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RBI admits to fraud deals by co-op banks

Rakesh P Sharma & Janaki Krishnan

The Reserve Bank of India has for the first time formally admitted the "fraudulent transactions" entered into by the co-operative banks in the recent government securities scam.

In a letter to the chairman of the Joint Parliamentary Committee probing into the market crisis of March 2001, the apex bank has said, "Though no securities were acquired or delivered, funds were parted with by the banks directly to their brokers purportedly for acquiring government securities. The transactions continued to be undertaken through the same brokers despite no securities being delivered in physical form or scripless form."

The RBI, in its letter, has iterated repeatedly that violations are "not merely irregularities, but manifestly fraudulent transactions entered into by some of the co-operative banks".

It has pointed out that the transactions were more in the nature of clean advances to the brokers under the guise of payment for government securities, which were not delivered.

According to RBI, the co-operative banks violated all RBI guidelines -- despite RBI instructions that brokers should not be involved in the settlement of transactions in government securities, the payments were made directly to the brokers; large value transactions were undertaken in the physical mode in violation of RBI guidelines that transactions in gilts are to be undertaken only through the subsidiary general ledger account; a disproportionate part of the transactions were put through certain brokers though RBI stipulates that transactions with any broker should not exceed 5 per cent of the total transactions entered into by the bank during a year.

Other guidelines issued by RBI in regard to investment transactions such as having an investment policy, management oversight, internal controls, audit among others have been floated resulting in losses to the banks, the apex bank has observed.

Financing brokers in violation of RBI guidelines, issue of power of attorney to brokerage firm for mobilisation of funds and for deployment of resources, undertaking transactions with brokers or their affiliates as counter parties and delivery of securities without funds being received are some of the other violations pointed out by the central banking authority.

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