An estimated Rs 100-crore co-operative bank scam has been unearthed in Kerala. The fraud was carried out by pledging properties to draw fresh loans without the knowledge of original owners by an unholy nexus involving bankers, bank administrative officials and local real-estate mafia.
What has come out so far, according to industry officials and local reports, is only the tip of the iceberg. Probes are leading to local politicians and bank officials, and it is a gauge of the actual depth of the scam, which allegedly took place for about six years.
Karuvannur Co-operative Bank
At the heart of the matter is the Karuvannur Co-operative Bank in Thrissur district. Till recently, the bank was a well-trusted local lender with a deposit base of Rs 290 crore, and a loan book of Rs 270 crore. These are not updated figures but based on publicly available data. The bank is controlled by the Left parties and has party members on its administrative panel.
According to the bank’s website, it has five branches and one extension counter in Thrissur. The website says the bank started in 1921 and has 13 members on its director board. The President of the Board is K K Divakaran, a local CPM leader, according to reports. The bank is a popular institution in the district.
Last year, many borrowers who had drawn loans from the bank, pledging their properties, started receiving notices that warned about outstanding dues on loans and the possibility of recovery proceedings, if the dues aren’t paid immediately. The only difference here was that these were borrowers with regular repayment record and, in most cases, there were no overdues.
The question arose: how did the loan accounts show overdue amounts?
On getting the notices, these borrowers rushed to the bank’s branches. Complaints were registered with the bank and the police. A probe began and what came out, subsequently, was a bank fraud that had no parallel in the co-operative banking industry.
There were complaints about this bank years ago but the warning signals were ignored till the matter came to a head. An audit report was submitted to the Registrar of Co-operative Societies in October 2020 but there was no action for about nine months.
Fake loans, 46 accounts: How the fraud happened
The audit by the Joint Registrar of Cooperative Societies found that these property documents were used illegally to borrow again by a nexus of of bank officials, director board members and some individuals belonging to the local real-estate mafia.
Loans were drawn using the same property documents already pledged in the bank and using fake signatures and letter heads. Preliminary estimates suggest that 46 documents were pledged and money was credited to different accounts, local reports said. Complete details are not known. An email questionnaire sent by Moneycontrol to Karuvannur Bank didn't elicit any response.
When the fraud surfaced, all hell broke loose and panicked depositors rushed to the branches to withdraw money.
"I have significant deposits in the bank. Looking at news reports, I'm worried. The bank has said there is no issue with deposits. We are waiting for details," said one depositor, a resident of Karuvannur, on condition of anonymity.
Investigations have found that money thus generated through fraud was allegedly used for real-estate transactions, including construction activities and purchase of land parcels. The idea was to return the loan amount from such transactions after selling real-estate properties. This went on for six years but COVID-19 changed the course.
Real-estate deals came to a halt during the pandemic and the chain of transactions came to a grinding halt. That's when default notices were issued. It is not clear whether loans were drawn from the same bank or other banks.
In the meantime, there was a rise in customer complaints and demand for probe. The whole issue had a political dimension, too. The Karuvannur Co-operative Bank is controlled by the ruling CPM and the party has already clarified that those involved in the scam will not have a place in the party.
According to reports, the police have booked six bank employees, including administrative members, for colluding with the real-estate mafia to divert funds. A case has been registered against six people — secretary TR Sunil Kumar, branch manager MK Biju, senior accountant CK Jilse, commission agent AK Bijoy and accountant of a supermarket under the bank, Raji Anil, and mediator Kiran, according to a report in The Hindu, quoting Irinjalakuda Circle Inspector MJ Jijo.
A larger issue
The Karuvannur scam is the latest scandal in the state after the Popular Finance fraud last year and a series of similar incidents involving several smaller co-operative banks. Interestingly, while the Karuvannur probe is on, yet another co-operative bank fraud too was reported in the Mugu Co-operative Bank in Kasaragod district. This Rs 32-crore fraud was allegedly committed by certain officials. Details of the scam are yet to be known.
What happened in Karuvannur Co-operative Bank is not an isolated case. Similar incidents have been reported in the sector, ravaged by dual regulation, poor governance and involvement of local politicians.
Co-operative banks are highly vulnerable to corruption due to light-touch regulations and poor standard of corporate governance. Rural Co-operative Banks, larger in number, are facing the brunt more, while, post the Punjab and Maharashtra Co-operative (PMC) Bank episode, urban co-operative banks, the bigger ones, have got some regulatory attention (RBI has more powers to govern these banks now). But the issue of dual regulation with respect to smaller co-operative banks still persists.
“The main issue with co-operative banks is political involvement at the local level. These banks are effectively run by politicians. There is very little the RBI or any other agency could do because of lack of resources and the issue of dual regulations,” said a former RBI official to Moneycontrol on condition of anonymity. RBI inspections take place in co-operative banks only once in two years in most cases.
A number of co-operative bank frauds have been reported in the country over the past few years, including the infamous PMC Bank scam, where a majority of the loans were sent to a single corporate group in violation of norms. According to RBI rules, no bank can lend more than a certain limit to a specific group.
The RBI has been clamping down on erring co-operative banks over the last few years. In 2020, the RBI had unleashed a big clampdown on co-operative banks. In the recent past, the central bank had cancelled the licence of four co-operative banks. These are Vasantdada Nagari Sahakari Bank, Karad Janata Sahakari Bank, CKP Co-operative Bank and the Mapusa Urban Co-operative Bank of Goa.
In 2020 (as Moneycontrol earlier reported
), the RBI had issued almost 106 directives, either restricting their business operations or extending the period of existing directions. About 60 of them were in the second half of the year. In other cases, the regulator imposed a monetary penalty. The RBI crackdown on co-operative banks continues in 2021 as well. In most cases, the findings point to poor governance and dubious deals.