Mother Of All Losses

Losses contribute significantly to the closure of many organizations, especially banks, finance companies (NBFCs in India).

Losses are because of:

1.      Bad credit;

2.      Lower prices;

3.      Manipulation of accounts for varied reasons, including tax;

4.      Inefficient technology, wrong policies, bad processes; and

5.      Frauds.

Frauds are mother of all losses in any organization more so in banks and finance companies. Frauds emerge from external sources and in more cases with help of internal sources.

Internal source, we mean here, are employees. Human Resource (HR) contributes the most by recruiting and continuing with fraudulent employees.

Good, efficient and effective employees are rare; it applies to HR people as well. So, bad HR recruits bad employees. Even Good HR do compromise on reference check, etc., so necessary for employees in financial service companies, because of shortage of people. They come under pressure often, from the top management. Aren’t they expected to be professional? Is it fraud?

Interviewers are manipulated easily by these frauds; they are obviously smarter. It is easier with phone or web com interviews. There was a senior guy who can speak freely, only under influence of alcohol. He was recruited for #2 position of the company by a MNC, on an overseas call; he even hidden his heart ailment by resorting to a medical test in a hospital convenient to him. He went on to become the managing director, by default. He was dismissed unceremoniously when they found that he not only manipulated his resume and credentials, but also policies, processes and the worst, the people. Is it fraud?

The wrong policy and inefficient processes also contribute significantly and go to help frauds, leading to losses. Policies are set by the top management. They take policies which are at times are  high risk, just to achieve, in short term, some advantages over competitors in terms of TAT  = turn-around-time. Very rarely, even top management could orient policies just to facilitate achieving his main KRA/ KPI. Policy and process are commonly compromised when the top man is a sales guy. You cannot blame them, because a top man of any listed company in current times lives by quarters; they are under pressure to announce growth serially, QoQ and YoY.  Is it a fraud?

Major facilitator for fraud perpetrators are the decentralized credit underwriting, decentralized accounting and decentralized collateral storage. Common thread here is ‘decentralization’ and half the frauds can be stopped by having a centralized control on credit underwriting, customer accounts and collateral storage. With banks’ current service offerings and available technology on high speed Internet, centralization is cheap, efficient and effective. Branches and different regions cry foul for TAT (read ‘power’) and data. All are possible with advent of high technology, today. Inaccurate customer accounts are what all it starts with, in a decentralized environment. Is it fraud?

Credit underwriting is compromised quickly, when there is a pressure for numbers as month gets close. Many losses occur out of these end-of-month syndrome accounts. I knew a branch manager in Madurai, who would approve every file on the last days of any month while those were rejected by him at the beginning of the month. Fraudulent subordinates and the manager knew this too well, but this happened regularly every month till the company lasted. Is it a fraud?

Losses out of internal frauds are about 1% of assets under finance and run into a few thousand crores for India. Unfortunately, a fraction of it only goes to these internal frauds; remaining goes to facilitators.

What are they worth in terms of sales?