny of banks this has

come up a number of times. Our view has been that the real
solution to preventing people from misusing funds of the bank likes
in strengthening the internal control mechanisms of the bank did in
devising better supervision, by which very early on signals are given
when an account is not non performing. International practice
suggests one thing. In no country of the world, bank transactions
are subjected to detailed scrutiny in Parliament or even audit types
of scrutiny by government bodies. We are continuously taking that
stand. There are many lacunae, w.hich we should fill up. Subjecting
individual accounts to scrutiny in Parliament, we feel that it would
not be conducive to the health of the banking. system. It is of an
essence of the banking s)lStem that decisions that are taken cannot
be judged on the basis of very tight rules. There is a large element
of discretion, while a banker is exercising a judgement. If those
decisions are subjected to scrutiny, in Parliament what will happen
is that nationalised banks will not take- a flexible decisions in the
way a banker normally should."

2.61 On the question of transparency, he said:

"We fully agree with what you say that there is lack of transparency
in the accounting practice that is being followed. This year, for the
first time, a large number of changes have been made and when
these are implemented, our assessment is that the Balance Sheets of
the Banks themselves and the consequent Annual Reports, will
reveal the true financial position of the banks in an aggregate
manner. So, these documents are available to the Parliament and on
the basis of that,there can be a much more informed discussion on
what is the performance of the banks".
 26

2.62 Explaining the changes made in the accounting policy, the

representative of RBI further stated:
"As regards the transparency of the accounts of the banks, it has
been improved upon from the year ending March, 1992. The banks
have been required to indicate in their Profit and Loss Account, the
provisions which they are making against debts which they consider
as difficult of recovery. This is now in consonance with the
international practice. They are now required to indicate what is
their investment policy. Therefore, a complete statement of
accounting policy is appended to the Balance Sheet which makes it
possible for a person to know what are the policies followed by that
bank. These need not necessarily be uniform among all the banks
but the policy followed by every banks is known to the person
reading the Balance Sheet. Secondly, I would like to clarify that
write off is not even known to the borrower unless it is as a result of
the compromise agreement with the borrower. There are cases
where for genuine reasons it has become necessary to enter into a
compromise agreement with the borrower and their are limits in the
hierarchy to what extent the write off can be allowed. It is only the
Board which can approve the tax benefit. Therefore, several banks
consider it prudentially advisable to write off the loans. It is then
followed up with the borrower and the moeny is recovered. In
numerous cases, recovery of amount wirtten off in previsious years
does take place."
2.63 When pointed out that banks were not taking into account the bad
debts in their Balance Sheet and asked whether a need was felt to amend
the Banking Regulations Act or any other relevant Act the representative
explained:
"We have tightened up the regulations governing many of the
provisions against bad and doubtful debts but they are operative
only from the current year onwards. Prior to that the banks were
required to make provisions in their own judgement if they think
that a particular amount is not recoverable and the security is not
sufficient to cater the amount of the outstanding loan. It is true that
certain banks have not been able to make these provisions to the
extent required because they are not generating sufficient profits.
Only if there are sufficient profits provisions can be made against
the bad and doubtful debts. that is why in several bank's Balance
Sheets you may have observed that there are short fall to the extent
of so many crores."
2.64 It was further pointed out during evidence that an amount is
declared as bad dobt when all efforts to recover the money have failed. So
why is this secrecy clause coming in the way and why it is necessary to
keep them secret.
 27

2.65 Replying to the above, the representative from RBI stated:

"Going to the court for filing Civil suits for recalcitrant borrowers
must not be called as giving publicity."
2.66 Additional Secretary, Ministry of Finance added:
"As far as transparency of account is concerned, we have issued
instructions from the RBI to the Banks viz. position of income
recognition as well as provisioning will be completely transparent
and full provisioning will be required to be made in respect of a
number of matters. But as far as classification is concerned, each
bank does classify any amount which they consider as bad debt.
Even if an amount is written off as bad debt, the liability of the
person against whom this debt remains that does not get
obliterated. He still owes that money to the bank and the bank at
a future date can also recover the money in case he starts the
business. It is only to protect the interests of the depositors that
this provisioning is there. It is then converted to a write off, in
some cases only."
2.67 It was, however, agreed that they would seriously examine the
possibility so that the Act is deterrent to the people.
Conclusions/Observation
2.68 The Committee note with concern that of the various categories of
frauds, cheques/drafts operations account for the maximum number of the
frauds whereas loans and advances occupy the first position if the amount
involved in the frauds, is taken into account. It is a matter of concern that
the amount involved in the foreign exchange category which has a limited
and selected clientele, is the second highest.
2.69 Number-wise and amount-wise fraudulent encashment through
forged instruments/manipulation of books of accounts or through fictitious
accounts and conversion of property is the single largest contributory factor
for high incidence of frauds perpetrated on banks, which has been
attributed mainly to laxity in observance of laid down systems and
procedures by operational and supervisory staff.
2.70 Though the break-up of frauds in each category has not been given
to the Committee, they find from the Ghosh Committee Report that during
the year 1990, as many as 729 frauds involving an amount of Rs. 28.28
crores constituting about 59% of the total number of frauds and as also of
amount involved therein pertains to fraudulent encashmentimanipulationl
conversion of property. These figures relate to frauds reported by the 19
Public sector banks to the Reserve Bank.
2.71 The Committee are given to understand that the frauds had
occurred not on account of any lacunae in the system and procedure but
owing to non-observance of prescribed procedures and safeguards. The
 28

Committee also feel that the safeguards and preventive measures

enumerated in various RBI circulars particularly those of September 1968,
October 1977 and February 1981 are adequate enough to minimise the
frauds substantially, if not wipe tbem out completely provided these are
fenowed scrupulously.
Recommendations
2.12 In order to further strengthen the preventive measures, the
Committee make the following recommendations:
(I) Since fraudulent ·withdrawal through opening of fictitious
accounts is prevelent, the Committee recommend that
"Introduction" for opening of the account in person should be
made mandatory/compulsory. Independent confirmation of
addresses of account -bolders in all cases and not only in doubtful
cases should be done.
(8) Sensit~ve paper, protectograph machines for writing drafts,
M.T., T.T., etc. should be used without any execption.
(ill) Verlficatilonof instruments under ultraviolet rays in all
branches should be introduced forthwith.
(Iv) Writing of day book and daily tallying should be done as a rule
and should not be left unbalanced. Branch Manager should be
held responsible for any lapse in this regard.
(v) Proper record of inward/outward instruments should be
maintained on day-to-day basis leaving little scope for loss!
destruction/tampering with the instruments. For this puspose,
incoming and outgoing instruments should be serially numbered
and entered into the registers at dak stage.
(vi) The differences arising out of non-balancing of day book and
transferred to suspense account should not be left unbalanced for
long. The entries proposed to be transferred to suspense account
should be checked by an officer before these are actually
transferred to suspense account.
(vii) Blank drafts, cheques and other important documents!
instruments should be kept in safe custody under dual control.
In no case these documents should be allowed to remain on the
table after banking hours are over.
(vill) In the case of M. T .IT. T. as per the recommendation of the
working Group of Customers Service in Banks (Talwar
Committee), banks caDDot refuse payment of drafts for want of
advice. The Committee recommend that some procedures
should be worked out in such a way that the payment could be
made only either on receipt of relative" advice or confirmation
 29
through telexitelegramitelephoMifax or any such accepted
practice.
(Ix) Payments against uncleared cheques should not be made as a
matter of pollcy.
Conclusions/Observations
2.73 The Committee are distressed to note that as on 31-3-1991, entries of
inter-branch reconclliation of accounts in as many as 11 publlc sector banks
were pending for 1987 and earller years. The entries had been reconcDed
upto 31-3-1991 only in four banks. The other banks were at various stages
of reconciliation between 1987 and 1991. As regard outstanding entries and
the amount therein (debit and credit) is concerned, 98.06 lakhs entries with
an amount of Rs. 356650.61 lakhs as on 31-3-1991 was yet to be reconcDed.
2.74 The Committee note that arrears in reconcDiation of entries which
had sUpped over a period of time, could only be updated by the
introduction of computers. However, unwillingness of the staff to use the
computers make the process of reconciliation of lakhs of entreis diflicult.
2.75 The Committee also note that RBI had set up a Working 'troup to
look into the matter of reconciliation which had recommended the following
time schedule:

Entries of Financial Year To be reconciled by

1990-91 30-9-1993
1991-92 30-12-1993
1992-93 March 1994
2.76 The Committee. also observe that as per working group
recommendation, no bank would be allowed to keep entries unadjusted for
more than 12 months.
2.77 The Committee feel that iDler-branch reconciliation of accounts is a
very important but neglected area which has provided not only enough
scope for perpetration of fraud, but also non-detection or delayed detection
of frauds.
Recommendations
2.78 The Committee recommend that arrears in inter-branch
reconciliation of accounts, which is a highly fraud prone area and causes
delay in detection of frauds, should be given topmost priority and the
entries reconcDed as per time schedule suggested by the Working Group.
2.79 The position of reconcDiatlon should be reviewed quarterly and
corrective measures taken including departmental actien against delinquent
omcials. In no circumstances, entries should be allowed to remain
unbalanced beyond one year.
 30

Conclusions/Observations
2.80 The Committee regret to note the sorry state of computerisation in
banking business. In the advanced technological environment, when the
wltole system is being linked with software network and advanced
telecommunication technology is the call of the day, the banks have not been
able to computerise the very basic and essential areas like reconciliation,
clearing etc. Earlier Committees like Rangarajan Committee, Narashimhan
Committee, Ghosh Committee etc., all have recognised the need of
mechanisation and computerisation.
2.81 What is still more distressing to note is that whatever little has been
agreed to, have either not been put through due to restrictive nature of
agreement or the progress has been much slow.

Recommendations
2.82 The Committee recommend as follows:
(i) The areas which have been agreed upon and where operations
could be put through should be computerised without any
further delay.
(ii) The staff unions should be persuaded to appreciate the
importance of mechanis~tion and computerisation and not to
insist upon .a restrictive use of computers at least in
reconciliation, clearing houses and other sensitive areas which
are highly fraud-prone.
(iii) The management should assure the staff unions that there will
not be any retrenchment and the services of surplus staff will be
utilised in a better manner.
(iv) The recommendations of a Rangarajan Committee, Narasimhan
Committee and others on the computerisation and automation
with which the Government is in agreement, should be taken up
with the unions and some acceptable solution should be worked
out.
(v) Large and exceptionally large branches and branches at business
centres/strategic locations as also those transacting foreign
exchange should be fully computerised at the earliest.
2.83 The Committee being well aware of the risks involved in
computerisation, also recommend:
(I) The operational personnel and supervisory staff should be given
vigorous training before they are put to such job.
(ii) Apart from periodical training, steps soould be taken to keep
them abreast with the changes and development in this
technology from time to time.
 31

(iii) Periodical review of programming by supervisory staff to locate

and set right any logical error.
(iv) Restricted access to control rooms to minimise their misuse by
unscrupulous elements.

Conclusions/Observations
2.84 The Committee are distressed to note that the amount involved in
frauds in foreign exchange business which has a very limited and selective
clientele, is the second-highest. It is matter of concern that some fictitious
deals in their nostro accounts by discounting bogus export bills or inflated
stock statements with the help of brokers had taken place which, the
Committee feel, could be possible only with the active connivance with bank
officials. The other area of perpetration of fraud in foreign exchange is
opening of import LlC.
2.85 The Committee feel that the laid down procedure and safeguard
prescribed are adequate enough to deal with irregularities and frauds in
export finance. It is the laxity in following these prescribed procedures
which has been responsible for the frauds.
Recommendations
2.86 The Committee emphasise the need for enforcement and strict
compliance of laid down system and procedure$ for prevention of frauds in
foreign exchange business. Any deviation from the procedure should be
dealt with severely.
2.87 Reconciliation of nostro accounts should be carried out regularly to
detect fictitious transactions.
Conclusions/Observations
2.88 The Committee are extremely unhappy to find that defrauded
amount involved in loans and advances portfolio is exceptionally high. Poor
credit appraisal of pre-sanction of loan proposals, deficiencies in post
sanction follow up, inspection, supervision and enforcement of controi
mechanism are the contributory factors for this sorry state of affairs. If the
amount involved in bad debts is taken into account, the amount is still
higher. They are perturbed to note that the pace of settlement is very slow
and recovery negligible. The Committee are of the opinion that among the
various reasons, behest lending, internal/external pressur~ and incomplet
and inadequate credit appraisal are the most contribu~ry factors.
2.89 In regards to hypothecation/pledging of goods, the Committee
regret to point out that the very essential safeguard of submission or
periodical statement in respect of goods hypothecated, is not adhered to.
Furthermore, physical verification is not carried out and statements as
submitted by the borrower are considered as authentic and forwarded to
 32

controlling authority. All this bas facilitated removal of hypothecated goods,

inflating the value of stock, pledging spurious goods etc.
2.90 The Committee feel that the Bnaks are shifting their emphasis from
transaction oriented to sales-oriented which has led to competitive
environment among banks to grab the business in order to get the targets
achieved. This competition has resulted in deterioration in scrutiny and
compromise with the quality.
Recommendation
2.91 (i) All loan applications should be scrutinised on merits and
examined critically under the laid down norms without succumbing to any
kind of pressure leaving little scope for inadequacy. The omcials
scrutinising the credit proposals should be technically trained enough to
scrutinise the loan appfications properly and only sound and viable
proposals should be entertained. Sponsoring agencies should be impressed
upon to send the loan applications at regular intervals throughout the year
and not in one bunch at the fag end of the fmancial year.
(il) Proper credit appraisal must be done taking into account all factors
like borrowers fmancial position, his capacity to pay back the laon, viability
of project, and other safeguards as laid down in the manual.
(iii) Post sanction follow up like inspection, physical verification of stock,
actual value of stock, proper documentation etc, should be done regularly.
(iv) Monthly statements should be based on factual verification. Monthly
as well as randum inspection should also be carried out. Any irregularity, if
found, should be dealt with promptly any higher authorities informed
accordingly.
(v) As soon as the recovery becomes irregular, the matter should be taken
up immediately. No laxity in the matter should be allowed.
(vi) Health code should be prescribed for aU kinds of loans. Whenever
there is a change in the health code, the matter should be reported to higher
ups for review.
(vii) In the light of experience gained, a uniform 'not too rigid' detailed
lending policy should be formulated with internal loan review department.
(viii) The ~ties charged to the Banks should be properly scrutinised,
evaluated and varifled from time to time.
(Ix) Banks should satisfy themeslves that a borrower does not get multiple
finance for the same security.
(x) Insurance cover should be renewed well in time.
2.92 As regards unauthorised removal of hypothecated goodS, the
Committee recommend tbat the officials 'detailed for supervision and
submission of stock statements should be instructed to report the matter to
 33

higher authorities about any unauthorised activity found during their

inspection. And if they fail to report the matter, they should be held
responsible - for any loss to the bank.
1.93 AU credit facilities granted to known unscrupulous borrowers
should be stopped forthwith.
1.94 Any tampering with stocks hypothecated to the Banks should be
made a cognizable otTence.
Conclusions/Observations
1.95 The Committee regret to observe that bad debts are the result of
deUberate diversion of funds and ultimately sickness in the industry.
Though, the Ministry have tried to justify the bad debt by saying that it
could be genuine because of failure of industry etc., the Committee are
of the candid view that diversion takes place only for the purpose of
siphoning otT the funds in order to make the industry. sick and ultimately
get the rmances written otT, or get more funds for the revival of the
industry with all kinds of relie£lconcessions under rehabilitation package.
In the opinion of the Committee, the group approach which is in vogue
for some time now, however, good it may bt:, is bound to be defunct.
1.96 The Committee do not agree with the Ministry on the question of
Parliamentary right to information and are of the candid view that being
the law making body, Parliament has every right to have information
regarding rmancial position and health of the banks. Though the
Committee do not wish to suggest scrutiny of the individual accounts by
Committees of Parliament, they would like these Committess to have
powers to scrutinize the banks as a whole with a view to know the areas
of weaknesses and suggest corrective measures.
1.97 The Committee are not convinced with the reasons put forth by
the Ministry that due to secrecy provision, the true financial position of
the borrowers are not disclosed. The Committee feel that unscrupulous
borrowers take advantage of it and continue to siphon otT the money.
Though the Government were well aware of this complacency and were
trying to discourage parties to indulge in this kind of unhealthy pracUces,
they themselves are not in a position to enforce strict discipline for the
reasons best known to them. The Committee consider the changes being
made in the Profit and Loss Account which will also reflect the position
of bad and doubtful debts in their Balance Sheet, a step in right
direction.
Recommendations
1.98 The Committee, therefore, recommend that:
(1) The banks should move very cautiously while refinancing a sick
industry. They should first satisfy themselves about the viability of
industry before resorting to revival package.
 34

(ii) A close monitoring by the operating agency should be undertaken and

the RBI informed about the same from time to time.
(iii) No concessions/reliefs beyond the parameters stipulated by RBI should
be extended to sick industries under rehabilitation package.
B. Staff Involvement
2.99 All banks have their own instructional manual to guide their
officials in various operational areas. Despite the procedures codified in
the manual and the delegation of powers. instances do take place in
violation of the set rules. RBI also looks into such violations as and when
it comes to its notice and issues suitable guidelines to avoid their
recurrence. The banks have been impressed upon from time to time for
taking a serious view of irregularities committed by its employees and
initiating action to inflict punishment befitting seriousness on the
delinquent staff.
2.100 The frauds arc perpetrated by employees in all banking
transactions particularly in passing fictious entire in bills purchased!
dP.icounted accounts. inter branch transactions suspense and dormant
accounts. cheating. forgery, stolen instruments etc. In the advances
portfolio insuffieent credit appraisal, failure to scrutinise properly the
relative receipts. failure to notify promptly the banks interest in the goods
to the carriers at the destination. production of spurious receipt. diversion
of funds. sale of hypothecated goods without crediting the proceeds to
banks. lack of supervision. follow up action in overdue bills. under credit
facilities and others arc the contributory factors for perpetration of frauds
which could be facilitated only with the active collusion of bank officials
and wherc staff involvc-ncnt is strongly suspected.

Award of Punilhment to Delinquent Officials

2.101 In regard to action to be taken agaiast the employees committing
frauds i.e., either rendering them innocuous or for placing them under
suspension, the banks are generally guided by their staff/service
regulations/manuals and bipartite agreements. Some banks have framed
their own guideline&lrules on the strength of cireularslletters issued by the
Ministry of Finance (Banking Division) or Ministry of Home Affairs.
2.102 While awarding punishments including dismissal, factors such as
gravity of misconduct, fraud, amount involved, nature of the involvement
of the officials-deliberate or incidental and other circumstances are taken
into consideration. The punitive actions, apart from dismissal are
wit~holding of super~nnuation benefits subject to the service rules by
which th~ employee IS governed, reporting matters to CBIIPolice and
proceeding against the employees in a Court of Law. Whel'e the delinquent
employee is not dismissed, the other penalties are imposed, depending
upon circumstances and merits of each case, which include withholding of
 35

increments, withholdings of promotion, reduction to a lower grade/post!

stage, compulsory retirement etc. Normally, the banks suspend an
employee where t~ere exists a prima facie case of fraud, misappropriation,
abuse of office, with or without collusion with outsiders.
Staff Accountability
2.103 RBI is also conscious of the fact that the staff accountability aspect
is not made use of as an effective tool of preventive vigilance and the same
could be noticed from its circular of 05.09.1991 to all the banks which inter
alia reads as under:
"Another disquieting aspect noticed was the tendency· on the part of
banks to gloss over the staff accountability aspect of irregularities,
malpractices, etc. Even if gross irregularities come to the notice, the
staff accountability is examined only when the question of monetary
loss and!or write-offs arise, by which time either the records are not
traceable and!or the concerned officials have retired or left the
services of the bank. Even in cases where substantial losses are likely
to arise, in the absence of definite evidence of gratification or
malafide intention (which is often difficult to prove), benefit of doubt
is given by banks to the concerned officials and no deterrent
punishments are awarded. It is also observed that the vigilance
investigation is generally not very comprehensive or effective,
particularly when senior officials and executives are involved. There
is a tendency in such cases to shift responsibility on to the lower level
functionaries who are also often let off with minor punishments, not
at all commensurate with the gravity of the irregularity. Dismissal of
delinquent officials is rare. More importantly, weeding out of officials
of doubtful integrity is seldom reesorted to. It was also observed that
the question whether vigilance angle is involved or not was, in the
case of certain banks, determined by other than vigilance department
officials. In short, staff accountability is not made use of as an
effective tool of preventive vigilance."
2.104 In connection with the allegations appearing in certain sections of
the press regarding alleged fraud of Rs. 121.71 crotes committed by certain
officers of the Bank of Maharashtra in sanctioning loan and discounting
bills to Stretch Fibre Group of Companies, the Committee desired to know
about the investigations carried out and the action taken against- the erring
officials. In their written reply, the Ministry have furnished the following
information:
"RBI's findings reveal that serious irregularities have been committed
by the bank violating norms laid down for prudent banking business
as also the directives of Reserve Bank of ·India (RBI) in financing
large manufacturing units. The units continued to remain closed!
defunct and the bank had filed suits against all borrowers viz.,
~. Stretch Fibres India Ltd., ~. Stretchlon Pvt. Ltd. and six other
 36

sister concerns. The total balance outstanding in the accounts of the

group as on April, 1991 aggregated to Rs. 2,823.91 lakhs. TIre :bank
has filed suits for recovery of Rs. 3,222.98 lakhs which includes
interest component. The bank has advised that of the 26 erring
officers, 10 have retired or expired. Of the remaining 16, action
.against six of them has not been initiated for want of substantial
evidence. Of the remaining 10, show cause notices have been issued
against six and issuance of show cause notices to other four was
stated to be under active consideration of the bank. The writ petition
filed by the ex-employee of the bank has been dismissed. CBI
investigation report is still awaited."
2.105 Asked what provisions exist for the recovery of defrauded money
from the bank officials involved in frauds, the Ministry in a written reply
slated that the avenues open to banks for recovering loss from the
delinquent employees are Banks contribution to P.F., forfeiture of gratuity
payable under the Service Regulations. Further, as per Banker's Indemnity
Insurance Policy, insurance claim is available with the banks for any loss of
money or security by reason of the dishonesty or criminal act of the
employees. Attempts are also made to attach the personal property or
assets of the employees in case the property or assets, have been amassed
out of such fraudulent transactions.
Award of Less Punishment
2.106 On the basis of information received from the banks, the Ministry
of Finance have stated that there was no such case with them where less
punishment was awarded by the Disciplinary Authority. VCO Bank has,
however, stated that there is one such case where the punishment awarded
was considered to be inadequate and the case is being reviewed by the
Bank.
2.107 However, in their circular dated 5th September, 1991. RBI has
observed that instances had come to its notice in some banks where the
advice and recommendations of the Chief Vigilance Officer had not been
accepted by the disciplinary authorities and minor punishments are
awarded taking a lenient view. Such cases of non-acceptance should be
brought to the notice of CMD explaining the reasons for deviation and
quarterly report of such cases submitted to the Board.
Complaints against CMDsIExecutives -
2.108 RBI had, in all, received 47 complaints against top executives of
public sector banks alleging serious irregularities in the working of their
respective banks during the period from 1.1.1986 to 31.12.90 out of which
RBI had investigated 38 complaints constituting 80.9 per cent of the total.
The remaining 9 complaints were not investigated as either the complaints
were not specific/too general or mere similar in nature on which
investigations were earlier carried out. Based on the investigations and
other operational deficiencies noticed, the RBI had taken up where
 37

necessary, the issues with the banks for necessary corrective measures. In
14 cases the complaints were substantiated on investigations and appropri-
ate follow-up action taken.

2.109 The details of investigations carried out by Special Investigation

Cell of RBI against some of the Chairmen, MDs and Executives of
different banks and the action taken/proposed to be taken is given below :

Name of the BanklCMDIED Nature of Complaint Action Taken/proposed to

be taken

2 3

1. Union Bank of India Non-observance of pre- Investigation revealed the

Shri M.U. Kini, E.D. scribed procedures in allegations to be true.
granting credit facilities GoV!. advised to take ap-
and misuse of powers de· propriate action ag... in~t
legated to him for granting Shri Kini. He was advised
of advances. By-passed the by Government to proceed
orders of the Chairman on on leave.
lectures/notes etc. and ig-
nored heirarchical tiers.

2. Bank of Maharashtra-G.M. Sanction of advances to Scrutiny reveal serious

Allahabad Bank, E.D. Desai Group of Cos. by irregularities in the matter
Shri S.M. Chitnis, G.M. grosslyabusin his position. of sanctioning of advances
Bank of Maharashtra and He has not kept the higher by Shri Chitnis and GoV!.
thereafter E.D. in Al- authority, informed of the was advise that con-
lahabad Bank. position. Similarly advan- tinuance of Shri Chitnis as
ces were also granted to ED - of Allahabad Bank
several other companies. was not warranted and
All these advances subse- Govt. was to take the de-
quently turned out to be cision in the matter. The
difficult of recovery. appointment of Shri Chit-
nis as ED was terminated
from 31.12.91.

3. New Bank of India Various allegations regard. Allegations were looked

Shri R.C. Suneja, Ex-CMD ing grant of advances, into and' 90vernment ad-
write-off allowing conces- vised of findings, pro-
sions etc. have been re- cedural and operational
ceived from time to time. irregularities -were fol·
lowed. Shri Suneja's resig-
nation accepted with effect
from 10.4.1990. Subse-
quently as per press re-
port, Shri Suneja was ar-
re~ed by CDI on the basis
of investigation carried out
by them on fraudulent de-
alings.
 38

2 3

4. New Bank of India Distortion of balance sheet Investigation reveals that

Shri J. Sethi, Ex-E.D. by wrong accounting of the mistake committed by
expenditure items in final the bank while drawing
accounts. the balance shett does not
seem not to be through
over-sight. Bank had not
controverted any of the
findings of the scrutiny.
For this, G.M. and E.D.
who is in-charge of the
bank cannot plead ignor-
ance of the serious mis-
take involving a large sum
of Rs. 10.70 crores. RBI
had brought this to the
notice of the Government
and also the earlier two
investigations establishing
the involvement of Shri
Sethi in the irregular sanc-
tion of advances to M-!I.
K.Y.l. Cotton and 5unain
Enterprises. RBI had sug-
gested to Government that
the continuance of Shri
Sethi as E.D. of the bank
may not be in the bank's
interest. His appointment
was terminated w.e.f.
24.4.92. As per press re-
port, Shri Sethi, was also
subsequently arrested by
CBI on further investiga-
tion on account of fraudu-
lent dealings.

5. Bank of Baroda While he was CMD of the The allegations were in-
Shri Premjit Singh, bank, he had granted Cre- vestigated and it was
Ex-C.M.D. dit facilities to certain hor- found that they were of
rowers recklessly. The general nature and not
bank had. taken over cer- horne out of facts. RBI
tain accounts from other had also carried out in-
banks without proper ap- spection of Bank of Baro-
praisal. da Fiscal Services Ltd.,
wholly owned subsidiary
of Bank of Baroda and the
important deficiencies ob-
served in the working of
BFSL were communicated
to the Bank of Baroda for
 39

1 2 3

taking suitablotemedial
action. In the meantime,
the review note of BFSL
prepared by BOB was re-
ceived by UI where from it
was seen that in response
,to the public aiticism the
Government bad asked
Shri Premjit Singh, CMD,
Bank of Baroda to pr0-
ceed on leave w.e.f. 29th
D'ec:ember, 1989. His ap-
pointment as CMD was
also only upto 31st March,
1990.

6. Vijaya Bank Allegations relate to grant- The investigation revealed

Shri K. Sadananda She tty , ing of huge credit limits to that the allegations are not
Ex-C.M.D. ~. Asian Wire Ropes entirely incorrect. The in-
Ltd. and· other associate volvement of CMD in the
concerns in utter disregard transaction was got ex-
of ~anking norms despite amined separately, The
advene features pointed scrutinies revealed that in
out by internal inspection! large number of cases,
auditors. CMD had sanctioned cre-
dit facilities to certain
group of borrowers with-
out any credit appraisal
and prudent financial as-
sessment and flouting of
normal banking norms. As
regards advances granted
to~. Asian Wire Ropes,
the bank is likely to saddle
with substantial loss in the
account due to the injudI-
cious and irresponsible
lending authorise(l by
CMD. RBI had advised
the Government that they
may after examining the
matter, consider calling
the' Oiairman and advising
him to tender his resigna-
tion. The CMD had since
resigned, effective from
'21.9.1990. His terms of
appointment otherwise
was earlier exten"d upto
9.6.1992.
 40

1 2 3

7. CeDtral Bank of India Allegations against CMD From the scrutiny it is ob-
Sbri N.M. Mistry, for flouting lending norms ·served that the former
Ex-C.M.D. in granting advances to CMD, Shri N.M. Mi~try,
Sanjanwala Group and ab- the General Manager, Shri
out the collusion between Daboo, had violated all
MIs. Sanjanwala and top banking norms in accom-
management of the bank. modating Sanjanwala and
Shrishma Group of ac-
counts and also Chatur-
vedi Group of Accounts.
It was decided by the top
management of RBI to
have a Special Audit re-
pon on the group of ac-
counts. The Special Audit
Repon from MIs. Thakur
Vaidyanath Aiyar & Co.
has since been received
and is being examined.
8. Syndicate Bank Allegations against RBI's scrutiny and also
Sbri P.S.V. MaUaya C.M.D. and other Ex- the repon of the Technical
Ex-C.M.D. ecutives. Examiner of CVC pointed
out several irregularities
relating to lease of land
appointment of Architact,
calling for tenders, award
of contract and sub!;tan-
dard material used for
construction etc. It was a
clear case where for want
of . proper planning and
control and supervision,
the bank has been put to
unnecessary additional ex-
penditure and avoidable
loss. For this it was felt
that the CMD being re-
sponsible for the failure on
his pan was trying to pass
on the responsibility to
others. RBI had taken up
the matter with the bank
and advised him to place
the contents of RBI's let-
ter together with CMD's
comments before the
Board of Directors.

2.110 Elaborating the requirement in the standing instructions of all

the banks in their operational manuals, the representative from the RBI
stated, during avidence:
"If any functionary at the branch level or regional manager's level
transgresses his authority and sanctions credit facility which is
above the powers given to him, he must report it immediately, on
the same day, to his next higher authority giving the reasons
 41

therefor and seeking the confirmation of the higher authority for

his having done so. This is there in L.C. facility area also. For all
kinds of credit facilities powers have been laid down very clearly
as to at what level it can be sanctioned and how much can be
sanctioned at a particular level etc. There are, sometimes,
occasions where a functionary has to exceed his authority very
marginally. If he does so-in the normal course he does not do so-
under exceptional circumstances he must report the same day
about it and get confirmation.
But, quite often, this does not take place. The Branch
Manager or the Regional Manager or the Zonal Manager takes
weeks to report transgression of powers to the higher authorities.
Even at the higher levels, in the central offices, either by the
General Manager or at top management level if such things take
place, they also do not report· the matter. For example if it is .
done by the Executive Director or. the Chairman, it has to be
ratified at the board meeting held immediately after it. This does
not always happen. There are occasions when they take it to the
. Board much later. They take 2-3 months time. And then only the
Board discusses it. By that time the credit facilities have already
been released to the borrower. Sometimes the Board meeting
ratifies land sometimes they may not ratify. The Board may call
for further details and the exact reasons for exceeding the
powers. The Board tells the Chairman and others that such things
shall not be allowed to happen in future. There are all kinds of
instructions.
If the management has acted in a manner which was
detrimental to the intereltts of the bank, the Board may not ratify
such actions."
2.111 In this connection, the Committee desired to know the details
of such cases where loans were sanctioned ~y CMOs and other top
executives exceeding their authority in sanctioning the loan and which
were not subsequently. Ratified by the Board of Directors.
2.112 Giving the detailS of such cases where the sanctions were not
ratified by the Bp8{d lof Directors, the Ministry has submitted as follows:
"The statements, reCeived from 25 public sector banks in respect of limits
sanctioned during the period from 1 January 1990 to 31st October 1992
by the Chairman and Managing Director/Chief Executive, in excess of
powers vested in them do not reveal any instance where the sanctions
were not subsequently ratified by the Board of Directors of the respective
banks. Bank of India has reported that the 2 cases where limits
sanctioned were in excess of discretionary powers of Chainnan Chief
Executive, are to be put up to the Board, at its ensuing meeting for
ratification. Further, VCO Bank and Vijaya Bank have reported that
 42

limits sanctioned by the Chairman and Managing director in some eases

are yet to be confmnedlratified by. the Board of the bank."
2.113 Attention of the Ministry was drawn to the grant of advances to
Sanjanwala and Chaturvedf Group of Accounts on oral instructions and
without credit appraisal. The Committee desired to know the factual
position in this regard.
2.114 The Additional Secretary of the Ministry of Finance stated
during oral evidence:
"This happened in the Central Bank of India a few months before
the Chairman was due to retire. There are no instructions or
authority with any officer at any level to orally direct an officer
working under him at some other branch to sanction an advance.
But there may be an occasion where, due to an emergency arising,
for which a borrower needs funds at extremely short notice, say,
for clearing a consignment which is awaiting clearance at the.
Customs, the Chairman may instruct a Branch Manager orally, if
the party has approached him, that this amount may be
sanctioned. It is a very extraordinary case where a Chairman or a
Zonal Manager or an Executive Director may give oral
instructions. If any oral instructions are given and the amount is
sanctioned, such sanction has to be confirmed in writing
immediately to the Branch Manager, or he should seek permission
in visiting from the next higher officer. If fraudulent motives are
established on the part of any authority who had sanctioned those
loans, the obvious course would be to seck the Government's
instructions as to whether intervention by the CBI would be
necessary. If the Chairman has given telephonic instructions for the
release of certain credit facilities which were not warranted in
terms of the cr~t standing in borrower's account, then mala fide
would be established. If that turns out to be true, then further
action would be called for. I am not, at the moment, in a position
to react whether oral instructions were given and, if so, whether
they were given under circumstances which did not warrant the
issue of oral instructions."
2.115 The Ministry in a note furnished to the Committee have
furnished the following facts of the case relating to grant of advances to
Sanjanwala & Chaturvedi Group of Accounts:
"The advances to the group of concerns were granted without any
credit appraisal and on telephonic instructions to the branch Manager from
the Zonal Manager and Chairman & Managing Director. Though the
branches from time tG time sought confirmations for excesses/sanctions
allowed as per telephonic instructions and reported the out of oroer
position of the accounts to Central Office no action was taken by the
monitoring departments at Central Office to review the accounts and take
 43

steps to regularise the accounts for safeguarding the bank's interest.

There was no post sanction supervision over the accounts. Huge
amounts were allowed to be withdrawn in cash. As at time of
scrutiny in September 1991 the total outstanding aggregated Rs. 11.29
crorcs against which the value of securities available with bank was
Rs.6.06 crores leaving a shortfall of Rs. 5.23 crores. The scrutiny
indicated the involvement of Shri N .M. Mistry, Ex-CMD of the bank
and Zonal Manager Shri N.S. Daboo."
Agreed List
2.116 Sixteen banks which have furnished information to RBI
have stated that there exist a system for preparing agreed list of
officers and exchanging the- same with CBI for maintaining clandestine
Surveillance. Lists of officers of doubtful integrity are also being
prepared by 9 out of the 16 banks. Bank of India and New Bank of
India have stated that the list of officers of doubtful integrity is used
for internal purposes and not exchanged with CBI officials. All the
executives upto the level of General Manager are covered under the
system.
2.117 The desired objective of the above system of maintaining
~o lists are to facilitate identification of officers who are of doubtful
integrity so as to enable the banks to take precautions while posting
giving assignments or considering promotions of such officers. The
system also helps the banks in identifying corrupt officials. The
identified officers are not posted in sensitive areas and/or are not
given an independent charge. A close watch is maintained on their
work performance. This also facilitates the banks in taking
administrative action against· such offioots whenever warranted.
2.118 Apart from the above, a few Banks have a system whereby
a close watch is kept over the life style of all the staff members.
This system has resulted in detection of some cases wherein
employees were found involved in corrupt practices.
Review of Service
2.119 The service regulation for officers in various public sector
banks provide for review of each officers on completion of 30 years
of service of 55 years of age, whichever is earlier. While taking
review of the officers falling under this category any adverse remarks!
corrupt practices on the part of the officers as noted in the service
records, are taken into account along with other factors like state of
health, usefulness, performance etc. VCO Bank has reported that the
exercise of review of such cases under their staff regulation 1979 is
yet to be initiated in the bank.
2.119. The position with regard to the cases reviewed and
 44

Officers weeded out during the years 1989, 1990 and 1991 in respect -df"the
Banks from whom information has been received is given below :-

1989 1990 1991

Cases Officers Cases Officers Cases Officers

reviewed weeded reviewed Weeded reviewed Weeded
out out out

1. State Bank of 48 3 46 4 45 8
India
2. State Bank of 141 1 114 62
Travancore
3. Canara Bank 826 2 438 1 171
4. Punjab 150 97 NIP
National Bank
5. Andbra Bank 34 23 30
6. Corporation 54 43 44
Bank
7. Bank of NIP NIP 102 3
Baroda
8. Oriental Bank 31 41 NIP NIP
of Commerce
9. Syndicate 149 164 136
Bank
10. Vijaya Bank 18 33 43
11. Indian Bank 37 102 46
12. Allahabad 58 6 100 10 144 10
Bank
13. Union Bank 282 NIP 168 NIP 109 NIP
of India
14. Union Bank NIP NIP 25 45
of India
15. Indian 79 95 95
Overseas
Bank
 45

Reward to Vigilant Staff

2.120 Asked whether any scheme has been introduced to reward the
staff who have foiled attempted fraud as also to make suitable appreciative
entries in their CRs in this regard, the Ministry of Finance furnished the
following information:
"All the public sector banks have reported that there is no
specific scheme to reward the staff monetarily for foiling attempts
to defraud the bank. However, such employees are given letters of
appreciation which are kept in the personal files of the concerned
employees. A few banks have a system of felicitating such
employees in sinall in-house functions and giving coverage in house
magazines as a motivating factor for other employees.
Most of the banks have reported that a copy of appreciation
letter is placed in the personal me of the concerned employee and
is taken into account at the time of promotions etc. A few banks
are having separate column in the CR dossiers (generally for
officers) to Record this aspect. RBI feels that if the appreciation
letters are placed in the service me/record and are taken into
account at the time of placement and promotion of an employee, it
will serve the desired purpose."
2.121 To a suggestion mentioned in the memoranda regarding
encouragement to staff for reporting frauds, the comments of IBA
with which RBIIMinistry of Finance also agree, are as tu:lder:
"At present banks are giving cash rewardlletter of appreciation!
noting in CR in case of employees who have· detected the frauds.
However, promotion policy is raid down by the individual banks in
respect of promotion from subordinate staff to .clerical and clerical
to officer, based on seniority/educational qualification, etc. In the
case of officers, guidelines have been laid down under Government
directives. Reporting of frauds would not be a criterion for
promotion by itself. This could form part of the special
achievement of the employee for performance appraisal. Vindictive
action by mlUlagement against employees reporting frauds is only a
subjective perception of the employees."
Training of Operational Personnel
2.122 RBI has impressed upon the Banks the need for proper training
of operational personnel so that they appreciate the implications of laxities
in following laid down procedures and take extra care in actual working.
2.123 Banks are also expected to impart suitable training to the
officers and employees at the time of induction as well as during their
service.
2.124 When asked to explain the attitudinal and technical training
 46

imparted to officers and award staff at different levels as well as the

improvement in training structure and methodology that have been made
in recent years, the Ministry in a written reply submitted as under:
1. Staff have been given the check-list of likely signals and are advised
to remain over alert to the situation.
·2. Rotation of staff within the branch and in different branches within
the ~ntre is very important.

3. Case studies of the cases of frauds and regular discussions to bring

the salient features to the knowledge of the staff also forms part of the
training.
4. Monitoring and Vigilance Cells and preventive machinery is
established at all levels in the banks to keep an eye on the cases.
S. Banks have started employing specialised and technically qualified
personnel to evaluate and keep a check on the advances to trade and
industry from the beginning of the account.
2.125 About the improvement in training, it has been stated that after
due consideration and discussions at various seminars and work-shops
organised to evaluate the course content vis-a-vis the present day need and
taking into account the modus operandi of the various types of frauds that
have come to light, the training courses for officers and employees at the
branch level, both on the job and clJlSS room, have been evolved in such a
manner that the persons handling the loans and advances portfolio are able
to get a signal at the first instance of its likely occurrance.
2.126 The need for regular and compulsory training to all operational
personnel has been separately emphasised by RBI and banks are making
efforts to expose all the staff to the training at regular intervals covering
different aspects.
Transfer Policy
2.127 In regard to the Govt. Policy on transfer/rotation of officers and
staff of the banks as also the cooperation from unions, the Ministry in a
written note furnished to the Committee stated that:
"Government of India has issued broad guidelines, as a preventive
measure, which stipulate that all officers should be rotated every 3
years and clerical staff every 5 years. Within the branch, officers and
award staff should be given job rotation at periodical intervals. Banks
have framed their own transfer policies based upon bipartite
agreements with the employees' Unions within the parame.ters
specified by the Government of India. The clerical staff posted in a
branch is generally rotated within the branch once in 6112 months as
per practice obtaining in each bank. Similarly, officers are also posted
to different sections/divisions at periodical intervals depending upon
the size of the branch/office. In so far as rotation of duties at a
branch is concerned, there is no resistance from
 47
the staff Unions. In terms of the existing transfer policy in vogue in
most of the banks. the clerical staff is transferred within the centre
after 5 years is there is more than one branch at that centre.
However. due to resistance from the staff Unions, transfers are not
generally effected, except the request transfers, where banks have
only one branch at a centre. While there is no resistance/opposition
from the Officers for transfers. the Officers' Association plead against
frequent/mid session transfers."
2.128 The rotation of duties as also the transfers play an important role
in checking the incidence of frauds in banks.
Conclusion!observation
1.1l9 From the information furnlshed to them the Committee note that
the staff was found Involved In considerable nUmber of fraud cases. Most of
the frauds are perpetrated on banks by the employees either on their own
or In collusion with outslden. EYen the frauds perpetrated by outslden
could be possible only due to laxity In the observance of laid down systems
and procedures, which could also be attributed to faDure on the part of
staff.
1.130 It Is however disquieting to note that Instead of awarding aemplery
punishment and initiating crImlnaI proceedings, the delinquent oftlclaIs wen
awarded either no punishment or very little punishment. It Is 0DIy In • very
few cases that omclals were dismissed or removed from service. In • few
other cases, the Committee obsene, the oftldals were allowed to resIp
taking a lenient view. In yet some other cases, no action was taken as the
omclals were at the verge of retirement. Other punishment awarded In
some cues Include suspension, rendering iDDOCUOUl, withholding of
superannuation benefttsl1ncrement and a number of other penalties
depending upon the gravity of misconduct, circumstances and merits of each
case. The Committee lind that there have been hardly any case where
Investlptlon resulted In conviction imprisonment.
1.131 What Is still more disquieting to note Is the fad that even tbough
gross irregularities come to the notice, the st8ft' accountabWty Is .not
examined immediately. It is examined only when the question of monetary
loss and/or write oft' arise by which time either the records are not
traceable and/or the concerned offtclals ha:ve retired or left the senlce of
the bank.
1.131 This fact can also be revealed by quoting the foll.wIng eDIDple:
Of the 16 erring oftlclals In a major case of fraud, 10 have retired or
expired; that means no action could be taken apinft them. Of the
remaining 16, action against 6 have not been initiated for want of
substantial evidence. Show cause notices have been Isaued Blalnst another 6
and the issuance of show cause notices to other foar was under ACTIVE
consideration.
1.133 In certain cases the Committee observe.Jbat the lIndin. of Chief
 48

Vigilance Omcer had not ~n accepted by dlsclpllnary authority and

lesS punishment was awarded taking a lenient view.
1.134 In the circumstances, the Committee are of firm view that
either no action Is taken or symbolic punishment Is awarded In
~mparlson to the gravity of mis-conduct.
Recommendations
1.13S The Committee, therefore, would like to make the following
recommendations:-
(I) As soon as a fraud or any Irregularity comes to notice, the
suspected omclal(s) should be rendered Innocuous the same
day.
(II) Bank should move fast and get all the records under Its
control In order to minimise the chances of tampering with or
destroying the records.
(W) Delinquent omclals found gullty should be awarded deterrent
punishment including imprisonment.
(Iv) A system of grOup accountabWty should be evolved I.e. aU
persoDDel~peratlonai and omcers connected with the area of
fraud should be held responsible for lrregularlty/frauds and
awarded suitable punishment.
(v) Disciplinery action should be taken Invariably for any kind of
laxity or negllaence shown In the observance of laid down
procedure.
(vi) Where CBI enquiry Is warranted, banks should keep a copy of
the records for parallel departmental enquiry.
(vII) In cases of compllclty or proved negligence Is Involved, lenient
view should not be taken by allowing the delinquent omclals to
resign or to retire.
Conclusion/observation
1.136 The Committee note that out of 47 complaints alleging serious
Irregularlties received against CMDslEDs, 38 complaints were
Investigated. In only 14 cases, complaints were substantiated. The
Committee are astonished to flnd from the detaOs of action taken In 8
cases that though the charges were established, no punitive action or
punishment was awarded. The same Is evident from the fact that In two
cases (one CMD and one ED) they were asked to proceed on leave.
1.137 The two other highest functionaries (CMDs) were allowed to
resign and the investigation In two other cases are In progress. It Is
only In 1 cases that their services were terminated.
1.138 In the circumstances, the Committee have every reason to
believe that In cases of frauds which result In substantial financial loss
 49

to Government, top persons are allowed to go scot free because of their

clout rat~r being subjected to exemplary punishment.
2.139 The Committee observe that the vigllance investigation is generally
not very comprehensive or effective when senior omclals and executives
are Involved. There is a tendency In such cases to shift responsibility on
the lower level functionaries. The Committee are of the view that
punishment given In such cases is not commensurate with the gravity of
the irregularity.
2.140 The Committee observe that as per instructional manual, different
functionaries are vested with powers to sanction credit facilities upto a
certain llmit with some discretionary powers to allow credit facllities over
and above the llmit bestowed upon them. All such cases where
discretionary powers have been utilised, are supposed to be reported to
next higher authority the same day for confirmation. However, the
Committee find and as deposed by the MlnistryJRB1, that quite often it
takes weeks to report to higher authority for confirmation. The
discretionary powers transgressed by executives/Chairman are also to be
ratified by the Board of Directors, at its meeting held immediately after it.
However, the Committee find that such transgression of power could be
taken up at board meeting much later by which time the credit facilities
had already been avaOed of by the borrower and the whole purpose of
ratiftcations is defeated and the Board has no option but to ratify. The
Committee regret to note that the persons who are at the helm of affain
and who are the pollcy makers do not follow the procedure laid down by
themselves.
2.141 The Committee further find that there are no instructions or
authority with any omcer at any level to oraDy direct an omcer working
under him to sanction an advance. But at times due to emergency and the
extraordinary circumstances a Chairman or an Executive may direct orally
a Branch Manager to sanction certain sums of amount. Such sanction has
to be confirmed in writing immediately. But the Committee find in one of
such cases, credit facilities were granted on telephonic instructions from
Chairman and Zonal Manager of the concerned Bank. Insplte of the
conf'U'mation sought by the Branch Manager from time to time, no action
was taken by the Central Omce of the Bank to regularise the accounts. At
the time of scrutiny in Sept., 1991, total outstanding against the flrm,
where loans were sanctioned under oral instructions were aggregated at
Rs. 11.29 crores as agalnst securities valued at Rs. 6.06 crores.
Recommendations
2.142 In the circumstances, the Committee strongly feel that the position
should be reviewed in regard to discretionary powers and recommend as
under:
(I) Since CMDs and Executives are the malo functionaries of a
Bank, any irregularity committed by them or any complaint
 50

received apInst them should be takeD ap immediately. If there Is

prinuJ facie substance In the complaints, the coDcerned person
mould be uked to proceed OD leave for fair and speedy
InvestlaatioD.
(0) All IndependeDt . .ncy· mould be enppd to Investlpte the
ConteDts of the complalntllrTegu.larlty.
(W) DIscretIonary powers mould elther be dispensed with or In case
these are atDlsed In the emaency of the circumstances, the
eucatives asin& such powers mould take fall responslbWty for any
Irreplarlty •
(Iv) When charps are substantiated, he mould Dot be allowed to
reslp bat action mould be pursued vlgoroasly and exemplary
punlshmeDt liven.
(v) After the malaftde hu coDclusively beeD proved apart from
dismissal, crlmlnal proceedings mould Invariably be initiated.
(vi) Vigilance InvestJptien should be very comprehensive and effective.
In DO drcumstances. responslbmty should be shifted OD low level
functionaries In cues wheD seDior ofIlclals and executives are
Involved.
(vii) In cues of the offeDders who have left service or retired all
Decessary steps should be takeD for lqal actioD to punish them.
(vW) Fact meet mould be circulated to other banks for lnformafloD.

1.143 In DO drcamstances, any kind of racWty-credlt, overdrawal etc.

mould be IJ'8Dted OD oral and telephonic InstructioDS.
Conclusion/ObservatioD
1.144 The Committee find that most of the banks have the system of
preparInJ qned lIst of oftken of doubtful Integrity aDd have beeD
exchanclnl the same with CBI for maintaining' clandestine surveillance.
Some banks do not exchange such Ust with CBI but use It for Internal
purposes. The oftken of doubtful Integrity, the COIIIIblttee ftnd, are Dot
posted In IeDSltlve areas and Dot liveD IndependeDt charge. The Committee
further find tIuit In some banks a close watch Is also kept OD the Ufe style
and osteDtatious speDdlng by sach starr.
RecommeDdatioD
1.145 In this COnnectioD the Committee recommeDd that all banks should
prepare Agreed LIst and exchange the same with CBI for maintaining
clandestine surveillance. They also stress the need for maintaining
surveillance OD oftlcen of doubtful Integrity. The preseDt arrangement for
DOt posting them In sensitive areas and g1v1n& them Independent charge
should be coDtinued.
 51

Conclusion/Observation

2.146 The Committee are not happy with the position. stated by the
MInIstry in reeard to review and weeding out the corrupt omcers andlor
the omcen having advene remarks. From the information furnished by the
MInIstry, they nod that only 12 omdals were weeded out in 1989, 15 in
1990 and 18 (8 from SBI and 10 from Allahabad Bank) in 1991. Taldna into
account the high inddence of involvement of bank omdals the number of
penons weeded out Is neglldble. ThIs weediq out includes state of health,
usefulness, performance etc. The Committee also note that this system of
review of service is not prevalent in aU the banks.

Recommendatlon

2.147 The Committee the~fore recommend that after completion of 30

years of service or attaining the age of 50 years, the continuance of omdals
in services should be reviewed in aD the banks and penons having doubtful
integrity/records should be compulsorily retired.

Conclusioo/Observation

2.148 The Committee note that there Is a system of living cash tewlirdl
letter of appredatloolnoting in C.R. in case of employees who have
detected the fraud. But there Is no such scheme to reward the staft'
monetarily for folOng attempts to defraud the bank thoup in their opinion
rolOng of attempted fraud Is more Important than detecting.

Recommendatlon

2.149 The Committee recommend that alert and vilflant staft' who have
foiled the attempted frauds should be reWarded monetarily IDitably
a10ngwlth appreciation letter/notlng in C.R. which should be taken into
;account 'at the time of consideration of promotion.

2.150 They also recommend that RBI should cOnsider the feulbWty of
having a spedaI type of forms for use by the staft without mentionin& their
names etc. for reporting the frauds/misdeeds of hieher ups in order to live
them Immunity from vindlet1ve actlon from the manqemenh AU I1Ich
complaints should be investlpted by a special talk force to be created under
the charge of RBI. Strict watch mould be kept on the lUMen chaqe in Ufe
style of bank employees u weD u their antecedents properly verified at the
time of recruitment.

1.151 The transfer poUcy should be strictly adhered to. However, u far
a possible mid-session transfen should not be resorted to in order to avoid
critidsmllnconvenience to bank oftldals.
 CHAPTER m
Control Mechanism
3.1 Banks have operational manual and prescribed detailed accounting
procedures and safeguards for prevention of frauds. From time to time
banks ·are also taking steps to strengthen the control mechanisms overall,
and in specific fraud prone areas. Besides that inspections carried out by
RBI, the banks are also inspected periodically by the firms of Chartered
Accountants, by the jntemal inspection and vigilance staff of banks, by
visits of officers from controlling offices etc. on regular and frequent
intervals. Reserve Bank of India has issued circulars giving comprehensive
gUidelines wherein banks have been advised to strengthen the control
mechanism with a view to eliminating scope for malpractices. RBI has also
impressed upon the banks for proper training of operational personnel so
that they appreciate the implications of laxities of following laid down
procedures and take needed care in actual working. While reporting
individual cases of frauds to RBI, the banks are also advised to indicate
the steps taken/proposed to be taken to avoid recurrence of frauds. The
banks have also been advised to report to their Boards individual cases of
frauds involving more than Rs. 1 lakh and also put up an annual Report.
3.2 keeping in view the magnitude of defrauded money the Committee
wanted to kriow whether any study has been conducted to initiate
preventive vigilance measures in their reply, the Ministry in a note
furnished to the Committee stated:
"In July-September, 1988 Govt. of India had reviewed preventive
vigilance measures, in genex:al, in banks and, in particular,
streamlining of existing rules and procedures for preventing
perpetration of frauds. In October-December, 1988. it took up for
study, preventive, vigilance measures adopted in respect of
prevention of frauds by means of theft of bank drafts and for
bringing down instances of frauds perpetrated through bank drafts.
In 1989 the Govt. again took up for preventive vigilance study (a)
issuance of bank guarantees by the banks (b) frauds/malpractices in
relation. to letters of credit and various transactions entered into by
overseas branches of Indian banks. Suitable instructions on
preventive measures were issued to all the banks in the above
matter."
Internal Inspection!Audit

3.3 Most of the banks have full fledged AuditlInspection Department of

their H.O., functioning directly under a senior level functionary whose
reporting relationship is to the ChiarmanlG .M. In some banks, audit!
inspection machinery has been decentralised and auditlinspection cells
have been created at regionaVzonal levels. The internal inspection report
their findings to their audiVmspection department and follow-up action is
initiated by this department and monitored by .the regionaVzonal audit
cells till all the irregularities detected are removed. The· internal
inspections are required to be conducted at periodical intervals. While it is
desirable to have all the branches inspected annually, every bank may not
be in a position to stick to this schedule and variation in this regard are
introduced to suit the requirements of individual institutions. In some
banks, the frequency is linked to the grading/rating of the branch, for
instance, a branch with a unsatisfactory rating may be subjected to
inspection, say, once in 6 to 9 months whereas a well run branch may be
inspected at intervals not exceeding 18 months.

3.4 All the banks have their own codified operational and inspection
manuals. Besides, there are various instructions/guidelines issued by the
concerned banks which serve as a guide/checklist to a bank inspector!
auditor. The inspectors/auditors are expected to draw upon their rich
practical experience, use their resourcefulness and judgement so as to suit
the circumstances of each case.

3.5 There are different types of auditslinspections generally in vogue in

banks viz. financial audit of branches, short au~iit or inspection, spot or
concurrent audit, revenue audit, systems audit and proprietory audit of
controlling offices. A few b~ks have introduced management audit. These
auditsl'mspections, as stated by the Ministry, differ from each other in
objectives as well as scope. AU the banks have their own codified
operational manuals. While it is desirable to tiave all the branches
inspected annually, every bank may not be in a position to stick to this
schedule and variation in this regard have been introduced to suit the
requirement of individual bank.

SpeciaVSpot Inspection

3.6 Out of 16 banks which have furnished the information, 12 banks

have the system of SpotlSpecial Audit. The remaining four banks have
reported that they do not have the system of Spot Audit in their banks.
Short Inspection
3.7 The System of Short Inspection is in vogue in 8 banks ouf of the
16 who furnished information. It has been stated that short inspection
has created greatet awareness among operating staff about the need to
guard against perpetration of frauds. These inspections have been
proved to be useful in rectifying irregularities, especially detection of
cases of exceeding discretionary powers, income leakages, unauthorised
response account entries etc.
Concu"ent Audit
3.8 In a written reply, the Ministry of Finance have submitted the
following information:
"Out of 16 banks which have furnished information, 14 banks
have reported that they have introduced the system of concurrent
audit. Bank of India and New Bank of India have reported that
the system has not been introduced by them. Ghosh Committee
on Frauds have recommended in its report that system of
concurrent audit should be introduced at all large and
exceptionally large branches. RBI have advised the banks to
implement the recommendation. The Committee has also
recommended that in respect of large accounts, say, rupees 1
crore and above, the borrowers may appoint concurrent auditors
for monitoring the accounts. This recommendation is under
examination of R.B.I."
Quick System Audit
3.9 With a view to further strengthen the existing preventive
vigilances, Quick System Audit (now known as System Audit), is
reported to be in vogue in Bank of Baroda. When asked about its
impact and whether Government intend to introduce this measure in
other banks, the Ministry in a written reply stated:
"The impact of System Audit is reported to be good by the bank.
It has helped the bank in upkeeping of balancing of books and
general house kccping as branches are required to rectify the
irregularities in a prescribed time schedule and submit a complete
rectification certificate. This also helps in creating an awareness
among the staff to be alert in observing laid down procedures."
3.10 As regards introduction of the measures in other banks, the
Ministry added:
"The Ghosh Committee on frauds has also recommended a
surprise short inspection at irregular intervals particularly of large
branches by officials at appropriately higher levels not only to
look into the general working of branches but also to ensure that
no malafide practices are indulged in by the branch officials. We
 ss
have instructed the banks to immediately introduce a system of
surprise/spot inspection of large branches."
Salnple C:hecktng
3.11 In the Bank of Saurashtra, adherence to system and procedure is
reviewed on a sample basis with a view to tonning up and tightening
procedure. Asked what method/mechanism is adopted in other banks to
enquire observance of system and - procedure, the Ministry' in a note
stated:
"Most of the banks do not have system of review of adherence to
systemslprocedures on a sample basis as such. However, this
exercise is undertaken in the course of regular annual inspection
of the branches and the branch inspections are required to lay
special emphasis to adherence t~ systems and procedures in their
report. The branches are required to initiate corrective measures!
rectify the deficiencleslirregularities in this regard in a fixed time
frame and this exercise is closely monitored by the controlling
authorities. As the process of inspections is a continuous one, it
forms part of measures to ensure the adherence to the prescribed
systems and procedures. Besides, the controllers during their
periodi,al visits also conduct sample check as a part of preventive
vigilance. A few banks have a system of sample checking called
System AuditlStudylSurprise checks by. Vigilance Department
whereby Senior Officers of the bank look into the adherence to
systems and procedures."
3.12 When asked how internal controlmachanism works, the RBI
representative, during evidence stated:
"In some banks, their is a three-tier heirarchy. In some banks,
there is a four-tier heirarchy...... There are standing instructions
for the Zonal Managers and the Regional Managers to visit every
Branch with a certain periodicity ..... The internal inspection is
required to look at, the loan proposals sanctioned by the Branch
Manager ..... Most of the frauds come to light through the internal
inspection. "
Monitoring Internal Audit
3.13 Asked whether there can be any system to monitor the internal
audit system of all banks and whether RBI has evolved any mechanism
to monitor the performance of internal audit, the RBI representative
said:
"One aspect which is looked into and discussed with. the top
management of the banks in the Action Plan meetings whic'll the
Governor takes on a quarterly basis is about the operations of
the internal audit. In the meeting, we look at the compliance of
the branches with the Inspection Reports of the internal
 S6

inspectors of·the banks and whether the periodicity of the inspection

is maintained."
3.14 It was admitted during evidence that there is no system in RBI to
monitor the quality of audit.
3.15 When attention was drawn to the suggestions made by the Ghosh
Committee on the quality of audit, it was stated that they would fully
review the present system and see that there could be improvement in the
system.
3.16 Asked to explain how they will streamline the whole process and
make the procedure fool proof or in such a way that any irregularity/fraud
is known within a short span or time, the representative of the Ministry of
Fmance explained:
"As regards improvement in the quality of audit and that of
inspection, we are proposing to set up a Board which would cover·
not only banks but non-banking financial institutions also. We will
give them more teeth than at present. They will have a strike force
to go into areas, into particular transactions which are of the nature
which need immediate consideration. We are also considering
setting up a Bureau of Frauds to investigate serious frauds because
with technology improving, the technology of frauds is also
improving. "
3.17 During evidence, it was admitted that there was absolutely no
substitute for much greater tightness and quality of internal control
mechanism of the banks. Even the Narasimham Committee had drawn
attention to the fact that the existing system of supervision of the different
Banks as well as the n~)D-banking financial intermediaries had become
weak and needed to be strengthened and had· recommended for the
establishment of separate Supervisory Board.
3.18 Agreeing with the above, the Secretary in the Department of
Economic Affairs during evidence stated:

"We are working on the proposal of the Narasimham Committee to set

up a separate Supervisory Board under the aegis of RBI. With the
establishment of this Board, which will be able to draw upon
professional expertise of Chartered Accountants and others from
outside, we will get a much higher quality and more detailed
supervision of the RBI with regard to banking system. So, a
combination of the internal control measures as well as a very basic
systems change in the method of supervision will, in my view, create
an environment in which some of the deficiencies that have come up
in the recent months, would not recur."
 57

3.19 Asked whether banking sector should be outside the control of

Government as indicated by Narasimham Committee, the Secretary,
Ministry of finance (Department of Economic Affairs) said:
"An ·efficient financial system would suggest that banks should not
be subject to direct Government control. Banks are' in the business
of collecting deposits from the public and deploying those deposits
in productive activities. They work within the broad framework and
parameters of the Government's policy. On broad policy matters,
RBI should have an active role but the individual decisions of the
Banks should note be subject to governmental control. This is what
autonomy means."
3.20 Asked to state whether the need to have a "'uniform system of
preventive vigilance for aU the nationalised banks has not felt, the
representative informed:
"We have not found, it necessary to have a total uniformity. in the
systems and procedures. Different banks have their own internal
system are procedure which have been evolved based on their branch
network, but there is a broad uniformity in the accounting
procedure. "
Statutory Audit
3.21 In terms of Section 30 of the Banking Regulation Act, 1949 the
balance sheet and profit and loss accounts of the banking companies in
respect of all business transacted by them (in case· of foreign banks in
respect of all business transacted in India) are required, to be audited by a
person duly qualified under any law for the time being in force to be an
auditor of companies. Similarly accounts of nationalised banks, SBI and its
associates are required to be aQdited under the corresponding Acts.
3.22 The main purpose of statutory audit which covers the annual
accounts and selected branches of a bank, is to ensure that the bank's
balance sheet and Audit Profit and Loss Account reflect a true and fair
view of the state of its affairs and profit and loss for the period. Such an
audit includes scrutiny of transactions to see how far they are within the
powers of the bank and also an assessment of bad doubtful debts.
3.23 Under provisions of the undernoted Acts, the accounts of all public
and private sector banks, foreign banks having branches in India are
subjected to statutory audit by the auditors appointed with prior approval
of the R.B.!.

Sr. Category of banks Act Relevant

No. Section

1. Private sector banks Banking Regulation Act, 30(IA)

and branches of foreign 1949
banks
 58

2. State Bank of India S.B.!. Act, 1955 41

3. Subsidiaries of SBI S.B.! (subsidiary Banks) 41(1)
Act, 1959'
4. Nationalised Banks Banking Companies 10(1)
(Acquisition and Transfer
of Undertakings) Act,
197011980

3.24 Thus, all the banks are already under statutory 'audit. As stated
above the audit is required to be done in respect of all bUSiness transacted
by banks. The statutes do no~ specify whether all the branches of banks
have to be individually audited'. RBI has however laid the norms in respect
of public sector' banks that all their branches willi advances over Rs. 1
crore and 25% of remaining branches (apart from those branches where
transactions of suspicious nature, alleged frauds, embezzlement of funds
etc. have come to notice) should be statutorily audited every year. This
ensures that within a period of 4 years all the branches of a bank are
audited. As far as private sector and foreign banks are concerned. RBI has
not laid down such norms. However, it is observed that generally all the
branches are being audited every year.
3.25 In regard to the role of statutory auditors and their accountability,
the representative of RBI stated during evidence:
"As far as the statutory auditors are concerned, their responsibility is,
while certifying the annual accounts of the banks to ensure that the
accounts reflect true tlIld fair value of the bank's financial position
and the Profit and- Loss Account Statement reflects the true profit or
true loss of the Bank and they are governed by the' Institute of
Chartered Accountants rules and the' Chartered Accountants' Act and
they are also governed by the rules and regulations of the Bank.
Atleast one case of statutory auditors. I can immediately recall,
where we decided to blacklist for the reasons that they had been
negligent in certifying the Annual Accounts of the Banks and have
referred these names to the Institute of Chartered Accountants for
disciplinary action."
Audit Failure
3.26 In an astonishing revelation, the Ministry of Finance have informed
that one employee of the State Bank of Hyderabad has defrauded the
bank to the extent of Rs. 1.48 crores over the period from May, 1977 to
February, 1988 by raising fictitious/double debits in Term Deposits
Accounts. The fraud was not detected even though the branch had been
audited six times by the Banks' Internal Auditors, once by a firm of
Chartered Accountants and yet another time by Inspecting Officials -of
State Bank of India.
3.27 During the study tour of the Estimates Committee, the State Bank
 59

of Hyderabad was asked what punishment WllS awarded to the defrauder

and whether accountability was fIXed on others connected with the above
fraud. The State Bank of Hyderabad has furnished the folloWing reply:
"The defrauder has been placed under suspension w.e.f. 1.3.1988.
Action like stoppage of promotionlincrement, charge sheet, caution
letter, warning, censure etc. have been taken against officers/award
staff connected with the fraud.
The CBI investigation have been completed and civiVcrimiQaI suits
filed against the defaulter and others."
Bank Audit Committee
3.28 The Bank Audit Committee which was fIrst constituted by RBI on
27th April, 1985 to enhance effectiveness of bank audit, is reconstituted
from time to time and is stated to be still in existance.
The main functions of the Committee are:
(i) Laising between the RBI and the audit profession;
(ii) achieving uniformity;
(iii) defining common terminology;
(iv) suggesting standard accounting concepts; and
(v) any other matter affecting bank audit.
3.29 The Committee also discuss Inter alia various matters such as
classification of advances under health code system, provision on bad and
doubtful debts, transparency of balance sheet and its suggestions/decisions
are taken care of for implementation whenever necessary.
Public Sector Banks and CAG
3.30 Asked whether the favour to briM the public sector banks under
the purview of audit by C&AG, the Ministry, in a wirtten reply stated that
they do not favour such a· move. The reasons which still hold good, were
communicated by the then Governor of RBI vide his D.O. letter dated
18th July, 1990 addressed to the then Finance Secretary. The arguments
put forth in the letter are as under:
(a) There are sufficient checks already in place for ensuring external
audit and inspection of commercial banks. In addition to internal
auditlinspection . machinery within banks, there is an elaborate
system of statutory external audit of the annual accounts of banks.
(b) The main .business of commercial banks is lending the resources
which are provided by depositors. Bank credit is essentially a matter
of discretion and there is necessarily an element of risk involved in
the business. Bank inspection have, therefore, to be approached in a
manner which is very different from expenditure audit.
(c) The law contains provisions for maintaining confIdentiality of a
bank's relationship with its clients. While this latter protection may
have to be gradually relaxed, a crucial consideration would be the
 60

maintenance of public confidence in the viability of commercial

banks.
3.31 In the light of further developments in the banking system, the
Ministry have also put forth certain other points for not agreeing to the
suggestion of bringing the public sector banks under the purview of
c&AG. The points are summerised below:
(i) The Finance Ministry has announced in the Parliament on 8th July,
1992, the setting up of a Supervisory Board under the aegis of the
Reserve Bank of India.
(ii) The Finance Ministe! has also announced the setting up of a Special
Bureau for handling frauds of large magnitude and extreme
complexity.
(iii) RBI are actively pursuing implementation of the Ghosh
Committee's recommendations with the banks.
(iv) RBI have started utilising the services of external auditors for
scrutinismg some specific areas of banks' working, to supplement
RBI's supervisory capabilities, wherever necessary.
(v) Introduction of a Comptroller and Auditor General audit could
slow down normal and legitimate decision-taking in the ~anking
system and may even bring about a total paralysis of the system
which would be most unfortunate.
3.32 Considering all these aspects, RBI is of the view that the audit by
the Comptroller and Auditor Gene~al should not be extended to the
nationalised banks and financial institutions. Government is in agreement
with the RBI.
Vigilance CeU
3.33 The Vigilance cells of public sector banks function at HO/CO and
ZonallRegional Office levels. The Vigilance Department is headed by
Chief Vigilance Officer who is of the rank of General or above (i.e. scale
VII and above) and functions directly under the Chairman and Managing
Director of the bank. The evo is assisted by senior level officers and
Vigilance Officers at COIHO and ZonaVRegional Office levels.
Chief Vigilance Officer
3.34 As directed by Govt. of India, the Chief Vigilance Officer (evO) is
appointed by ever), Public Sector bank and disciplinary action as well as
award of·punishment to officers drawing a salary above certain limits per
mensum (Presently Rs. 18001- p.m.) has to be effected in consultation with
Central Vigilance Commission (CVC).
3.35 In the context of appointment of an outsider as CVO, the Ministry
of Finance have stated that an impression was earlier created that in-house
evOs and staff attached to the Vigilance Department were not functioning
in an impartial manner and that there was a tendency to gloss over the
 61

irregularities, malpractices and misdemeanour etc. of colleagues and only

in very exceptional cases where there -was no other way, major
punishments were awarded. The decisions in vigilance cases- relating to
seniors were greatly influenced due to their superior positions and those
relating to other colleagues were affected by brotherly considerations being
a part of the same institution. As such, either decisions were deliberately
delayed to accomodate delinquent officials to avoid punishments, or very
minor punishment were awarded by water-shedding the finding of the
vigilance inquiries. A need was, therefore, felt to free the Vigilance
Deptts. from such pushes and pulls within the banks in order to ensure
that they functioned in a free and fair atmosphere.
3.36 As such, in 1990, CVC suggested that Chief or Vigilance Officer of
a particular Bank may be appointed as CVO of another bank on
deputation basis. This suggestion of CVC was accepted. It was, therefore,
decided with the approval of Govt. of India, that outsider officials of an
executive cadre, from another bank may be approved as evOs of the
banks so that the vigilance cases against delinquent officials were disposed
off quickly and in a dispassionate manner.
3.37 The above arrangement is found quite useful. It bas therefore, been
decided that the practice of appointing an outsider as evo in the banks
would hence forth be observed in all the public sector banks including the.
State Bank of India.
Vigilance and Inspection!Audit Department
3.38 In most of the banks Chief Vigilance Officers are also entrusted
with the task of InspectioL and Audit in order to make their role· more
effective. In this connection, the Committee enquired about the banks
which have not introduced the above. system. In a written reply, the
Ministry stated that although in most of the banks both the Departments
are entrusted to Chief Vigilance Officer, in· State Bank of India, State
Bank of Hyderabad, State Bank of Mysore, Union Bank of India and
Vijaya Bank the CVOs are not entrusted with the Inspection!Audit
Department. However, there is a close liaison between these two
Departments.
3.39 Asked to explain the justification for placing Inspection and Audit
under the jurisdiction on CVO, the Ministry stated that it is advantageous
to place both Inspection!Audit and Vigilance Department under evo as
the inspection reports contain extensive information which is very much
material and relevant to Vigilance Department specially in the areas of
preventive vigilance. Entrustment of both the Departments to the C'Tn
will also result in better communication and rapport between Vigilance and
Inspection!Audit Department and will make both the Departments more
effective.
3.40 Asked whether it will not increase their workload and thereby
hamper the investigations, the Ministry in their reply stated that no doubt,
 62
the control of two departments will increase the workload on evo,
considering the benefits de'rived from the system, it is desirable to have
both departments under the charge of cvo. It is, however. left to the
bank managements to consider whether both the departments can be
hqaded by CVO only or by·· two different officials depending upon
administrative convenience. In any case the banks will have to keep in
view the need for close coordinatioin among these departments from
vigilance angle.
3.41 In· this connection RBI had advised public sector banks on 14th
May 1985 that Cheif Vigilanee· Officer may be entrusted with portfolios
like Inspection and Audit, ACcounts, Planning and Development and Legal
matters. However, as a number .of vigilance cases arise in the areas of
investment, credit, promises, dead stock, stationery, it is not desirable for
obvious reasons to allot these protfolios to CVOs.
Functions 0/ CVOs
3.42 The cva functions as central point for co-ordinating the vigilance
activities of the bank. The role of CVO is three fold in nature i.e.
preventive, detective and punitive. The evo functioins under the overall
supervision of the Chairman and Managing Director of the bank. His role
is of an advisory nature both in the establishment of Vigilance angle and
award of punishment. This is due to the fact that disciplinary authority is
distinct from the vigilance authority, the Industrial Disputes Act and Staff
Regulations of each public sector bank govern the disciplinary proceedings
and service rules of the staff of public sector banks. The CVOs main
source of infortnation for initiating vigjlance cases are complaints. source
reports from CBI, special reports from the internal inspection teams and
specific cases referred to for advice by the other operational departments.

No. of Vigilance Cases Finalised

3.43 The information furnished by the banks to RBIIMinistry of
Finance regarding No. of vigilance cases decided and charges proved!
penalty imposed during the year 1991-92 is reprodu·ced below:

Name of the banlt. No. of No. of No. of cases

cases cases where where less
decided Charges punish-
fraud ment was
proved and awarded
penalty
imposed
 63

(A) (B) (C)

2. State Bank of Indore Information awaited from the bank

3. State Bank of Bikaner and Jaipur -do-
4. State Bank of Hyderabad 12 12· Nil
5. State Bank of Mysore 19 19 Nil
6. State Bank of Patiala 3 3 Nil
7. State Bank of Saurashtra 2 Nil
8. State Bank of Travancore 21 21 Nil
9. Canara Bank 171 156 Nil
10. Punjab National Bank 74 55 Nil
11. Andhra Bank 106 Nil
12. Corporation Bank 20 16 Nil
13. Bank of Baroda 8S 78 Nil
14. Oriental Bank of Commerce 33 Nil
15. ,UCO Bank 43 40 1·
16. Bank of India 103 98 Nil
17. Bank of Maharashtra 12 Nai
18. Syndicate Bank 2SO Nil
19. Vijaya Bank 33 Nil
20. Indian Bank 64 Nil
21. Punjab & Sind Bank Information awaited from the bank
22. Central Bank of India 88 87 Nil
23. Allahabad Bank. 182 Nil
24. Union Bank of India 15 15 Nil
25. United Bank of India 23 Nil
26. Indian Overseas Bank 40 Nil

·Punishment awarded was considered to be inadequate .and steps are being taken review of
the order of disciplinary authority.
3.44 Asked whether non-observance of system and procedure is consi-
dered staff indiscipline and whether such indiscipline are investigated, the
Ministry, in their written reply stated that :
"The banks investigate the cases where the system and procedure is
not followed owing to the staff indiSCipline. Some of the banks have
treated non-compliance with the bank's instructions as indiscipline
(e.g., SBI) whereas some have treated such non-compliance as
negligence and not as indiscipline (e.g., State Bank of Patiala)."
'Role of the Reserve Bank of India
3.45 Reserve Bank of india's responsibilities include the development of
an adequate and sound banking system for catering to the needs of
 64

industry, agriculture, trade and commerce. The Reserve Bank has been
vested with extensive powers of regulation of commercial banks and a !
segment of co-operative banks. The control is.. exercised by the Bank
through periodic inspections conducted by its own staff and follow-up
action after the inspection as also by calling for returns and information
from banks.
·3.46 The basic objective, of inspection of banks is to safeguard the
interest of the depositors and to build up and maintain a sound banking
system in confirmity with the banking laws and regulations as well as the
country's socio-economic objectives.
3.47 A system of periodical returns/reports to be submitted by the banks :
to RBI has been devised. The system serves the purpose of ensuring that :
the legal requirements with reference to cash-reserveslliquidity and other i
requirements are complied with by banks. It also provides information i
about the significant aspects of the working of banks. A nominee each of !
the RBI and Government is appointed on the Boards of public sector
banks, besides non-officials are also appointed on the Board of Private ~
Sector Banks. The system of reporting by the nominee directors. is yet
another means of knowing the trends in the working of banks. Regular
periodical inspections at ,prescribed intervals by RBI helps in assessment of
the quality of assets; estimated loan losses and adequacy of provisions
there against. The inspections also cover board aspects about the manage-
mental and organisational set-up, man-power planning, business policy and
planning, funds Management, management information system and control
and supervision over branches.
Monitoring by RBI
3.48 When asked about the monitoring and review undertaken by RBI,
the Ministry, in a written repl~-stated that as far as RBI is concerned, it
monitors and reviews the bank's c~ntrol mechanisms, supervision informa-
tion system, follow up, inspection/audit arrangements, housekeeping,
vigilance machinery, training of personnel etc. encompassing all banking
activities in order to ensure 'that guidelines suggested by RBI are being
observed by the banks. RBI has set up a Special Investigation Cell (SIC)
in 1983 for undertaking investigation and scrutiny into reported cases of
major frauds as well as snap inspections covering systems, procedures and
control arrangements in identified fraud prone areas. The investigations
also include serious complaints against top executives of banks and serious
irregularities in the working of banks. The banks have been impressed
upon from time to time for taking a serious view of irregularities
committed by its employees and initiating action to inflict punishment
befitting the seriousness on the delinquent staff.
3.49 A statement showing the number of fraud cases reviewed by RBI
during the years 1986 to 1990 (bank-wise) is given below:
Statement showing the number o//raud cases throughly reviewed by Reserve Bank o/India during the last five
years.

1986 1987 1988 1989 1990 1991 Remarks

1. State Bank of India 252 208 211 181 196 209

2. State Bank of Indore 18 38 13 16 13 9
3. State Bank of Bikaner and Jaipur 27 29 21 25 25 26
4. State Bank of Hyderabad 26 33 26 11 25 12
5. State Bank of Mysore 18 16 13 25 18 12
6. State Bank of Patiala 24 24 1{, 13 15 11
7. State Bank of Saurashtra 44e 0\
VI
8. State Bank of Travancore 51 e
9. Canara Bank 117 76 58 65 93 73
10. Punjab National Bank 106 53 32 39 65 NF
11. Andhra Bank 19 22 29 44 36 32
12. Corporation Bank 9 4 8 13 12 15
13. Bank of Baroda 61 51 57 64 59 61
14. Oriental Bank of Commerce 14 13 9 17 12 NF
 1 2 3 4 5 6 7 8 9

consolfdated figures for 1986 to 1991

15. UCO Bank 40 37 42 27 30 NF
16. Bank of India 72 52 65 60 58 59
17. Bank of Maharashtra 13 16 15 10 3 10
18. Sydicate Bank 61 82 42 50 64 70
19. Vijaya Bank 22 15 10 28 25 28
.20. Indian Bank 29 24 26 28 24 NF
2l. Punjab and Sind Bank 11 17 14 9 15 NF ~
22. Central Bank of India 53 58 37 34 ~8 45
23. Allahabad Bank 35 40 66 48 18
24. Union Bank of India 55 45 28 37 40 46
25. United Bank of India ·43 58 39 19 45 NF
26. Indian Overse~ Bank 30 25 17 30 18 N.A
27. Dena Bank 23 22 20 23 16 19
28. New Bank of India 24 13 33 20 25 NF

1112 1061 949 884 988

 67

3.50 During evidence, attention of representatives was drawn to the

Ghosh Committee· Report wherein it was mentioned, 'Though various
measures have been taken from time to time to curb the trend, the results
achieved have not been very encouraging which indicate that the measures
taken by banks either have not percolated to the operating level or have
not been acted upon ....... evolve adequate system and procedures to
strenghten internal control, monitoring and vigilance mechanisms which
alone will help to curb these losses.'
3.51 Explaining the position, the representative from RBI stated:

"We had explained that in all the banks we have very detailed
inspection manuals and there are systems and procedures which
include safeguards against perpetration of fraud, the dual control
mechanisms and then double-signatures and so on. So, the entire
gamut of operations is there, there are systems and procedures. It is
not that there was lack of procedure and systems, and the
Committee had recommended a number of new measures. The
Committee has reiterated the need to ensure that these systems and
procedures are observed both in letter and spirit and they have also
added that some new measures may also be put in place. So, it is
not as if there was total lack of systems and procedures; even the
banks which have come into the scam picture, now they have some
of the best procedural manuals which are available and it is not that
there is lack of these instructions. But they have been wilfully
disregarded. "
3.52 On being asked whether they have drawn th~ attention of the
concerned banks about their failures, the representative from RBI said:

"Over a period of time from 1968 onw~rds... a series of instructions

have been issu~ hightlighting the areas where frauds have come to
th~ notice and in each areas, instructions have been issued to the
banks. Then, we check their compliance during the inspection we
undertake called, 'Financial Inspection of Nationalised Banks,
Private Sector Banks and Foreign Banks."
Special Investigation Cell (SIC)

3.53 Special Investigation Cell was set up at Central Office of R.B.I.

with effect from 2nd May 1983 which functions as a Grievance Cell for
. conducting investigations into major cases of frauds and complaints.
Further, it was envisag~ to carry out snap inspections covering systems
and procedures and control arrangements in identified fraud-prone areas,
like grant and supervision of advances, lacunae in credit appraisal, house-
keeping (particualrly reconciliation of inter branch accounts and clearing
adjustments) etc.
 68

RBI's powers to carry out scrutinies etc.

3.54 To give a statutory backing to the process of scrutinies /
investigations which in many cases involve senior officials / executives
(including the Chief Executives of the banks) the provisions of Section 35
of the banking Regulation Act, 1949 have been amended (Banking Laws
Amendment Act, 1983) empowering the RBI to undertake scrutinies of the
affairs of the bank in the same way as regular inspections.
Investigation against Chairmen / Executives
3.55 Regarding investigations concerning the conduct of Chairmen and
Executive Directors appointed by the Appointments, Committee of the
Government, is taken up only with the approval of RBI's Governor.
~egarding investigations concerning other officials, the Chairman of the
bank is taken into confidence and told about the purpose of the enquiry.
In very special cases, where it is not considered advisable to take the
Chaimian into confidence, the case is cleared by RBI Governor.
3.56 The Cell would mainly be investigating frauds in banks where the
amount involved is Rs. 1 coroe or more. However, while this is not a rigid
cut off point, SIC also investigates into frauds of lesser amounts if more
than one bank is involved.
Broad guidelines for aspects to be looked into during investigations /
scrutinies
3.57 The scrutiny and the report broadly cover the following aspects. As
the investigation will be with reference to particular transactioMlccount or
a group of accouQts/hlisuse of discretionary powers etc., it is expected that
the investigating officer makes in depth study of the case. The report
clearly brings out the modus operan.di of the fraud, non-observation of
usual safeguard&llaid down procedures, lacunae in the system and
procedures/contributory factors, loss likely to be suffered by the bank,
security available and stpes taken/proposed to be taken for recovery, any
criminal complained lodged etc.' The report also pinpoints the
involvement! negligence of staff, if any, at various levels in the bank's
hierarchy.
Issue of Circulars
3.58 As and when it is considered necessary, the Cell also issues circulars
to all the banks, bringing out the salient features of the frauds and
indicating the lacunae in the systems, if any, and safequards to be followed
by the banks. Whenever the activities of certain borrowerslgroup of
concerns defrauding the banks are expected to have wider ramifications,
the Cell issues secret circulars to the ChairmanlExecutive Directors of all
scheduled commerical banks (excluding RBs) furnishing the, available
d~taiIs on such parties and asking them to exercise due care while granting
facilities to such parties.
Closing of Case
3.59 The cases where RBI have investigated or any information made
available to this section is taken up with the concerned banks for
comments. After RBI receive' the comments from the bank the case is
once again examined. Thereafter, the case is either taken up with Banking
Division of Ministry of Finance, Government of India or taken as closed.
3.60 RBI sends secret communications to ChairmenlE.D. of commercial
banks, pointing out the position and requesting them to treat the contents
of their letters for I their personal information and to caution the offices /
branches about the period without revealing the sources.
Snap inspection
3.61 Asked how many snap inspections have been carried out by it
during the last five years; the Ministry have informed that just one snap
inspections of the New Bank of India's Head Office at New Delhi was
conducted. It revealed that the dealing officials of the agencies and
Balance Sheet Section of the accounting department were responsible for
not detecting the wide variations between provisional expenditure and
actual expenditure under Interest Paid on borrowings in the final accounts.
Based on the findings of our investigation, RBI had come to a conclusion
that the mistake committed by the bank in drawing the balance sheet was
deliberate and not through over-sight.
Circulation of Modus Operandi
3.62 RBI has reported that modus operandi of ingenious cases of the
following 9 cases was circulated and safeguards advised to banks during the
same period:
1. Sanctioning of loans I overdrafts aga~t -thjrd party (institutional)
deposits.
2. Co-acceptance of bills drawn under Letters of Credit by banks.
3. Kite flying operations I purchase of cheques.
4. Frauds committed in few branches of a public sector bank through
Mail Transfers purported to have been issued by a branch of
another public sector bank.
5. Frauds by intercepting cheques of new accounts.
6. Frauds in banks-opening of new accounts.
7. Fraud in foreign bills purchased / negotiated and other accounts.
8. Frauds Kite flying of cheques.
9. Frauds in newly opened Account-Deposits through broker.
 70

Conclulomv'ObservatioDl
3.63 So far as inspection IIbd audit Is concerned, the Committee note that
besides the lDspec:tlon carried out by the RBI, the banks are subject to
inspection and audit bI the Internal inspection, Audit and VlgI1aDce staff of
bIlDks and statutory audit by a FIrm of Chartered AccoUDtants.,
3.64' The Committee fIIld that there Is no UDiformlty In the Internal Audit
sy~m. There are clifterent types of Audit such as Fbumclal Audit, System
Audit, Spot Audit, Concurrent Audit, Revenue Audit, Short Audit,
MllIlIlIement . Audit, Proprietory Audit etc. In vogue In dift'erent banks to
strengthen the con~l mechaDlsm. Some of the above audits may differs
from each other but the scope and objective of most of them Is more or less,
the same with dift'erent nomenclature i.e. to fIIld out deflclencles In the
syStem, to report Irreplarltles, malpractice, to detect frauds and to suggest
corrective measures for removal of deflclencles. The Committee, therefore,
conclude that the Internal Audit Is not only overlapping but over-regulated
as well. From the face of It, the system of Internal Audit looks quite
adequate to Inspect, audit and pinpoint the deflclencles in the system as also
detect the frauds d1ll'lDa their audit, but the Committee CaD not resist the
obvious iDference that IDspectlon and audit has substantially faUed to
pinpoint or hl&hlllht the IJ'OSS Irregularltleslfrauds during Its IDspectloni
audit and the frauds have been continuing for a number of years without
being detected. A glarlng example of the same Is the case of a fraud in the
State Bank of Hyderabad where an employee defrauded the Bank of
Rs. 1.48 crores for over ten yean during the period from May, 1977 to
February, 1988 by raising fictitious/double debits in Term Deposit
Accounts. The Conuilittee are shoclted to fIIld that the frauds could not be
detected even thoupthe Branch had been audited six times by the banks
Internal Auditors, once by a film of Chartered AccoUDtants and yet another
time by IDspectlna Oftlclals of State Bank of india.
3.65 The Committee further note that the quarterly meetings of RBI are
held to look at the compllance of the' Branches with inspection Reports of
the Internal Inspectors. It' Is, however, surprlsln& to note that there Is no
system in RBI to mODltor the quality of Audit. The Ghosh Committee have
also pointed out the same and have felt the need for increasing the quality
of Audit. Being custodian of all banks, the Committee feel that RBI should
exercise all roUnd control lncludln& momtorlng the quality of audit over the
inter.nal worklnl of the Banks in order to ensure observance of guldeliDes
Issued by It.
3.66 The· Committee coaslder the recommendations of the Ghosh
Committee In strenllbenlna the control mechanism adequlte and are
convinced that If the same are implemented and followed scruplously, the
incidence of frauds can come down conslderabl)" If not " -eliminated
completely. In their oplDlon what Is lackiDg Is to ensure that the mechanism
of inspectloaa Is actually followed.
 71

Recommendations
3.67 The Committee, therefore, recommend as follows:-
(i) A. uniform Internal Audit System with uniform terminology
appllcable equally to all Banks should be evolved.
(0) The Internal Audit should be independent from the management
control for their fair and impartial inspection and reporting.
Their reporting should be at Board level.
(iii) Inspectors!Auditors should be made accountable for not
detecting or reporting the lapses/deviations from the laid down
systems and procedures noticed during the course of inspection/
audit.
(iv) There should not be overlappi~ of inspection/audit and various
types of audit should be clubbed and their areas of operation
should be defined clearly.
(v) To improve the quanty of inspection/audit, persons with
adequate quaUficatlon, experience and of proven integrity should
be posted in inspection and audit department.
(vi) Periodicity of auditl1ns~tion of all the branches should be
maintained.
(vii) Supervisory Board as announced in Parliament should be set up
at an early date.
(viii) There should be a mechanism to ensure that inspection reports
are followed scrupulously.
ConclusionslObsenations
3.68 The Committee note that the Balance Sheet and Profit and Loss
Account of all banks are required to be audited by Statutory Auditors.
As per RBI norms, all branches are require.d to be audited within a
period of four years. The responsibility of· Statutory Auditors Is to
certify the annual accounts of the banks, reflecting true and fair value
of banks' fmancial position. The Auditors who are negligent, are
blacklisted.
3.69 The Committee find that the bank Audit Committee constituted
in 1985 Is still in vogue to maintain inter alia liaison between RBI and
Audit as aiso to suggest uniformity. They do not see any useful purpose
being sened by this Audit Committee.
3.70 The Committee fmd that the Government is not in favour of
bringing the· public sector banks under the puniew of audit by
Comptroller & Auditor General of India. They are not convin~d by the
reasons advanced by the Government in this regard as experience has
shown that the audit by Chartered Accountants appolated by RBI, has
proved to be an adequate deterrent to check bank frauds. They are also
 72

not convinced by the argument that the audit by C8cAG will Infringe the
conlldentlaUty provisions as the dcers of the C8cAG of India are bound by
OfIlclal Secrets Act.
Recommendations
3.71 Altholllh various control mechanisms exist In banks Uke statutory
audit, Internal audit, snap Inspection, vigilance cell, experience bas shown
that the same are not effective. The Committee recommend that urgent
steps need to be taken to strengthen these mechanisms and to make them
more effective.
3.72 WbUe the audit by statutory audiors viz. Chartered Accountants
might continue, there is need for Comptroller and Auditor General to be
closely associated with the audit of banks. The persistent stand of the
Government that it will violate conlldentiality of relationship between bank
and customer is not convincing.
3.73 There is need for greater transparency In the Final Accounts and
Balance Sheets of various banks. The Final Accounts should give clear
picture and position regarding frauds and bad and doubtful debts.
ConclusiomiObservations
3.74 Th~ <;ommittee note that .there are Vigilance CeDs with a Chief
Vi&ilance Ofter (CVO) IBach bank. They further note that since 1990,
CVOs are app.,~ted on deputation basis from other banks In order to
ensure free and fair investiptton and decision which they consider a step in
right direction.
3.7S The Committee also note that in most of the banks, Chief Vigilance
Omcers are entrusted with the tasks of vigilance, inspection' and audit to
have better coordination and thereby making their role more efl'ective.
However, some banks ~e State Bank of India, State Bank of Hyderabad,
State B.qk of Mysore, Unlon Bank of India, Vljaya Bank have not
introduced the system of entrusting both the departments under CVOs.
3.76 The Committee are not happy to find that the role of CVO or the
Vigilance Ceil is only of advisory nature. At times thelradvices are not
accepted by the disciplinary authority, which is distinct from vigilance
authority.
Recommendations
3.77 Keeping in view the benefits derived from having both the
departments under the. one head, the Committee suggest that tbe system
may be introduced In all tbe public sector banks.
3.78 The Committee expect that the advice of the Vigilance Celi would be
given due care wbile awarding the punisbment to delinquent officials and
less punlsbment should be awarded only after consultation with Vigilance
Authority.
 73

Conclusions/Observations

3.79 The Committee note that the responsibility of the development of

banklng system Des on the Reserve Bank of India. So, it Is vested with
extensive powers of regulation, inspection, supervision, review of control
mechanism, follow up etc. etc. They also nod that the Spedal Investlptlon
Cell (SIC) was set up in 1983 to investigate and scrutinize niaJor fraud cases
includin& complaints aplnst top exeCutives of banks as well as to carry out
soap inspection. The other m.m functions of RBIISIC are to Issue clrculan
bringing out saDent features of the frauds with modus operandi and the
safeguards to be followed. It also decides whether a fraud case should be
referred to the Government or it should be investlpted internally.

3.80 In regard to snap inspection, the Committee are sorry to point out
that so far only one snap inspection has been conducted.

3.81 Further, they are constrained to nod that since 1986, modus
operandi of only nine ingenious cases of frauds were circulated.

Recommendations

3.81 While banks may continue to enjoy autonomy in their operation,

there should be greater control of .Reserve Bank of India on their
functioning so as to ensure healthy growth of noancIai Sector in the country.
The Reserve Bank should ~t rest content with the Issue of Clrculan but
should also ensure that these' art actually followed in practice and deterrent
action taken against the dellnquent banks.

3.83 RBI should exerdse more effective cOlltrol over the banks and bring
about changes in service re&ulatlons renderilig staff accountability more
effective.

3.84 The Committee urge the Government to impress upon RBI to carry
out snap inspections whenever they come across with any irregularity in the
accounting and Balance Sheet of any of the banks, so that it may serve as
deterrent.

3.85 RBI should circulate modus operandi of all the ingenious cases of
frauds suggesting necessary safeguards.

3.86 RBI should consider the proposal of bringing the oveneas branches
of all Indian Banks under an umbrella corporation.
 CHAPTER IV

INVESTIGATION CONVICfION AND STATUTORY PROVISION

4.1 The guidelines in vogue for referring cases of fraud to Police and/or
to CBI for investigation, are as follows:
1. All cases of frauds excepting some minor or trivial ones should be
reported to police.
2. Following types of cases of frauds in Public Sector Bank should
be reported toCB!.
(i) Cases involving Rs. 1 lakh and above if bank employees or
bank employees in collusion with private persons are involved
and those where there are special reasons warranting CBI
enquireslinvestigation.
(ii) Frauds committed by outsiders (Private persons) ii they
involve-
(a) important firms/persons;
(b) amount involved is Rs. 10 lakhs or more;
(c) the case has internationaVor inter-state ramifications; or
(d) frauds are committed against several banks.
4.2 It has further been stated that:
"Cases of frauds which are not referred to PolicelCBI are
investigated by the banks themselves. Banks also investigate certain
cases of frauds to determine the exact amount of frauds, staff
accountability, lacunae , if any, in their systems and procedure as
also to rule out possib'lity of fraud in other areas of operations by
the delinquent officials.
As regards the lodgement of complaints with CBI the decision is
generally taken by Cent~l Office of the bank or controlling
authorities in consultation With the Chief Vigilance Officer of the
bank as per the administrative guidelines of the respective banks. In
order to minimise the delay in investigating the cases by Police
Department, the Ghosh Committee on frauds has made a
recommendation that fraud cases upto Rs. 25,000/- having
involvement of an insiders and where the bank is hopeful of
realising the entire money from the concerned employee, need not
be referred to police although such cases are cognizable offences

74
 75
under the Criminal Procedure Code. However, it is provided that
the departmental action may be initiated against the concerned
employee in the usual manner."
4.3 Number of officers of Public Sector banks convicted during 1986 to
1990 for involvement in cases of frauds/corrupt practices and the number
of employees against whom prosecution was pending at the end of each
year during 1986 to 1990 is as under:

1986 1987 1988 1989 1990

F CF CF CF CF C
No. of employ~es 51 3 88 12 99 38 73 18 82 38
convicted
No. of employees 630 217 590 220 595 325 666 252 637 287
against whom
prosecution is
pending in the
Court.

F = Fraud Cases
C = Corrupt practices
4.4 It is generally recognised that there is undue delay in investigation
by CBI. When enquired about the reasons for delay, the representative
from CBI explained the position as under:
"The CBI has made a study of delays in investigating the cases. It is
one central investigating agency which has been given cases of
various types, including murder and kidnapping, bank frauds, scam,
any type of cases. With 400 investigating officers the CBI is being
hard pressed. We have seen all these cases. We have four categories
of cases in our Anti-Corruption Department. I am not talking of
special crimes Department dealing with murder and kidnapping. It
takes 70 months to 80 months for a major fraud cases to be
investigated. One fraud case was spread over 29 months and 60
days. The period of investigation is time-consuming. A famous case
against the Manager of a bank has been delayed for 85 days. It was
registered on 31.10.85. The original documents requisitioned by the
CBI were made available by December, 1988 by the Custom
Department because their adjudication case was going on. Records
from the Overseas Division to be obtained and sent to the Bank
were requisitioned in 1987. They were collected in April, 1989.
They Bombay High Court stayed further action in one case with
regard to prosecution in January, 1988 and it continued till 1991.
 76
Interpql investigation from Yugoslavia, U.K. and South K~r~a
referred to in October, 1987 could be obtained in October, 1988<and
March, 1990. Our prosecution is being done by our legal division."
4.5 The representative furthet added:
"About the delays, the CBI itself is conscious of this fact. In fact,
. we have suggested that major frauds of this respect should be
completed in one year. Ordinarily it takes more or less six months.
Disproportionate assets cases take one year. These are the norms
whIch have been laid down in the CBI manual. Every two months
we monitor those case~. Over two-year old cases are monitored by
the Director of Board himself. We are answerable to him. Despite
this, there are delays. 1q.ese are delays which the CBI has to
answer. Some delay takes place in sanctioning of prosecution and
also in the trial also.Fill-the man is convicted or acquitted by the
Court, the general feeling is that the case is pending with the CBI.
The CBI's primary responsioility is to complete the investigation as
fast as possible. As the person who is facing investigation is a
powerful person or moneyed person, he goes to the Court and
obtains stay for three or four years. There was not a single case of
bank fraud which is pending for the last five years. This is the only
case which has been pending and I have already given the reasons
for it. There is delay in the Court because of the huge pressure of
pendency. There is a genuine case for not only special Courts but
also for special prosecuters attached to those courts to hear the case
from day to day. But now it .does not happen. Now the COl1rts
cannot give a date. The date comes after four or five months and
therefore there is delay in the 'trial. As far as Mr. Puri's case is
concerned, investigation was started in 1985, but charges were
framed in 1992 only.'
4.6 Asked whether any instances have been brought to their notice
about deliberate delay in investigation on the part of CBI, the Ministry
have stated that on the basis of information furnished to them by various
banks, they have not noticed any deliberate delay in CBI enquiry. Instead,
some banks have reported that fOT the purpose of prompt and expeditious
investigation of cases of bank fraud, the matter was taken up by banks'
Chief Vigilance. Officers with CBI and appropriately high/superior officials
of Police.
4.7 On the other hand, it was brought to the notice of the Committee
during their on-the-spot visits that CBI was not very helpful especially in
~, long drawn cases of fraud.
4.8 Asked whether they need State Government's permission to
investigate, the representative from CBI stated that they do take the
consent from the State Government.
4.9 The representative from RBI, however, denied it and stated that
 77
"since bank employees are public servants, for investigating any bank
fraud in any state, there is no need to get the consent of the State
Government. "
4.10 In this connection relevant portion of RBI Circular letter No.
DBOD :GC: 290/c 408(A)-89. dated 151211989 is reproduced below:
•• •• ••
Under the DSPE Act 1946, the SPE Division of the CBI is empowered
to investigate certain specific offences notified by the Central Government
from time to time in Union Territories. The SPE can investigate these
offences when they occur in the States also, provided the State
Governments give their consent to such exercise of powers by the SPE,
as per notification periodically issued by the Central Government. All
offences under the Prevention of Corruption Act and offences under the
Indian Penal Code which relate to bribery, corruption, forgery,
falsification of accounts, cheating, misappropriation etc. have been
included in the notifications issued by the Central Government.
4.11 The Committee enquired about the procedure being followed in
regard to investigations of complaints and allegations against Chairman!
Managing DirectorslExecutive Directors of the banks and whether
concurrence of the Ministry of Finance was required. The Ministry in a
written reply intimated the position as under:
"In accordance with the Department of Personnel and Training,
Ministry of Personnel, Public Grievances and Pensions' Circular
No. 350/16187-AVD. III dated 20th January, 1988, the procedure
required to be followed for investigations of the cases against
ChairmanlManaging Directors and other Board level officers of
banks is indicated below:
(i) All requests for inquiries into allegations relating to Banking
transactions will be referred by the Central Bureau of
Investigation, to the Secretary Department of Banking for advice
of the Reserve Bank of India. If, after inquiry, the RBI comes to
the conclusion that there is no evidence of personal corruption or
malafides, then the matter will be referred to a Committee of
officers consisting of Cabinet Secretary, Finance Secretary and
Secretary (Banking). This Committee will make recommendations
to the Minister of State for Finance and Finance Minister on
whether CBI should be given permission for further investigation.
(ii) if, in the course of the inquiry, the Reserve Bank of India comes
across evidence of personal corruption or malafides, then the
matter will be referred back to the CBI for an op~ inquiry into
the matter. For this purpose, the RBI will take in its custody all
relevant records of the bank to be handed over to the CBI.
 78

(iii) In c~s of allegations of personal corruption or malafides the

Department of Banking, on being primafacie satisfied, will give
their concurrence for further action by the CBI.
As regards other senior functionaries of banks such as Regional or
Zonal Managers, the CBI will be competent to proceed with the
enquiry without the concurrence of the Department of Banking."
4.12 Asked to point out the deficiencies they have come across or the
hinderance they were facing during the course of their investigation, the
representative from CBI, during evidence, stated:
"We have already recommended to the Government for setting up
Economic and Banking Division and it is with the Department of
Personnel. Secondly, we have asked for CBI Act. There should be
Central courts and central prosecutors so that we need not depend
upon the State to appoint the Judge. Some times there is delay in
filling up the vacancies in the State Courts for years together."
4.13 Asked whether Governmeni have ever considered the feasibility of
having a separate agency to investigate exclusively fraud cases and other
irregularities committeed in Banks, the Ministry, in a note submitted to the
Committee said:
"The Finance Minister made a statement in the Parliament in the
Budget Session that -an institution similar to the Serious Frauds
Office of the U.K. will be set up in India. The proposal to set up a
Special Bureau staffed by .officials and persons with legal and
accounting background for handling frauds of large magnitude and
extreme complexity, is being examined by the Reserve Bank!
Government. "
Delay in Courts
4.14 It has been brought to the notice of the Committee by the Bank of
India that there were cases pending in Court since 1976. In certain cases
the concerned employees have been put under suspension and their
suspension still continues pending the outcome of the court cases. Despite
the fact that the Bank is required to pay them subsistence allowance for all
these years, the Bank is deprived of manpower to that extent. In respect of
frauds, the legal process takes lots of time before punishment is awarded
to the delinquents. Due to the delay in settlement of the issue through the
present legal system, Banks enter into compromise proposals even with the
fraudulent borrowers. The vary purpose of bringing the culprits to back,
which may have demonstrative effect on the society is lost and in the
process the confidence .of the public in the Banking system is shaken off.
4.15 The Central Bank has also pointed out that scores of suits have
been pending in the court for as many as 10 to 15 years or sometimes even
20 years. In the meanwhile, the securities charged to the Bank either
disappears or its value is find -consequence. Knowing this lacunae and legal
 79

procedures, the borrowers are not at all bothered for a compromise. In

certain cases, the persons/guaranters concerned have expired even
before the banks gets the judgement in its favour. In the circumstances,
they were of the view that there should be separate courts to try and
take up bank case or a tribunal. The bank must have separate
jurisdiction so as to expeditiously deal with the number of pending suits
which will also come a long way in drastically reducing the legal cases
which are today at a phenominal level.
4.16 The same has been suggested to the Committee during inform a.
discussions with the Management of various public sector banks that
recovery of defrauded amounts could be resorted to by allowing banks
to operate existing statutes as also the setting up of Special Tribunals
for recovery of Government dues.
4.17 When asked for their views on the above suggestions, the
Ministry in a detailed note, submitted to the Committee stated as under:
"At present there is no smgle enactment which lays down the
procedure to be adopted by the banks to enforce recovery of
their dues from defaulters. The banks have to resort to the
procedures laid down under various provisions of different statutes
to enforce their rights such as:
(1) The Indian Contract Act, 1872
(2) The Transfer of Property Act, 1882
(3) The Sale of Goods Act, 1930
(4) The Companies Act, 1956 ,
(5) The Registration Act, 1908
(6) The Motor Vehicles Act, 1937
(7) The Hire Purchase Act, 1972
4.18 The Tiwari Committee which was set up to look into the
question of inordinate delay in the recovery of the dues pursuant to
legal proceedings and suggest measures, had considered three
alternatives in this regard, namely:
(i) recovery of dues as arrears of land revenue;
(ii) BOs conferring special powers in banks and financial
institutions like these avoidable to IFCSlSFC, so that they
can take possession of the undertaking for effective recovery;
and
(iii) setting up of special tribunals.
4.19 ·Having regard to the limited efficacy of the first two alternatives,
the Tiwari Committee had recommended that Government of India
should set up Special Tribunal which would adjudicate all matters
relating to the recovery of dues of the banks and financial institutions in
 80

a time bound manner. The Government of India is actively considering

enactment of comprehensive legislation for setting up of Special Tribunals.
4.20 Diversion of bank advances for purposes other than those for which
they have been granted, is one of the major fraud prone area. Keeping the
above in view i RBI has advised banks on 28th August, 1985 to incorporate
in the loan documents a suitable clause to enable them to recall the
advances granted if the banks have reason to believe that the borrowers
have not utilised the advances for the purpose for which they have been
granted. Banking Division had taken up the matter with Ministry of Home
Affairs suggesting inter-alia to make amendments to Indian Penal Code
Section 424A, for making sale' of hypothecated goods without crediting
proceeds to the account with the bank, a penal offence.
The amendment, if made, would take care of substantial number of
cases of diversion of funds. Prevention of Corruption Act, 1988 has also,
inter-alia amended Schedule to Criminal Law Amendment Ordinance (of
1944), thereby making enabling provision for confiscatioMeizure of
property acquired by means of 'fraudulent act' etc.
4.21 The perPetration of frauds or misappropriation of funds by
fraudulent mea~s involves a criminal act on the part of the perpertator of
frauds. The question of recovery of defrauded amount will have to be seen
in a different perspective as this is not recovery of bank over dues in the
course of normal banking business. While suggesting the operation of
existing Government statutes for recovery of defrauded amounts, the
banks have perhaps in mind the delinquent borrowers who try to defraud
the banks by removing/disposing of stocks, machinery etc. hypothecated to
them without their knowledge. A proposal to amend IPC which provides
for punishment or imprisonment or fine or both for removal, concealment
or transfer as also furnishing of false statement with reference to property
proposed to be or already offered as security to banks is under
consideration of the Government. The High Level Committee set up by
RBI under the Chairmanship of Shri A. Ghosh, the then Deupty
Governor, to enquire into various aspects relating to -frauds and
malpractiCes in banks, has in its Report submitted to RBI in July, 1992
recommended setting up of Special Courts at all majo! centres for hearing
bank fraud cases as this will facilitate speedy trial and ultimately help the
banks to recover the defrauded amounts without much delays.
4.22 The Committee has also called for ameding IPOCPC to ensure
punishment for economic offences and simplification of legal procedures
for immediate confiscation/freezing of assets, execution of the decree
against the delinquent borrowers/staff members. These recommendations
of the Committee are under consideration of the Government of India.
The proposed measures will speed up the trial of fraud cases and facilitate
early recovery of banks' funds locked up in fraud cases.
4.23 Earlier the Central Vigilance Commission made a suggestion in
 81

January, 1986 for considering amendment in the law so as to make

provision for confiscation of property acquired as a result of fraud. The
matter was -examined in consultation with Ministry of Home Affairs. That
Ministry intimated in October, 1988 that p.e. Act, 1988 has amended the
Criminal Law Amendment Ordiance, 1944. In view of this, a reply was
sent to eve stating therein that amendment made by p.e. Act, 1988
would meet the requirement as visualised by eve. It was, therefore, felt
that there was no need to go in for further legislation. eve also agreed
and advised not to pursue the matter further.
Conclusions/Observations
4.24 The Committee note that cases involving Rs. 1 lakh and above or
having internationalllnter state ramifications and the frauds committed
against several banks etc. are referred to CDI for investigation. Cases not
referred to PoUce/CDI are investigated by banks themselves. GeneraUy, the
decision regarding lodgement of .complaint with CBI Is taken by Central
Omce of the Dank in consultation with CVO.
4.25 AU other cases except some minor or trivial ones are reported to
police. In this connection, the Ghosh Committee recommended that fraud
cases upto Rs. 25,000 committed by stafl' memben should not be referred to
poUce provided bank Is hopeful of realising the entire amount.
4.26 It was brought to the notice of the Committee that there has been
considerable delay on the part of CDI in investigating the fraud cases.
However, from the CBI point of view, mul~ifarlous Investigations with
Umlted manpower, non-availabUlty of records/documents on time, stay
orders· f5S1led by courts and heavy work-load are some of the constraints
filced by them to complete Investigation within stipulated time.
4.27 The Committee also note that CBI Is in favour of setting up an
Economic and Banking Division and for a separate Act for prosecution of
economic offenders, They further note that a proposal to set up a Spedal
Bureau slmUar to SerIous Fraud Omce of U.K. Is under consideration of
RBI/Government.
4.28 The Committee observe that the Tewarl Committee set up to look
into the question of inordinate delay in the recovery of dues, has also
recommended for setting up of Special Tribunals which would adjudicate aU
matten relating to recovery of dues in a time bound manner. The
Committee rep'et to note that though the Report of the Tewari Committee
was submitted to the Government of India in 1984, The Government Is still
considering enactment of legislation in this regard. Thereafter, the Ghosh
Committee which submitted its report in June, 1992, has also recommended
for the setting up of such Spedal Tribunals for speedy trial of bank frauds.
4.29 The Committee are also of the view that due to present complex
legal system, there is considerable delay in the ftnaUsation of bank fraud
cases and the unscrupulous borrowers take adventage of the situation.
 82

Recommendations
4.30 As the CDI is entrusted with a number of functions and
investigations, there is an imperative need to set up a seperate Division in
CDI for investigation into fraud cases more or less on the lines of Serious
Fraud Office of U.K. As investigation into bank fraud cases requires
thorough knowledge of various banking operations it is desirable that
persons appointed in this Special Division should be acquainted with the
banking procedure and legal provisions relating to banking industry.
4.31 Relevant documents and records should be made avallable by the
banks to the CDI to ensure speedy investigation, as any delay in this regard
not only hamper Investigation but also provide opportunity to the defaulters
to tamper with or destroy the records. Disciplinary proceedings against
delinquent omcals should invariably be initiated simultaneously by
segregating the charges and preparing authenticated copies of the records.
4.32 It must be ensured that CDI is entrusted with powers to proceed
against the offenders under Prevention and Corruption Act expeditiously
and there should be no legal requirement to obtain the consent of the State
Government in this regard. If required, necessary amendments in the
relevant Law may be effected.
4.33 The proposed Division of the Dureau should be empowered to
investigate cases against bigb functionaries of the banks. Nobody should be
kept out of the purview of Law inspite of his status.
4.34 Necessary sanction/permission may be accorded to CDI within a
period of one month for initiating prosecution/trial in the Courts of Law.
4.35 As there are unusual delay in the Courts of Law in deciding the
cases of bank frauds due to heavy burdens-pendency which in many cases
remain pending for more than 10 years, Special CourtslTribunals should be
set up to investigate economic offences. Any delay in awarding punisbment
to the guilty persons wUl dilute the intensity of crime and the very purpose
for which action is initiated would be lost. Moreover, the .-elay causes
disappearance of the securities charged on the banks or there is
considerable devaluation of such securities.
4.36 DiverSIon of funds and multiple fmance against the same security as
weD as tampering with the security, removal of goods hypothecated with the
banks should be made cognizable offence, punishable under the Law.
4.37 The Tribunal may be empowered to confiscatelfreeze immediately
the assets of economic offenders including bank employees involved in
fraudsmisappropriation/embezziement. For this purpose, necessary
amendment in the relevant Ac~aw may be made.
4.38 The Police investigations are having undue delayed and help the
alleged offenders to get scot free. There should be a mechanism found out to
gearing the Ponce investigation with time bound urgency.
 83

4.39 The frauds committed by the banking sector as a whole besides the
nationalised banks have been a matter of grave concern. All necessary steps
should be urgently taken to stop the corrupt practices by fopeign banks. If
necessary suitable legislation may be made in this regard.

NEW DELHI; DR. KRUPASINDHU BHOI,

November 22, 1993 Chairman,
Estimates Committee,
Agrahayana 1, 1915(a)
 84

APPENDIX I
COMPOSmON OF TIm ESTIMATES COMMITI'EE
(1992-93)
Shri Manoranjan Bhakta - Chairman
MEMBERS

2. Shri Abraham Charles

3. Shri Rajendra. Agnihotri
4. Shri Mumtaz Ansari
5. Shri Ayub Khan
6. Shri Sartaj Singh Chhatwal
7. Shri Somjibhai Damor
8. Shri Pandurang Pundlik Fundkar
9. Shri Saqtosh Kumar Gangwar
10. Shrimati Girija Devi
11. Shri Nurul Islam
•..
~:; . 12.
13.
Shri R. leevarathinam
Dr. Viswanatham Kanithi
14. Shri C.K. Kuppuswamy
15. Shri Dharampal Singh Malik
16. Shri Manjay Lal
17. Shri Hannan Mollah
18. Shri G. Devaraya Naik
19. Shri Rupchand Pal
20. Shri Sriballav Panigrahi
21. Shri Harin Pathak
22. ShriHarish Narayan Prabhu Zantye
23. Shri Amar Roy Pradhan
24. Shri Ebrahim Sulaiman Sait
25. Shri Moreshwar Save
26. Shri Manabendra Shah
27. Shri Mahadeepak Singh Shakya
28. Shri Rajnath Sonkar Shastri
29. Shri Manku Ram Sodhi
30. Shri Braja Kishore Tripathy
SECRETARIAT

1. Shri G .L. Batra - Additional Secretary

2. Shri K.K. Sharma - Joint Secretary
3. Shri B.B. Pandit - Director
4. Shri K.L. Anand Under Secretary
5. Shri S.B. Arora - Committee Officer
 APPENDIX II
Statement of Recommendations

Sl. Para Ministry/ Recommendation

No. No. Deptt.
1 2 3 4
1. 1.31 Finance As the problem of' frauds and forgeries ~
nationalised banks have assumed serious
proportions, the Ministry of Finance/RBI
should issue necessary comprehensive guidelines
and ensure their effective implementation for
prevention of frauds.
2. 1.32 -do- There is need to strengthen the vigilance system
as well as internal audit system in various banks
in order to ensure that the frauds are detected
at the earliest.
,3. 1.33 -do- Senior officers in the bank should be. made
personally responsible for enforcing laid down
procedures strictly and in case of failure they
should be made accountable for any loss to the
bank/Government.
4. 1.34 -do- The use of computer and modem technology in
all banking operations should- be enhanced after
taking into confidence the staff unions.
5. 1.35 -do- The Advance Portfolio is a highly fraud prone
area. Frauds in this -area could be possible in
active convenience with concerned officials. So,
preventive action should be taken immediately
after the fraud comes to light or as soon as the
recovery becomes irregular.
6. 1.36 -do- Suitable measures be taken to complete
investigations of all cases of fraud urgently.
Report of investigation into cases- involving
Rs. 100 lakhs and above referred to in
Anexure-II of the Report be furnished to the
Committee within a period of six months.
7. 2.72 Finance In order to further strengthen the preventive
measures, the Committee make the following
recommendations:

85
 86

1 2 3 4
•
(i) Since fraudulent withdrawal through opening
of fictitious accounts is prevalent, the
Committee recommend that "Introduction" for
opening of the account in person should be
made mandatory/compulsory. Independent
confirmation of addresses of account holders in
all cases and not only in doubtful cases should
be done.

(ii) Sensitive paper, protectograph machines for

writing drafts, M.T., T.T., etc. should be used
without any exception.

(iii) Verification of instruments under

ultraviolet rays in all branches should be
introduced forthwith.

(iv) Writing of day book and daily tallying

should be done as a rule and should not be left
unbalanced. Branch Manager should be held
responsible for any lapse in this regard.

(v) Proper record of inward/outward

instruments should be maintained on day-to-day
basis leaving little scope for loss/destruction!
tempering with the instruments. For this
purpose, incoming and outgoing instruments
should be serially numbered and entered into
the registers at dak stage.

(vi) The differences ansmg out of non-

balancing of day book and transferred to
suspense account should not be left unbalanced
for long. The entires proposed to be transferred
to suspense account should be checked by an
officer before these at actually transferred to
suspense account.

(vii) Blank drafts, cheques and other important

documentsl"mstruments should be kept in safe
custody under dual control. In no case these
documents should be allowed to remain on the
table after banking hours are over
 87

1 2 3 4

(viii) In the case of M.T .IT.T. as per the

recommendation of the working Group of
Customers Service in Banks (Talwar
Committee), banks cannot refuse payment of
drafts for want of advice. The Committee
recommend that some procedures should be
worked out in such a ,way that the payment
could be made only either on receipt of relative
advice or confirmation through telex/telegram!
telephone/fax or any such" acceptCd practice.
(ix) Payments against uncleared cheques
should not be made as a matter of policy.
8. 2.78 Finance The Committee reeommend that arrears in
interbranch reconciliation of accounts, which is
a highly fraud prone area and causes delay in
detection of frauds, should be given topmost
priority and the entries reconciled as per time
schedul_c suggested by the Working Group.
9. 2.79 -do- The position of reconciliation should be
reviewed quarterly and corrective measures
taken including departmental action against
delinquent 6fficials,. In' no circumstances,
enteries' should be ,nowed to remain
unbalanced, beyond one yeu.
10. 2.82 -do- In regard to computerisation, th~ Committee
recommend as follows:
(i) The areas wJ:Uch have been agreed upon
and where operations could be put through
-should be computerised without any further
delay.
(ii) The staff unions should be persuaded
to appreciate the importance of mechanisation
and computerisation and not to insist upon a
restrictive use of computers at least in
reconciliation, clearing houses and other
sensitive areas which are highly fraud-prone.
(iii) The management should ~ure the
staff unions that' there will not ~ any
retrenchment and the services of sUrplus staff
will be utilised in a beuCr manner.
 SIS

1 2 3 4

(iv) The recommendations of Rangarajan

Committee, Narasimhan Committee and others
on the computerisation and automation with
which the Government is in agreement, should
be taken up with the unions and some
acceptable solution should be worked out.
(v) Large and exceptionally large branches
and branches at business centres/stretegic
lo~tions as also those transacting foreign
exchange should be fully computerised at the
earliest.
11. 2.83 Finance The Committee being well aware of the risks
involved in computerisation, also recommend:
(i) The operational personnel and
supervisory staff should be given vigorous
training before they are put to such job.
(ii) Apart from periodical training, steps
should be taken to keep them abreast with the
changes and development in this technology
from time to time.
(iii) Periodical review of programming by
supervisory staff to locate and set right any
logical error.
(iv) Restricted access to control rooms to
minimise their misues by unscrupulous
elements.
12. 2.86 -do- The Committee emphasise the need for
enforcement and strict compliance of laid down
system and procedures for prevention of frauds
m foreign exchange business. Any deviation
fJ:om the procedure should be dealt with
severely.
13. 2.87 -do- Reconciliation of nostro accounts should be
carried out regularly to detect fictitious
transactions .
14. 2.91 -do- In order to minimise the number of frauds in
Advances Portfolio, the Committee recommend
as under:
 89

1 2 3 4

(i) All loan applications should be

scrutinised on merits and examined critically
under the laid down norms without succumbing
to any kind of pressure leaving little scope for
inadequacy. The officials scrutinising tile credit
proposals should be technically trained enough
to scrutinise the loan applications properly and
only sound and viable proposals should be
entertained. Sponsoring agencies should be
impressed upon to send the--Ioan applications at
regular intervals throughout the year and not in
one bunch at the fag end of the financial year.
(ii) Proper .Ct"edit . appraisal must ~e done
taking into account all factors like borrowers
financial position, his capacity to pay back the
loan, viability of project, and other safeguards
as laid down in the manual.
(iii)" POSt sanction follow up like inspection,
physical verification of stock, actual value of
stock, proper documentation etc. should be
done regularly.
(iv) Monthly stlJtements should be based
on factual verification. Monthly as well as
randum inspection should Uso be carried out.
Any irregularity, if found, should be dealt with
promptly and higher authorities informed
accordingly.
(v) As soon as the recovery becomes
irregular, the matter should be taken up
immediately. No laxity in the matter should be
allowed.
(vi) Health code should be prescribed for
all kinds of loans. Whenever there is a change
in the health code, the matter should be
reported to higher ups for review.
(vii) In the light of experience gained, a
uniform 'not to rigid' detailed landing ,poliq
should be formulated with internal IQan review
department.
 90

1 2 3 4

(viii) The securities charged to the Banks

should be properly scrutinised, evaluated and
varified from time to time.
(ix) Banks should satisfy themselves that a
borrower does not get multiple fmance for the
same security
(x) Insurance cover should be renewed well
in time.
15. 2.92 Finance As regards unauthorised removal of
hypothicated goods, the Committee recommend
thatthe officials detailed for· supervision and
submission of stock statements should be
instructed to report the matter to higher
authorities about Bny unauthorised activity
found during their inspection. And if they fail
to report the matter, they should be held
responsible for any loss to the bank.
16. 2.93 -do- All credit facilities granted to know
unscrupulous borrowers, should be stopped
forthwith.
17. 2.94 -do- Any tampring with stocks hypothecated to the
Banks should be made a cognizable offence.
18. 2.96 -do- The Committee do not agree with the
Ministry on the question of Parliamentary
right to information and are of the candid view
that being the law making body, Parliament has
every right to have information regarding
financial position and health of the banks.
Though the Committee do not·wish to suggest
scrutiny of the individual accounts by
Committees of Parliament, they would like
these Committees to have powers to scrutinize
The banks as a whole with a view to know the
areas of weaknesses and suggest corrective
measures.
19. 2.98 Finance On the question of refinancing sick industries,
the Committee recommend that:
 91

1 2 3 4

(i) The banks should move very cautiously

while refinancing a sick industry. They should
first satisfy themselves about the viability of
industry before resorting to revival package.
(ii) A close monitoring by the operating
agency should be undertaken and the RBI
informed about the same from time to time.
(iii) No concessions/reliefs beyond the
paramenters stipulated by RBI should be
extended to sick industries under rehabilitation
package.
20. 2.135 Finance As regards staff accountability the
Committee, would like to make the following
recommendations:-
(i) As soon as a fraud or any irregularity
comes to notice, the suspected official(s) should
be rendered innocuous the saine day.
(ii) Bank should move fast and get all the
records under its control in order to minimise
the chances of tempering with or destroying the
records.
(iii) Delinquent officials found guilty
should be awarded deterrent punishnient
including imprisonment.
(iv) A system of group accountability
should be evolved i.e. all
personnel-operational and officers connected
with the area of fraud should be held reponsible
for irregularity/frauds and awarded suitable
punishment.
(v) Disciplinary action should be taken
invariably for any kind of laxity or negligence
shown in the observance of laid down
procedure.
(vi-) Whether eBI. enquiry is warranted,
banks should keep a copy of the records for
parallel departmental enquiry.
(vii) In cases of complicity or proved
negligence is involved, lenient view should not
be taken by allowing the delinquent officials to
resign or to retire.
 92

1 .2 3 4

21. 2.42 Finance The Committee strongly feel that the position
should be reviewed in regard to discretionary
powers and recommend as under:
(i) Since CMDs and Executives are the main
functionaries of a Bank, any irregularity com-
mitted by them or any complaint received
against them should be taken up immediately. If
there is prima facie substance in the complaints,
the concerned person should be asked to pro-
ceed on leave for fair and speedy investigation.
(ii) An independent agency should be en-
gagCd t~ investigate the contents of the com-
plaintlirregularity.
(iii) Discretionary powers should either be
dispensed with or in case these are utilised in
the exigency of the circumstances, the ex-
ecutives using such powers should take full
responsibility for any irregularity.
(iv)When charges are substantiated, he
should not be allowed to resign but action
should be· pursued vigorously and exemplary
punishment. given.
(v) After the malafide has conclusively
been proved apart from dismissal, criminal pro-
ceedings should invariably be initiated.
(vi) Vigilance investigation should be very
comprehensive and effective. In no circumstan-
. ces responsibility should be shifted on low level
functionaries in cases when senior officials and
executives are involved.
(vii) In cases of the offenders who have left
service or retired all necessary steps should be
taken for legal action to punish them.
(viii) Fact sheet should be circulated to
other banks for information.
22. 1.43 -do- In no circumstances, any kind of facility credit,
overdrawal etc. should be granted on oral and
telephonic instructions.
 93

1 2 3 4

23. 1.45 Finance In connection with maintaining surveillance, the

Committee recommend that all banks should
prepare Agreed List and exchange the same
with CBI for maintaining clandestine surveill-
ance. They also stress the need for maintaining
surveillance on officers of doubtful integrity.
The present arrangement for not posting them
in sensitive areas and giving them independent
charge should be continued.
24. 2.147 -do- The Committee also recommend that after com-
pletion of 30 years of service or attaining the
age of 50 years, the continuance of officials in
services should be reviewed in all the banks and
persons having doubtful integrity records should
be compulsorily retired.
25. 2.149 -do- The Committee recommend tQat alert and vigil-
ant staff who have foiled the attempted frauds
should be rewarded monetarily suitably along-
with appreciation letter/noting in C.R. which
should be taken into account at the time of
consideration of promotion.
26. 2.150 -do- They also recommend that RBI should consider
the feasibility of having a special type of forms
for use by the staff without mentioning their
names etc. for- reporting the frauds/misdeeds of
higher ups in order to give them immunity from
vindictive action from the management. All
such complaints should be investigated by a
special task force to be created under the
charge of RBI. Strict watch should be kept on
the sudden change in life style of bank employ-
ees as well as their antecedents properly verified
at the time of recruitment.
27. 2.151 -do- The transfer policy should be strictly adhered
to. However, as far as possible mid-session
transfers should not be resorted to in order to
avoid criticismlinconvenience to bank officials.
28. 3.67 -do- As far as audit and inspection is concerned, t'"
Committee, recommend as foUows:-
(i) A uniform Internal Audit System with
 94

1 2 3 4
uniform terminology applicable equally to all
banks should be evolved.
(Ii) The Internal Audit should be indepen-
dent from the management control for their fair
and impartial inspection and reporting. Their
reporting should be at Board level.
(iii) Inspectors!Auditors should be made
accOuntable for not detecting or reporting the
lapses/deviations from the laid down systems
and procedures noticed during the course of
inspection/audit.
"ilv) There should not be ovarlapping of
inspectioD. audit and various types of audit
should be clubbed, and their areas of operation
should be defined clearly.
(v) To improve the quality of inspection!
audit, persons with adequate qualification, ex-
perience and of proven integrity should be
posted in inspection and audit department.
(vi) Periodicity of auditlinspection of all
the branches should be maintained.
(vii) Supervisory Board as announced in Parlia-
ment should" be set up at an early date.
(viii) There should be a mechanism to
ensure that inspection reports are followed
scrupulously.
29. 3.71 Finance Although various control mechanisms exist in
banks like statutory audit, internal audit, snap
inspection, vigilance cell, experience has shown
that the same are not effective. The Committee
recommend that urgent steps need to be taken
to strengthen these machanisms and to make
them more effective.
30. 3.72 -do- While the audit by statutory auditors viz. Char-
tered Accountants might continue, there is need
for Comptroller and Auditor General to be
closely associated with the audit of banks. the
persistent stand of the Government that it will
 95

1 2 3 4

violate confidentiality of relationship between

bank -and customer is not convincing.
31. 3.73 Finance There is need for greater transparency in the
Final Accounts and Balance Sheets of various
banks. The Final Accounts should give clear
picture and position regarding frauds and bad
and doubtful debts.
32. 3.77 -do- Keeping in view the benefits derived from
having both the departments-Vigilance and
Inspection & Audit under one head, the Com-
mittee suggest that the system may be intro-
duced in all the public sect,?r banks.

33. 3.78 -do- The Committee expect that the advice of the
Vigilance Cell would be given care while award-
ing the punishment to delinquent official and
less punishment should be awarded only after
consultation with Vigilance Authority.
34. 3.82 -do While banks may continue to enjoy autonomy
in their operation, there should be greater
control of Reserve Bank of India on their
functioning -so as to ensure healthy growth of
financial sector in the country. The Reserve
Bank should not rest content with the issue of
Circulars but should also ensure that these are
actually followed in practice and deterrent ac-
tion taken against the delinquent banks.
35. 3.83 -do- RBI should exercise more effective control over
the banks and bring about changes in service
regulations rendering staff accountability more:
effective.
36. 3.84 -do The Committee urge the Government to im-
press upon RBI to carry out snap inspections
whenever they come across with any irregularity
in the accounting and Balance Sheet of any of
the banks, so that it may serve as deterrent.
37. 3.85 -do- RBI should circulate modus operandi of all
the ingeneous cases of frauds suggesting neces-
sary safeguards.
 96

1 2 3 4

38. 3.. 86 -do- RBI should consider the proposal of bringing

the overseas branches of all Indian Banks under
an umbrella corporation.
39. 4.30 Finance As the CBI is entrusted with a number of
functions and investigations there is an impera-
tive need to set up a separate Division in CBI
for investigation into fraud cases more or less
on the lines of Serious Fraud Office of U. K. As
investigation into bank fraud cases requires
thorough knowledge of various banking opera-
tions it is desirable that persons appointed in
this Special Division should be acquainted with
the banking procedure and legal provisions
relating to banking industry.
40. 4.31 FiJ)ance/ Relevant documents and records should be
Home made available by the banks to the CBI to
ensure speedy investigation, as any delay in this
regard not only hamper investigation but also
provide opportunity to the defaulters to tamper
with or destroy the records. Disciplinary pro-
ceedings against delinquent officials should in-
variably be initiated simultaneously by sagregat-
ing the charges and preparing authenticated
copies of the records.
41. 4.32 -do- It must be ensured that CBI is entrusted with
powers to proceed against the offenders under
Prevention and Corruption Act expeditiously
and there should be no legal requirement to
obtain the consent of the State Government in
this regard. If required, necessary amendments
in the relevant Law may ~be effected.
42. 4.33 -do- The proposed Division of the Bureau should
be empowered to investigate cases against high
functionaries of the banks. Nobody should be
kept out of the purview of Law inspite of his
status.
43. 4.34 -do- Necessary sanction/permission may be ac-
corded to CBI within a period of one month for
initiating prosecution/trial in the Courts of Law.
 91

1 2 3 4

44. 4.35 Finance/ As there are unusual delays in the Courts of

Home Law"in deciding the cases of bank frauds due to
heavy burdens/pendency which in many courts
remain pending for more than 10 Years, Special
Courtslfribunals should be set up to investigate
economic offences. Any delay in awarding
punishement to the guilty persons will dilute the
intensity of crime and the very purpose for
which action is initiated would be lost. More-
over the delay causes disappearance of the
securities charged on the bank or there is
considerable devaluation of such securities.
. 45. 4.36 -do- Diversion of, funds an4- multiple finance
against tl... same security as well as tampering
with the security, removal of goods hypothi-
cated with the banks should be made congnis-
able offence, punishable under the Law.
46. 4.37 -do- The Tribunal may be empowered to confis-
cate/freeze immediately the assets of economic
offenders including bank employees involved in
frauds/misappropriation/embezzlement. For
this purpose, neces.o;ary amendment in the relev-
ant ActlLaw may~be made.
47. 4.38 -do- The police investigatiol}s are undue delayed
and help the alleged offenders to get scot free.
There should be a mechanism found out to
gearing the Police investigation with time bound
urgency.
48. 4.39 -do- The frauds committed by the banking sector
as a whole besides the nationalised banks have
been a matter of grave concern. All necessary
steps should be urgently taken to stop:; flie
corrupt practices by foreign banks. If necessary
suitable legislation may be made in this regard.
 FRAUDS IN PUBLIC SECTOR BANKS
ANNEXURE I
(Amount in lacs of rupees)

S.No. Name of the Banks 1987 1988 1989 1990 1991

No. of- Amt. No. of Amt. No. of AmI. No. of AmI. No. of AmI.
Frauds involved Frauds involved Frauds involved Frauds involved Frauds involved

2 3 4 S 6 7 8 9 10 11 12

1. State Bank of India S90 393.89 607 626.86 490 S63.83 S06 991.26 4S7 S20.64
1- 18.90- 3-. 349.74- 6-
7SOO.00
2. State Bank of 28 72.92 26 46.69 24 203.26 32 113.94 19 603.54 -0
Bikaner & Jaipur 00
3. State Bank of Hyderabad 2S 87.34 31 292.84 10 103.04 24 74.16 14 34.73
4. State Bank of Indore 43 157.56 13 14.20 16 9.11 17 87.8S 9 77.50
'5. State Bank of MY50re 35 51.99 42 12.59 34 1044.28 34 30.86 24 12.89
6. State Bank of Patiala 19 423.48 18 4.12 13 4.01 12 36.04 9 6.39
7. State Bank of Saurashtra 8 41.62 11 6.31 14 2S.83 8 21.87 11 121.20
8. State Bank of Travancore 2S 44.37 16 10.73 16 27.31 17 35.21 14 8.92
9. Allahabad Bank 33 13.82 72 3S.44 39 103.66 31 24.97 34 2S.66
10. Andhra Bank 22 20.30 29 454.2S 37 241.23 38 799.40 3S 290.03
11. Bank of Baroda 97 16S.22 77 63.94 91 83.94 80 181.83 79 240.95
11- 18.06- 12- 29.34- 7- 92.11 - 16- 90.13- 10- 30.11
 2 3 4 5 6 7 8 9 10 11 12

12. Bank of India 100 161.53 135 208.91 114 165.75 81 255.73 96 689.03
3- 452.76- 2- 438.18- 4- 34.18- 6- 15.70- 6- 38.53
ksh
180000.00
13. Bank of Maharashtra . 33 16.26 23 24.00 15 8.53 6 1979.19 12 742.29
14. Canara Bank 141 164.37 135 91.60 134 311.05 156 2295.96 115 489.14
15. Central Bank of India 91 704.57 63 107.64 63 285.09 50 148.63 68 106.04
16. Corporation Bank 11 6.97 14 16.89 30 49.83 17 49.16 19 6.64
17. Dena Bank 28 307.50 27 24.10 32 80.38 22 24.35 20 46.16
18. Indian Bank 23 62.88 67 32.09 50 34.58 45 87.10 56 223.73
19. Indian Overseas Bank 44 180.48 72 11.43 37 772.30 46 11.04 60 18.67
.~
20. New Bank of India 13 24.01 31 122.32 17 185.46 25 774.63 19 517.28
21. Oriental Bank of Commerce 12 17.32 10 70.67 17 16.50 12 26.10 7 80.25
22. Punjab National Bank 51 123.55 33 69.31 39 140.37 63 268.40 42 218.59
23. Punjab and Sind Bank 15 385.05 13 291.15 9 10.10 15 33.70 14 198.70
24. Syndicate Bank 231 132.24 102 130.99 91 173.15 113 123.36 116 381.85
1- 0.98-
25. Union Bank of India· 82 154.52 44 127.15 53 74.11 60 374.64 65 46.05
26. United Bank of I.,dia 50 55.78 47 13.20 27 12.88 42 17.36 24 7.71
27. UCO Bank 37 ,25.93 43 44.01 27 14.33 29 131.88 57 492.18
1- O.tO- 1- 0.61- 12.25
 .~ 3 4 5 6 7 8 9 10 11 12

28. Vijaya Bank i4 15.19 36 44.25 47 280.98 33 1069.81 40 58.40

Total 1916 4481.60 1854 3466.75 1598 5170.08 1639 10774.00 1559 6541.31

+ Ksh 180000.00 +Shs 459n87

+$ 7500.00
-Frauds outside India.

.....
g
 ANNEXURE II
(Rs. in Lakhs)

Date of Amount Category of fraudslarea Involvement of Action takewpresent

reporting involved in of operations personS'firms position
the fraud

(1) (2) (3) (4) (5)

15.07.1988 117.41 Misappropriation and (i) Vikas Products & Goving (i) CBI investigation completed.
criminal breach. of Trust. Indus. (ii) Civil suit filed on 23.1.89.
(Fictitious bill receipts) (ii) Branch Manager (iii) Bank officials suspended.
(iii) Dy. Manager
(iv) Field Officer 0
05.09.1988 178.15 Cheatinjfforgery and Shri C.D. Ram, Accountant (i) CBI is investigating.
criminal breach of trust (ii) Accountant and Cash Officer
--
(unauthorised removal of suspended.
call deposits)
16.02.1989 139.30 Misappropriation and Shri S.K. Jain, Accountant (i) CBI is investigating
criminal breach of trust (ii) Civil Suits filed.
(unauthorised removal of (iii) Branch Accountant
drafts) suspended.
 (1) (2) (3) (4) (5)

09.02.1990 142.45 Unauthorised. credit facilities (i) M/s. Yamuna Chl"micals (i) CBI is investigating
(Kite flying fictitious bills) Agencies (ii) Civil/Criminal Suit
,(ii) Dy. Manager filed.
(iii) Dy. Manager suspended.
(iv) Rs. 21.89 lakhs have so far
been re~vered.

5.10.1990 340.00 Fraudulent encashment through Shri P.K. Purkayastha, Officer Shri Purkayastha, Bank Officer
forget instrument (LiC Bills) suspended.

.....
07.02.1990 388.80 Othe..-Altering inter-'bank MIs. Friends Constructions (i) Head Clerk suspended. S
advices-removing the (ii) Branch Accountant who was
instruments relating to clearing transferred, was found dead
transactions. on Railway track.
(iii) CBI/Crime Branch is in-
vestigating.
(iv) RI. 140.27 lakhs have been
recovered.

12,(16."1991 175.32 Cheating (Overdraft) MIs. Oshwal Pickles Ltd. (i) Branch Manager was allowed
to resign.
(ii) Pound Stg. 635.427 has been
written off.
(1) (2) (3) (4) (5)

13.09.1991 154.08 Fraudulent escashment Addl. Dy. Commissioner, Jammu (i) FIR lodged with Police.
(forgery)
(ii) Rs. 1.00 1akhs have been
recovered.
08.11.1989 168.59 Misappropriation and Criminal Mis. Podar Silk and Synthetics (i) CDI is investigating.
Breach of Trust. (Diversion of Ltd.
(ii) Suit filed for recover of
frauds/removal of hypothecated
dues.
goodslletting out mortgaged
premises etc.) (iii) Recoveries of Rs. 2.76 lakhs
are held in Sundry Deposits!
Protested Bills Account.
27.12.1991 554.16 Cheating and forgery Fictitious Account of Singee Family (i) CBI is investigating
Credit facilities/overdrafts (ii) The then Regional Manger.
Administration Officer, S
-
Branch Manager, placed
under suspension.
16.02.1987 228.00 Removal of stocks hypothecatedM/s. South East Training Co. Suits filed for recovery of dues.
to the Bank
30.06.1988 147.46 Manipulating of books of Shri E. Sarath Babu, Clerk and (i) CDI investigated.
accounts/opening of fictitious three officers. (ii) Civil suits filed.
accounts .(TDRslFDRs) (iii) Sh. Babu and three officer
placed under suspension.
(iv) Recoveries of Rs. 1.45 lakhs
held in Sundry Deposits
Account.
05.01.1989 988.00 Unauthorised credit facilities (i) Dynamatic Forgings Pvt. (i) CBI inve~tigated.
(L/C) , Ltd. (ii) Branch Manager, suspended
(ii) Btanch Manager (iii) Total outstanding recovered.
 (1) (2) (3) (4) (5)

24.01.1987 375.00 Unathoriaed a-edit (i) Mil. Kemin, Too" Co. Ud. (i) Branch Manager dismilled.
facilities (ii) Branch Manager. (ii) Civil Suit filed.

September, 1990 328.12 Unathoriled a-edit facilities (i) Mis. Parolia Group of (i) CDG investigated.
LlClOverdraft concerns. (ii) Civil suit filed.
(ii) Branch Manager (iii) Branch Manager suspended.
(iv) Desk Off"lCer chargesheeted
lind censured.

27.()6.1991 142.40 Fradulent encashment through (i) CDI investigating. ~

-
forged instruments and (ii) An officer of the bank
manipulation of books of suspended.
accounts. (Theft of draft book) (iii) RI. 15.98 lakhs in the
Account frozen.

26.05.1987 450.00 Fradulent documentary bills Mis. Linga IntI. Pvt. Ud. (i) Director of the firm
(S7.S09 MN) Ibills of lading. aentenced 4 yean
imprisonment.
(ii) Suit filed for recovery of
dues.
15.03.1988 438.00 Unathorised credit facilities MIs. Pamson Motors Ltd. (i) Ocp«. of Trade & Industry
is investigating.
(ii) Suit filed but fraud squad at
UK closed the investigation.
(iii) Branch Manager
(iv) Second Officer awarded
punishment in reduction of
pay scale.
(v) Default judgement-obtained""
against 7 bank officials.
(vi) Entire a.mount decided to be
written off.
.....
~
23.11.1990 107.47 Fictitious accommodation bills (i) Ws. Sharrison Tyre Co_ (i) CiviVCriminal suits filed/to
(ii) Chief Manager be filed.
(ii) CDI investigating.
(iii) Chief Manager dismissed.

31.05.1991 440.55 Unauthorised credi, facilities. (i) Mahalaxmi Group of (it Civil suit filed for recovery
(unauthorised mortgation) Accounts Masaruwala of dues.
Group (ii) CDI investigaing.
(ii) Zonal Manager (iii) The then Zonal Manager
lince retired, Criminal suit is
being filed.
(1) (2) (3) (4) (5)

17.07.1991 151.00 Unauthorised credit facilities (i) Parekh &: Sonscash (i) CBII ACB investigating
(Manipulation on records) clearing (ii) Cashier dismissed from
(ii) Chief Manager service.
(iii) Cashier (!ii) Departmental enquiry is in
progress.
(iv) National interest of Rs. 9.5
lakhs recovered.

9.09.1990 1954.53 Unauthorised credit facilities ~. Desai Group (i) Suits filed.
(UC, opening of new (ii) Departmental enqUiry in
accounts.) progress.
......
o
0'1
18.10.1991 499.54 Misappropriation and criminal General Ledger Clearing House, (i) Matter reported to CBI.
breach of trust (unauthorised Receivable Ales, and various (ii) Branch Manager suspended.
credit facilities) current account holden

09.02.1990 , 150.00 Fraudulent encashment Janapriya Fin. &: Ind. (i) FIR lodged with Police.
(KDRs) Inv. Ltd. (ii) Departmental enquriy did
not indicted ~taff
involvement.

21.03.1990 1620.59 Manipulation of books of Mr. Kuldeep Singh Marwah, (i) COl investigations in
accounts. (Inter Branch Accountant progress
Transactions/D DI1T) (ii) Departmental enquiries
conducted.
(iii) Sh. Marwah, Accountant
died on 4.2.90.
(1) (2) (3) (4) (5)

21.08.1990 440.00 Misappropriation and criminal Anadigi Instruments (P) Ltd. (i) Suit filed for recovoery of
br~ach of Trust. (credit facilities) dues.
(ii) Stock/lnventories/
properties bank deposits
attached.
(iii) CBI investigation completed
recommending closure of
case.
(iv) Court also passed orders in
this regard.
(v) Branch Manager awarded
punishment of reduction in
time scale. ....o
......
26.09.1987 292.68 Forged documents Manish Group of Industries. (i) CBI investigation completed.
(ii) The then Chief Manager
dismissed from service.
(iii) Prosecution of 4 officers and
dep!lrtmental action against
10 officials sanctioned.

10.09.1990 155.21 Cheating and Forgery (i) Mis. Tenkis Electronics (i) CDI is investigating.
Fictitious billsllntlated (P) Ltd.
(ii) Suit filed for recovery of
stock statement/manipulation
(ii) Branch Manager dues.
in bank records.
(iii) An officer in Accounts (iii) Branch Manager and Officer
Deptt. in Accounts Deptt.
dismissed.
 (1) (2) (3) (4) (5)

~.12.1989 168.56 Misappropriation and criminal (i) MIs. Agra odour Pvt. Ltd. (i) Criminal complaints lodged
\ breach of trust. (ii) Branch Manager w~th courts subsequently
I (Purchase of accommodation withdrawn.
cheque)
,. (ii) Branch Manager dismissed.

:15.05.1987 141.23 Fradulent discount of instruments (i) MIs. Lings Int. (S) Pvt. Ltd. (i) Suit fil.ed.
(bill purchase). (ii) DOH. (ii) ·The t/lree officers
(iii) Chief Officer. chargesheeted.

(iv) Chief Manager. (iii) CVC enquiries concluded.

....
~
09.11.1989 700.00 Others (Co-acceptance) (i) Tengem Comp Co & Aswani (i) an is investigating.
(Hundies) Kapoor
(ii) Branch manager suspended
(ii) Branch Manager. and chargesheeted ..
1l!.07 .1987 588.89 Misappropriation and criminal (i) MIs. Kajaco Industries (i) CBI is investigatillg.
breach of trust (H ypothecation)
(ii) Civil suit filed.
23.05.1989 108.36 Misappropriation and criminal (i) Mis. Fraternity Electronics (j) Case lodged with
breach of trust (UC/ Ltd. Enforcement Directorate.
\
Hypothecation)
(ii) Branch Manager. (ii) CBI is investigating.
(iii) Police investigating criminal
complaint.
(iv) Recoveries \held in Nominal
Account.
(1) (2) (3) (4) (5)

04.05.1989 l00.SO Misappropriation &. criminal Mis. Empress TIn Factory (i) Civil and Criminal Suits filed.
breach of trust. Pvt. Ltd. Disciplinary action against the
(Credit facilitylHypothecation) then Chief manager initiated.

19.03.1991 tlUI Unauthorised credit facilities. (i) Gurudayal Corpn. &. Others. (i) CDI is investigating.
(ii) Branch manager (ii) bank officials suspended.
(iii) Spi. Asstt. and Asstt.
cashier.

10.09.1988 160.64 Unauthorised credit facilities. (i) Mis. Amrit Industries (i) CDI indicted DM and DGM,
and Assoc.
(ii) Accused discharged 55
by Coun.
-•
(iii) After departmental enquiry.
DM dismis!led from service.
(iv) Civil suits filed.

01.03.1991 114.73 Fraudulent encashment (i) Shri S.K. Gael. (i) Complaint lodged with CDI.
(Fictitious AccountsINon- Officer.
(ii) Shri Gael, Officer
reconcilation) .
suspended.
(Iii) Disciplinary Authority
investigating.
 (3) (4) (5)
(1) (2)

Unauthorised credit facilities. (i) Ws. Doshi " Ganesh (i) CBI investigation completed
06.12.1988 321.65 and recommended
(Kite flying) Group.
prosecution of Branch
(ii) Branch Man.ger &: other manager and 3 other
officials. officials.
(ii) Officials placed under
suspension.

Unauthorised credit facilities. (i) Ws. Punjab United Forge (i) CBI investigated and
04.09.1990 554.00
(Kite flying) Ltd. recommended major penalty
against Branch manager and
(ii) Branch Manager. others.
.....
(ii) CVC recovered initiation of .....
o
major penalty against
officials.
(iii) Branch Manager placed
under suspension in some
other case
(iv) Rs. 100 Lakhs received.
325.47 Misappropriation and criminal Dhanalakshmi Con so\. (i) Suits filed.
26.02.1990
breach of trust. (Fictitious Industries.
Bills, Forged signature of
officials.
(ii) CVC recommended major
penalty against bank officials.
(iii) Regional Manager suspended.

~.10.1991 123.13 Unauthorised credit facilities. (i) ~. Coromondel Builders (P) (i) Suit filed for recovery of
!.td. dues.
(ii) Regional Manager and (ii) Regional Manager and
Branch Manager. Branch Manager suspended.
(1) (2) (3) (4) (5)

23.10.1991 202.36 Misappropiration and criminal (i) Mt. Pankaj Finance Leasing(i) Sr. Manager and Manager
breach of trust (Pledging forged Ltd. suspended.
documents. ) (ii) Civil Suit filed for recovery
of dues.
16.02.1989 119.39 Cheating and Forgery (Bill (i) Saraf Gr. & Lohia Group of(i) CBI recommended minor
purchase) (Hypothecation) Concern penalty against officials at
Calcutta
(ii} Prosecution Branch Manager·
and other officials at
Bhubaneshwar. Bombay.
(iii) Disciplinary proceeding in
progress.
26.05.1990 375.16 Unauthorised credit facilities. (i) Ws. Super Sales Corporation(i) CST investigated.
(hypothecation) (ii) Divisional Manager (ii) Divisional Manager
--
(iii) Branch Manager censured.
(iii) Branch Manager suspended.
(iv) Suits filed.
12.02.1990 591.96 Misappropiration & criminal (i) Asian Wire Ropes Ltd. (i) CBI investigated and filed
Breach of Trust (Credit facility) cases against OM .• CM and
Sr. Manager.
(ii) D.M .• C.M. and Sr. (ii) Suits filed for recm-ery of
Manager dues.
15.06.1987 326.72 Misappropiration and criminal Mis. P.S. Jain Group (i) CBI investigated
Breach of trust (ii) Civil-'Suits filed.
(iii) Compromise decree
obtained in some cases.
 (4) (5)
(2) (3)
(1)
(iv) Suitahle action taken against
bank officials.

MIs. Oriental Mot on (i) CBI investigated

167.86 Misappropiration and Criminal (i) .
12.12.1988
Breach of trust. (Hypothecation) and othe n. (ii) Civil suits filed .
(ii) Branch Manager
(iii) Branch Manager suspended.
(iv) Departmental enquiry
.,ain st other officials in
progress.
....
....
N
Malter referred to:
Irregularities in foreign (i) Fuldeep Singh & other hank (ii)
April. 1991 3.97 ers. (ii) CBI ;
exchange transactions. (Uc) offic
(iii) Directorate of Enforcement.

declined to investigate
Ws. Bridge Stone foregings (i) CBI
4.11.1988 141.01 Misappropriation and criminal (i) as file is not traceable.
Ltd.
breach of trust. (HundVfictitious However. they taken up the
(ii) Ex. Chairman and Branch
concerns) matter later on.
Manager.
I
(ii) Civil suit flied.
(iii) Ex-Chairman found
responsihle.
(iv) Branch Manager issued show
cause notice.