Large part of banks’ bad loans result of fraud: CAG

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New Delhi, July 1 (IANS) Not only is a large part of bad loans on the books of India’s commercial banks the result of fraud, but a substantial amount also does not appear to be recoverable, the country’s top official auditor said here on Friday

A “significant” part of the banks’ non-performing assets (NPAs) was a result of loans obtained by fraudulent methods, Comptroller and Auditor General (CAG) of India Shashi Kant Sharma said here on Friday.

“There is a significant part of NPAs that amount to fraudulently obtained advances,” the CAG) said at a conference on financial and corporate frauds organised by the Assocham.

“There is also the belief that a large part of these advances may have been transferred abroad and may never be recovered,” said Sharma, as growing non-performing assets of commercial banks have become a matter of grave concern in recent months.

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“In recent times, there have been frauds against institutions, frauds committed against banks, especially public sector banks that are struggling. Banking fraud can be related to technological flaws related to both the employees and the customers of the banking system,” Sharma added.

The top auditor also mentioned chit funds regulated by the state governments and the non-banking financial companies (NBFCs) as other areas of “big risks” due to their vulnerability to easy frauds.

Ten state-run banks suffered losses of over Rs 15,000 crore in the fourth quarter of 2015-16 due to provisioning to cover for bad debts. Punjab National Bank, for instance, made an operational profit of Rs 12,000 crore in 2014-15, but declared a record loss because of such provisioning.

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As per a study by Assocham, commercial banks will need to write off their losses between 40 and 70 per cent in at least 240 companies, which are under heavy debt mostly in steel, construction, power, textiles and infrastructure.

The study, conducted jointly with India Ratings and Research, also suggested asset reconstruction to cut their losses with the help of revamped asset reconstruction companies (ARCs) sector to help banks achieve a sustainable level of bank debts.

The Reserve Bank of India (RBI) estimates that the gross non-performing advances, which rose to 7.6 per cent of gross advances in March 2016 from 5.1 per cent in September 2015, could even top 8.5 per cent of total assets by March next year.

Finance Minister Arun Jaitley has said that new the bankruptcy code and debt recovery legislation will significantly help the banks deal with stressed assets. The government allocated Rs 25,000 crore in 2016-17 for the revamp of public sector banks.

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