Housing Loans & Various Types of Frauds Detected by Banks


After the various big Bank scams of the period from 1990s, Banks felt that it is necessary to spread their risks by advancing monies to individuals, specially against mortgage of immovable property, by means of housing finance. This kind of advance has not only spread the risk and also generated lot of economic and civil construction activities. The defaults in housing finance was almost negligible. Therefore, it was considered as a very good business proposal for all the Banks to go in for housing finance. Thus, there was an unhealthy competition between various Banks/Financial Institutions and many Banks/FIs aggressively tried to capture the housing finance business and many a times circumventing the requisite security aspects of such advances. Since competition between Banks & FIs was so severe, many Banks & FIs ignored the basic safety measures. Thus the entry of large scale fraudsters in the housing finance became easy.

Many Banks did not insist upon taking Legal Scrutiny Reports i.e. prior to entertaining the loan proposal, copies of the documents submitted by the intending borrower is given to the panel lawyers, who would take search in the Land Records and other records to ascertain that the documents submitted by the borrower are genuine and there are relevant entries in the Land Records maintained by the State and that there is chain documents atleast for a period of 13 years, so that the credentials of the borrower is established.

Obviously, this verification of documents takes time in view of the fact that in Sub-Registrar’s Office and Land Record’s Office, there is hardly any facilities and since large number of such Applicants for housing loan are emanating, Banks feel that is causing delay in disbursing of their loan and to meet the competition and to avoid cost and delay in making disbursal of loans, Banks/FIs avoided taking Legal Scrutiny Reports. Therefore, Banks started disbursing loans without taking search, thus opening flood gates for the fraudsters to submit bogus documents and submit coloured zerox to show that they hold original documents and Banks/FIs were cheated by unscrupulous people.

Various types of frauds could easily be committed on the financial sector by these unscrupulous people, because Banks/FIs started resorting to unhealthy competition, ignoring safety device.

Various types of frauds committed are as under:-

(1) Fabrication of Income Certificate, Balance Sheets,etc.

With a view to get larger amount of money than the capacity of the borrower to repay, the borrowers were induced to produce bogus income certificate and balance sheets,etc. Thus Banks granted larger amount of loan, which the borrower could not repay resulted into frauds. Verification of documents was not made compulsory to avoid disbursal. Thus number of frauds took place on this methodology.

(2) The 2nd type of fraud committed are that the Bankers hand over the Bankers Pay Order while disbursing loan in the hands of the borrower himself, and in many cases the borrower resorted to frauds by opening a false Bank Account in the name of the Payee of the Pay Order, which should be actually the Vendor or the Builder, but the Pay Order issued by the Bank are encashed through opening a bogus bank account and the borrower himself started decanting the money without handing over the Pay Order to the Vendor, thereby the Vendor has not received any money and the borrower has encashed the same. This kind of frauds could take place, because Banks were very negligent in handing over the Pay Order of the sale price to the Borrower himself, and many borrowers out of their ingenuinity, open separate bank account and encash the same without there being a sale transaction or procuring any immovable property. Thus the borrower has not purchased any property but the amount has been paid to him by the Bank, which he has encashed fraudulently. Thus Bank’s money are at stake.

This kind of fraud could have been avoided by making the borrower to write the Account No., Bank and Branch Name of the Vendor and the Banks insisting upon issuing Pay Order stating the Account No., Bank and Branch Name of the Vendor, so that the Pay Order could have been encashed in that account only, and the borrower is asked to produce a request letter from the Vendor that the money should be paid by means of Pay Order payable to his specified Bank Account. The Pay Order ought to have been handed over to the Vendor or his representative who visits the Registration Office for executing the Sale Deed and his signature should have been obtained against delivery of the Pay Order. Under no circumstances, the Pay Order should be handed over to the Borrower.

(3) Over valuation of the property

In this kind of fraud, the Valuers in the panel of the Bank join hands with the borrower and give an exorbitant Valuation Report and induce the bank to give higher loans than what the property deserves. Thus borrower would use the money for other than procuring the property and he will not be in a position to repay the same, as there is no asset to sustain the repayment. This kind of frauds can be avoided by giving valuation work to 2 different Valuers, if the amount advanced is more than Rs.10 Lacs or so, and even the Bank Officers must enquire about the market price of the said property, before disbursal of the loan.

(4) Multiple Financing

The borrower make one genuine document and pay the stamp duty, Register the same with Sub-Registrar, etc. Thereafter, take a colour zerox of the same and make some changes in the documents and submit to various Banks for the same property and if these coloured zerox are handed over to Panel Advocates, and Panel Advocates take inspection of the records, he could find out that this property has already been mortgaged to another bank and the fraud can be detected prior to disbursement of the Loan. Where the Banks are not engaging Advocates for taking search, the incidence of coloured zerox fraud are more and frequent.

(5) Title Deeds are forged

There are instances of borrower producing false title certificates by printing Advocate’s Letter Heads and submitting the same to the Bank, showing that the Bank’s Panel Advocate has given the Title Certificate. To avoid such type of frauds, the Bank should hand over the papers directly to the Panel Advocates and the Advocates should send the Legal Scrutiny Report in a Sealed Envelope to the Bank. If this kind of procedure is followed, producing false Certificates can be avoided.

In early 2000, even stamp duty was shown to have been paid by franking the Sale Agreement with huge amount of stamp duty,shown as paid. It came to be subsequently known as Telgi Scam. Telgi has purchased Franking Machine from Government Printing Press as scrap and he started using parallel franking work and received crores of Rupees from various fraudsters causing thousands of crores of loss to the Exchequer and Banks, as the Banks advanced huge money and the entire transactions were bogus. In many cases, even all stationery, receipts,etc. belonging to Government were printed and made forged documents and the Banks relied upon the same and disbursed the loan. If search would have been taken, this kind of frauds can come out openly before disbursal of the loan.

(6) Bookings of Under construction Flats

In this case, under construction flats are booked and the documents are registered and after taking the loan, the borrower would go to the Builder and cancel the booking and the Builder refunding the money to the borrower without the knowledge of the Bank.

Many a times, original documents of Sale Deed deposited are with the Bank while creating Equitable Mortgage and Banks do not insist upon all relevant documents, thereby, as and when the Share Certificate is issued by the Society, the borrower would take the Original Share Certificate alongwith zerox copies of Sale Deed,etc. and go to another Bank and take loan on the same property. Hence, Banks should insist upon Original Sale Deed, Society’s NOC,etc.

In Mumbai or places where Unit Holders in a building are forming into a Statutory Body, NOC from that Body must be taken on record signed by atleast 2/3 office bearers of the said Body and preferably the Bank should verify from the Society about the genuineness of the NOC issued by the Society to mortgage the flat and the Society should certify that there is no earlier mortgage and they will not register any further mortgage on the said property.

Interest Rate on housing loans are reduced to the minimum, so that maximum number of genuine borrowers can get the benefit of having their own residence or business premises. Therefore, the margin of profit in such transactions for the Bank was so low that they could not take up the huge bad debts. Hence, the Banks have now tightened the screws and also increased the rate of interest and by that genuine borrowers are suffering. Banks and FIs must be properly guided by Indian Banks Association or some Statutory Authority and see that minimum basic parameters for disbursal of housing loan must be set, and all Banks must comply with the same, so that all are on equal ground level. Because there was no Statutory Body regulating the housing finance disbursement, each Banks/FIs started competing with each other and flouting the rules & regulations and safety requirements, thus burned their fingers in housing finance. Now many of the Banks are facing huge financial burden on account of this fraudulent transactions.

It is our experience that if the Banks were to insist upon taking search of the Land Records by engaging Lawyers, the chances of detecting the frauds are more, though inspite of having searches by Advocates, the incidence of frauds cannot be totally eliminated but in most of the cases it can be arrested.

State Government must give more importance to safety for these Banks/FIs, by providing adequate facilities at the Land Records Department, so that Advocate’s Search Clerks may have adequate infrastructure made available, so that he can take inspection of the records without any haste. In many of the places, the Land Record Books are in torn condition for years together and Search Clerks cannot verify for these particular number of years, and thereby there is large scale scope for frauds. In many of the progressive States, there is a system of Advocates applying to the Land Records Office and they give Certificate of Non-Encumbrance at a nominal cost. Thus the chances of frauds are eliminated in such States on this account.

In Land Records Department, there is hardly any sitting arrangement to enable Search Clerks to take search comfortably, and one book is available and there are more than 100 people waiting to take search. Hence, the Court Clerks to meet the deadline of time limit, just pay the search fee and bring the receipt and say that they have taken the search. This kind of frauds can be avoided, if the State Government takes adequate care to maintain Land Records and make available extract and Non-Encumbrance Certificate, without any delay.

In Maharashtra, the entire Land Records are being computerized. May be down the line in 2 or 3 years, we may be in a position to get Non-Encumbrance Certificate on the computer itself. If that happens, all Banks may go in for Non-Encumbrance Certificate before disbursal of the loan. The Banks should also insist upon the State Governments maintaining a detailed Register at the Sub-Registrar’s Office so that even if Equitable Mortgage is created by the Bank, must be entered compulsorily in that Register, so that the instances of double mortgage by using coloured zerox and fabricated documents could be arrested.

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