Lens on Fraud Prevention – National Housing Bank Training Program
Even as the banking industry in the country is reeling under the NPA menace (See a separate blog Non Performing Loans,) it behooves the lending industry to look at the critical components that collectively propel the NPA to such magnitude. One such critical component of the NPAs happens to be ‘Frauds in the industry’. In this context, it is indeed perfectly befitting and heartening to see the Housing Finance regulator, National Housing Bank (NHB) organize a full scale training program on Fraud Prevention. The two and half day training program, held in Marriot, Hyderabad (11th to 13th August) saw enthusiastic participation from housing finance companies, SCBs and RRBs among others….over 50 participants in all.
I had the delightful opportunity of participating in this training program as a trainer and conducted a session on Frauds in Housing Finance – Financial and Operational Aspects and Risk Mitigation, followed by a case study discussion. The participant mix consisted of people from across functions such as Risk Containment, Credit & underwriting, Operations, Audit, Business and Branch Management. It was really reassuring and heartening to see that some of the core concepts and values of lending got validated in the interactions with this group. What did come out very clearly was due to the pressure of market competition, volumes and targets, things are done, that otherwise would not stand the test of prudence. I present some of these items hereunder.
Inadequate / incomplete title search reports
It is well known and appreciated that Housing Finance is by itself a complex product and much more so in a country like India with such diversities all over that remain unparalleled. The legal records in the sub-registrar offices in the country (in most locations) remain in a state that fails to promise ‘perfection’ or ‘completion’. And so the moot question raised was ‘What is the legal validity of the title search reports and the legal opinions given by the empanelled lawyers?’ Many participants felt that at times the lawyer reports are kept open with the usage of language such as ‘property is clear and marketable’ subject to 1, 2 and 3. Or they leave it to the financier to take a call. And the search reports remain incomplete, because the records in the sub-registrar’s office are not complete. The result is, all this does not stop lending. In the rush of meeting targets, financing does not stop. Lenders still go ahead with these incomplete legal reports. Therefore, this remains an open risk, at least in the cases, where the reports are incomplete.
Project Approvals
Project approvals involve a thorough check of legal documents of the project under question. However there are several issues in project approvals such as builders not sharing documents honestly, concealing any pending litigations, concealing facts about existing mortgage on the property, not in possession of revisions to approved plans etc. An approval that is given by the financier, with these issues unresolved, raises questions on open risks in project approvals. To compound it further, it is an accepted practice with many financiers where builder projects get approved simply if the project has been approved by any other financier. If project A is approved by one or two reputed HFCs or Banks, some lenders automatically approve those projects, without further scrutiny of legal documents. To a question to the entire participant group on whether, given the pressures of business, it is acceptable to approve projects based on approvals by other financiers, the answer was a resounding ‘No’. So then why are some players in the industry doing it?
Supervisory Dictats and Pressures – Is it ok to Blow the Whistle?
‘My Supervisor tells me to do it. What can I do?’
This was a comment that was made by one of the participants and was silently acquiesced by some others. Business Pressures, market competition push people to limits that they personally are not prepared to go. Voicing dissent would mean that the dissenter is sidelined or perhaps branded as an obstacle for growth and becomes a target of negative reaction from various units. So then, should the wannabe dissenter just remain quiet and follow what he or she is told to do? Recent events in an NBFC where several senior level people had to separate from the organization due to some frauds has proven that if an individual is in the know of something that is not right, and if he /she remains quiet about it, he / she can be asked to leave. It was collectively felt by the group that, if there is something that is not acceptable, the concerned individual should document in writing, i.e send an email to his / her senior colleague, stating that what is being done is not correct and he or she is doing it only because it is the approved organizational policy / process. But do organizations give adequate protection to individuals who muster the courage to blow the whistle? Something that the key decision makers should introspect on.
Calling a spade a spade
For the industry to get the most out of its efforts in Fraud Prevention, all constituents on the lending side will have to collectively gear up the courage to call a spade a spade. Many things in the industry are today done simply because it is ‘accepted market practice.’ There have been many events in the recent two decades to prove the disastrous consequences of blindly following the ‘market practice’.
Perhaps it’s time that there is some collective thought and action on these and other related issues by various players in the industry that could help in opening the knots, make some breathing space and reduce stress in the lives of scores of employees.
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