The listed bank, which has suspended a senior official after it stumbled upon the irregularities in its Ahmedabad operations, will soon have to decide whether to provide the amount in the September-end earnings number.
A senior official of the government-owned institution told ET that the matter has been reported to the Reserve Bank of India. "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.
In typical bill discounting transactions, a bank buys the bill before it is due and credits the amount (after deducting certain discounting charge) to the customer's account. It's a facility that sellers and exporters avail of from banks to obtain finance. A fraud is perpetrated when typically a buyer and seller, acting in connivance, win the bank's confidence by carrying out a string of regular transactions where the buyer (either local or overseas) agrees to honour the payment. As these come across as normal trade transactions, the bank agrees to raise the bill discounting limit. After a default — when a buyer fails to pay up — the seller comes up with explanations like product defect or cash crunch faced by the buyer for non-payment.
Once the bank is convinced, the seller makes a new shipment, discounts a new bill and uses the proceeds to repay the bank for the previous transaction. As this is repeated for a few more shipments, the amount increases due to the interest cost.
While the specific modus operandi in the Bank of Baroda fraud is still unclear, it is possible that the customer concerned — which, according to a banker in Ahmedabad, is a textile company — had used a similar ploy.
Such frauds surface as increasingly larger amounts and frequent discounting evoke the bank's suspicion.
In recent times, the facilities offered by many banks for working capital have increasingly been misused by borrowers facing cash flow stress — in particular, the trade bills discounting facilities offered by banks has been a source of frequent 'kite flying' (without actual trade transactions) for funds generation by borrowers.
"At some point when the amount becomes too large to handle, the parties abruptly discontinue. Since in several cases, these are in the nature of unsecured finance, a bank may be left with no choice but to absorb the losses," said another banker.
Source : Economic Times