Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Stocks

Suckered: Bank Of Baroda Sees a 375 Cr. Fraud And Quietly Takes The Hit, But Who is the Company That Frauded Them?

Bank of Baroda has an interesting footnote in the Sep 2015 results:

Fraud in Bank of Baroda

Wow, you think. 375 crores! That’s a lot of moolah to lose in one fraud. But apparently, this was in a bill discounting fraud in Ahmedabad:

There is a suspected fraud. An internal probe is on. If the money cannot be recovered, the bank will have to take a hit… An established company is involved, but I’m not in a position to disclose the name… We sensed something was wrong when a few bills bounced,” said the person who declined to share details as an investigation is underway.

It is understood that one of the bank’s offices in Ahmedabad ended up discounting bills against which the underlying trade transactions were fake or non-existent.

Bill discounting is like this – you go to the bank saying person X has to pay me for this transaction. But he’ll pay me after a few months, so why don’t you collect on this bill, and give me some money right now? The bank is expected to then check the antecedents of all parties involved and then pay a discounted value – so for Rs. 100 on the bill, it might pay only Rs. 90, and the rest is like interest. The bank actually lends to the customer who is supposed to pay the bill.

The scam is when the bank can’t collect on the bill, and therefore loses the money. Sometimes this can happen after years of successful discounting, where a bank’s customer happily discounts bills which are eventually paid, in multiple transactions. This allows a bank to increase the limits of discounting and then, one fine day, the other party refuses to pay the bank the bill amount.

The bank must be forced to reveal the entity that frauded it and recover the money. How can they lose Rs. 375 cr? And write off the whole amount? The discountee is in India and cannot just run away with the money – it would take a heck of a lot of suitcases to convert that money to cash. So it’s probably in some bank somewhere, and the RBI can trace it?

Apparently, the defaulter is a textile company, according to Business Insider. Any discounting transaction involves legal work that says that if the end-customer won’t honour the bill, then the person who discounted it should pay up – and if he doesn’t, he’s a wilful defaulter. Guess what, BoB hasn’t even uploaded its wilful defaulter list for the September quarter. If they do, we’ll know the company name at least.  (Their biggest wilful defaulter in the June quarter is “Jalpa Textiles Private Limited” but we can’t be sure this is the company involved, and the amount they have apparently defaulted is just 28 cr.)

If we want to fix the banking system, this is a good place to start. Name the fraudulent company, and take it to court. Sell its assets and recover whatever money can be recovered. Otherwise we’re going to have a “quiet” default, and everyone will shush it away and forget about it. 375 cr. is not huge nowadays, but it’s a heck of a lot of money to lose to a bill discounting fraud, especially when they know who the “established textile company” is.

(Note: this is a different fraud from the Rs. 6000 cr. forex scam we saw in BoB around the same time. That fraud will not really hit BoB books, other than perhaps an RBI fine. But this 375 cr. fraud is hurting shareholders as we speak)