Bill Discounting Fraud and relevance of IDEA Data Analytic

Hi,

The papers today talk about a leading Bank investigating a Bill Discounting fraud.

In recent times, the facilities offered by banks for working capital have increasingly been misused by borrowers facing cash flow stress - in particular, the trade bills discounting facilities offered by banks have been a source of frequent 'kite flying' (without actual trade transactions) for funds generation by borrowers.

What appears from the preliminary facts is the following -

a. A Bank buys a bill before it is due from a seller and credits the amount to the seller / customers account. This is a facility sellers and exporters avail of from banks to obtain finance.

b. The 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 on the due date of the bill. As these come across as normal trade transactions the bank agrees to raise the bill discounting limit with every passing transaction.

c. After a default - when a buyer fails to pay up- the seller comes up with a plausible explanation attributing product defect or cash crunch faced by the buyer for non-payment.

d. 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 balloons out of control and poses a huge delinquency risk for the incumbent bank.

Possible preventive role of IDEA Data Analytics

a. IDEA's Summarization can be used to analyse patterns i.e. count of transactions between each seller/buyer combination say per month.

b. Excessive counts can be filtered out using Direct Extraction

c. By drilling down into the number of records for high count seller/buyer combinations one can study the pattern of bill discounting amounts in the fly-out drill down window.

d. If the bill discounting amounts seem to be increasing and moving upwards from one transaction to another it could be one of the indicators of 'kite flying' warranting a detailed investigation into the arrangement.

Kind Regards

Jairam