Fake Loan Applications, Banking and Real Estate Nexus: The Story of the Rs 100 Million Karuvannur Cooperative Bank Scam
Yet another scam has shocked hundreds of customers at a Kerala-based cooperative bank. The modus operandi involved taking out loans using ownership documents without the knowledge of the land owners. But there is more than meets the eye.
A cooperative bank scam estimated at Rs 100 million has been discovered in Kerala. The fraud was carried out by compromising properties for new loans without the knowledge of the original owners through an unholy nexus involving bankers, bank clerks and local real estate mafia.
What has come out so far, according to industry officials and local reports, is just the tip of the iceberg. The investigations are leading local politicians and bank officials, and it's an indicator of the true depth of the scam, which allegedly took place for about six years.
100 Million Karuvannur Cooperative Bank Scam
At the heart of the matter is the Karuvannur cooperative bank in Thrissur district. Until recently, the bank was a trusted local lender with a deposit base of Rs 290 million and a loan book of Rs 270 million. These are not updated figures, but publicly available data. The bank is controlled by left-wing parties and has party members on its administrative panel.
According to the bank's website, it has five branches and an extension desk in Thrissur. The website says the bank started in 1921 and has 13 members on its board of directors. The chairman of the board is K K Divakaran, a local CPM leader, according to reports. The bank is a popular institution in the district.
Warning signs
Last year, many borrowers who had borrowed from the bank, compromising their properties, began receiving notices warning of outstanding loan installments and the possibility of repossession procedures, if installments are not paid immediately. The only difference here was that these were borrowers with a regular repayment history and, in most cases, there were no arrears.
The question arose: how did loan accounts show past due amounts?
Upon receiving the notifications, these borrowers rushed to the bank's branches. The complaints were registered with the bank and the police. An investigation was launched and what subsequently came out was bank fraud that was unparalleled in the cooperative banking industry.
There were complaints about this bank years ago, but the warning signs were ignored until the matter reached a critical point. An audit report was submitted to the Registrar of Cooperative Societies in October 2020, but there was no action for approximately nine months.
Fake Loans, 46 Accounts: How the Fraud Happened
The audit carried out by the Joint Registry of Cooperative Societies found that these ownership documents were illegally used to borrow again by a nexus of bank officials, members of the board of directors and some individuals belonging to the local real estate mafia.
The loans were made using the same property documents already compromised at the bank and with false signatures and letterheads. Preliminary estimates suggest 46 documents were compromised and money credited to different accounts, according to local reports. Full details unknown. An email questionnaire sent by Moneycontrol to Karuvannur Bank did not get any response.
Panic spreads
When the fraud broke out, all hell broke loose and terrified depositors rushed to the branches to withdraw money.
"I have significant deposits in the bank. Looking at the news, I am concerned. The bank has said that there are no problems with deposits. We are awaiting details," said a depositor, a Karuvannur resident, on condition of anonymity.
Investigations have found that the money thus generated by fraud was allegedly used for real estate transactions, including construction activities and the purchase of parcels of land. The idea was to repay the loan amount from such transactions after selling real estate. This continued for six years, but COVID-19 changed course.
Real estate deals came to a halt during the pandemic and the chain of transactions came to a complete halt. That's when the default notices were issued. It is not clear whether the loans were obtained from the same bank or from other banks.
Meanwhile, there was an increase in customer complaints and the demand for investigation. The whole issue also had a political dimension.
The police have reportedly booked six bank employees, including administrative members, for colluding with the real estate mafia to divert funds. A case has been registered against six persons: Secretary TR Sunil Kumar, Branch Manager MK Biju, Chief Accountant CK Jilse, Commissioner AK Bijoy and the accountant of a bank-dependent supermarket, Raji Anil, and Mediator Kiran, according to a report in The Hindú, citing the inspector of the Irinjalakuda circle, MJ Jijo.
A bigger problem
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 cooperative banks. Interestingly, while the Karuvannur investigation is ongoing, another cooperative bank fraud was also reported at the Mugu Cooperative Bank in Kasaragod district. This 32 million rupee fraud was allegedly committed by certain officials. Details of the scam are not yet known.
What happened at Karuvannur Co-operative Bank is not an isolated case. Similar incidents have been reported in the sector, devastated by double regulation, poor governance and the involvement of local politicians.
Cooperative banks are highly vulnerable to corruption due to loose regulations and poor standards of corporate governance. The more numerous rural cooperative banks face the worst of the worst, while after the Punjab and Maharashtra Cooperative Bank (PMC) episode, the largest urban cooperative banks have received some regulatory attention (the RBI has more powers to govern these banks now). But the problem of double regulation with respect to smaller cooperative banks still persists.
Political participation
“The main problem with cooperative banks is political participation at the local level. These banks are effectively run by politicians. There is very little that the RBI or any other agency could do due to lack of resources and the problem of dual regulations, ”a former RBI official told Moneycontrol on condition of anonymity. RBI inspections are carried out at cooperative banks only once every two years in most cases.
Various cooperative bank frauds have been reported in the country over the past few years, including the infamous PMC bank scam, where the majority of loans were sent to a single business group in violation of regulations. According to RBI rules, no bank can lend more than a certain limit to a specific group.
The RBI has been cracking down on failing cooperative banks for the past few years. In 2020, the RBI had unleashed a major crackdown on cooperative banks. In the recent past, the central bank had canceled the licenses of four cooperative banks. They are Vasantdada Nagari Sahakari Bank, Karad Janata Sahakari Bank, CKP Co-operative Bank and Mapusa Urban Co-operative Bank of Goa.
By 2020 (as Moneycontrol previously reported), the RBI had issued nearly 106 directives, either restricting its business operations or extending the period of existing instructions. About 60 of them were in the second half of the year. In other cases, the regulator imposed a monetary penalty. The RBI's crackdown on cooperative banks also continues into 2021. In most cases, the findings point to poor governance and dubious deals.
A cooperative bank scam estimated at Rs 100 million has been discovered in Kerala. The fraud was carried out by compromising properties for new loans without the knowledge of the original owners through an unholy nexus involving bankers, bank clerks and local real estate mafia.
What has come out so far, according to industry officials and local reports, is just the tip of the iceberg. The investigations are leading local politicians and bank officials, and it's an indicator of the true depth of the scam, which allegedly took place for about six years.
100 Million Karuvannur Cooperative Bank Scam
At the heart of the matter is the Karuvannur cooperative bank in Thrissur district. Until recently, the bank was a trusted local lender with a deposit base of Rs 290 million and a loan book of Rs 270 million. These are not updated figures, but publicly available data. The bank is controlled by left-wing parties and has party members on its administrative panel.
According to the bank's website, it has five branches and an extension desk in Thrissur. The website says the bank started in 1921 and has 13 members on its board of directors. The chairman of the board is K K Divakaran, a local CPM leader, according to reports. The bank is a popular institution in the district.
Warning signs
Last year, many borrowers who had borrowed from the bank, compromising their properties, began receiving notices warning of outstanding loan installments and the possibility of repossession procedures, if installments are not paid immediately. The only difference here was that these were borrowers with a regular repayment history and, in most cases, there were no arrears.
The question arose: how did loan accounts show past due amounts?
Upon receiving the notifications, these borrowers rushed to the bank's branches. The complaints were registered with the bank and the police. An investigation was launched and what subsequently came out was bank fraud that was unparalleled in the cooperative banking industry.
There were complaints about this bank years ago, but the warning signs were ignored until the matter reached a critical point. An audit report was submitted to the Registrar of Cooperative Societies in October 2020, but there was no action for approximately nine months.
Fake Loans, 46 Accounts: How the Fraud Happened
The audit carried out by the Joint Registry of Cooperative Societies found that these ownership documents were illegally used to borrow again by a nexus of bank officials, members of the board of directors and some individuals belonging to the local real estate mafia.
The loans were made using the same property documents already compromised at the bank and with false signatures and letterheads. Preliminary estimates suggest 46 documents were compromised and money credited to different accounts, according to local reports. Full details unknown. An email questionnaire sent by Moneycontrol to Karuvannur Bank did not get any response.
Panic spreads
When the fraud broke out, all hell broke loose and terrified depositors rushed to the branches to withdraw money.
"I have significant deposits in the bank. Looking at the news, I am concerned. The bank has said that there are no problems with deposits. We are awaiting details," said a depositor, a Karuvannur resident, on condition of anonymity.
Investigations have found that the money thus generated by fraud was allegedly used for real estate transactions, including construction activities and the purchase of parcels of land. The idea was to repay the loan amount from such transactions after selling real estate. This continued for six years, but COVID-19 changed course.
Real estate deals came to a halt during the pandemic and the chain of transactions came to a complete halt. That's when the default notices were issued. It is not clear whether the loans were obtained from the same bank or from other banks.
Meanwhile, there was an increase in customer complaints and the demand for investigation. The whole issue also had a political dimension.
The police have reportedly booked six bank employees, including administrative members, for colluding with the real estate mafia to divert funds. A case has been registered against six persons: Secretary TR Sunil Kumar, Branch Manager MK Biju, Chief Accountant CK Jilse, Commissioner AK Bijoy and the accountant of a bank-dependent supermarket, Raji Anil, and Mediator Kiran, according to a report in The Hindú, citing the inspector of the Irinjalakuda circle, MJ Jijo.
A bigger problem
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 cooperative banks. Interestingly, while the Karuvannur investigation is ongoing, another cooperative bank fraud was also reported at the Mugu Cooperative Bank in Kasaragod district. This 32 million rupee fraud was allegedly committed by certain officials. Details of the scam are not yet known.
What happened at Karuvannur Co-operative Bank is not an isolated case. Similar incidents have been reported in the sector, devastated by double regulation, poor governance and the involvement of local politicians.
Cooperative banks are highly vulnerable to corruption due to loose regulations and poor standards of corporate governance. The more numerous rural cooperative banks face the worst of the worst, while after the Punjab and Maharashtra Cooperative Bank (PMC) episode, the largest urban cooperative banks have received some regulatory attention (the RBI has more powers to govern these banks now). But the problem of double regulation with respect to smaller cooperative banks still persists.
Political participation
“The main problem with cooperative banks is political participation at the local level. These banks are effectively run by politicians. There is very little that the RBI or any other agency could do due to lack of resources and the problem of dual regulations, ”a former RBI official told Moneycontrol on condition of anonymity. RBI inspections are carried out at cooperative banks only once every two years in most cases.
Various cooperative bank frauds have been reported in the country over the past few years, including the infamous PMC bank scam, where the majority of loans were sent to a single business group in violation of regulations. According to RBI rules, no bank can lend more than a certain limit to a specific group.
The RBI has been cracking down on failing cooperative banks for the past few years. In 2020, the RBI had unleashed a major crackdown on cooperative banks. In the recent past, the central bank had canceled the licenses of four cooperative banks. They are Vasantdada Nagari Sahakari Bank, Karad Janata Sahakari Bank, CKP Co-operative Bank and Mapusa Urban Co-operative Bank of Goa.
By 2020 (as Moneycontrol previously reported), the RBI had issued nearly 106 directives, either restricting its business operations or extending the period of existing instructions. About 60 of them were in the second half of the year. In other cases, the regulator imposed a monetary penalty. The RBI's crackdown on cooperative banks also continues into 2021. In most cases, the findings point to poor governance and dubious deals.
