CASE STUDY

FRAUD PREVENTION IN HOUSING FINANCE

Prepared by: SineEdge Consulting Pvt. Ltd.

Note:
This case study is prepared only for learning purposes. The facts mentioned in the case
are fictional and put together to facilitate understanding of the concepts. However, all
type of incidents covered here have been observed in real life experience with many
financiers.

Copyright with SineEdge Consulting Pvt. Ltd. If any part of this material / case study
is to be used elsewhere, the same can be done with the permission of SineEdge giving
due credits.

Case of Aalok Reddy

Fraud Prevention Case Study
Chandan is the manager in-charge of credit appraisals and loan sanctions in the Mumbai
branch of Capital Bank. Capital Bank offers all kinds of lending products to its customers.
Home loans is one of its main products.
On the 24th of March 2014, Deepak the sales manager in the Mumbai branch, had logged
in a home loan application of a customer named Mr.Aalok Reddy. Mr.Reddy had applied
for a loan of Rs.75 lacs to buy an apartment in Mumbai. The super built-up area of the
property was 1250 sq.ft. The government circle rate in the area where the property was
located was Rs.5000 per sq.ft. Mr.Reddy worked as Head Finance and Treasury of
Chanakya Pharmaceuticals Ltd (CPL). Mr.Reddy had mentioned to Deepak that CPL had
its head-quarters in Hyderabad and was setting up its operations in Mumbai. Very soon
they would have a large office and a large number of employees working in Mumbai.
Deepak had also learnt from Mr.Reddy that CPL was a big company and had a turnover of
more than Rs.1000 crores. This was the first loan that was being done by Capital Bank for
an employee of CPL. Given the profile of the company, Deepak was keen to explore more
business from CPL.
Deepak had advised Mr.Reddy that the Bank would not fund any part of Cost of Property
that is not included in registered agreement to sell. The maximum LTV allowed by the
Bank was 75%. The market valuation done by an empanelled valuer of Capital Bank
showed the market value of the property as Rs.1.05 crores. Deepak also got the legal title
of the property checked by the banks empanelled lawyer, who gave a clear report and
mentioned that the Bank must collect the original registered agreement to sell from the
customer before disbursement. After receiving the legal and valuation reports, Deepak
called Mr.Reddy on 30th March 2014. Even though 30th March 2014 was a Sunday,
because of the month-end (also year-end) all loan staff in Capital Bank were working that
day.
Deepak: Mr.Reddy, Ive got your property appraisals done. It is all clear. However, the
registered value in the copy of the agreement to sell you have given is Rs.60 lacs. Hence
the maximum loan we can give you is Rs.45 lacs. Our LTV cap is 75%.
Mr.Reddy: Deepak, I need a higher loan amount. Not less than Rs.75 lacs. I can get the
agreement to sell revised for Rs.1 crore. You should not have a problem then to fund me
Rs.75 lacs.

Deepak: Sure sir. In that case there would be no problem.

Mr.Reddy: You can collect the copy of the revised agreement to sell in an hour from my
residence. I have given you all the other documents you asked for. I will also give you my
salary slip for March 2014.got my March salary yesterday. As already mentioned to you
several times, I need the disbursement urgently as I need to make the payment to the
seller positively on 1st of April. Otherwise I lose the deal. All my income papers are in
order. All verifications have been done by you. Just ensure that I get my disbursement by
tomorrow evening positively. If you get my work done satisfactorily, I will refer you to
many of my colleagues and friends to take loans from your Bank.
Deepak: Sure sir. I will ensure that you get the disbursement by tomorrow.
Deepak then went across to Chandan.
Deepak: Chandan, have you completed the appraisal of Mr.Reddys case? I must get this
case disbursed by tomorrow at any cost as there is lot more business coming from CPL.
And for your information, Mr.Reddy is getting his Agreement to sell revised to Rs.1 crore.
I am getting the revised copy of the agreement to sell in an hours time along with his
March 14 salary slip.
Chandan: Deepak, I have all the documents and verification reports. Will be able to give
you my decision only by tomorrow. I am not sure if you can also disburse the case
tomorrow itself. And by the way, how come the registered value of the agreement to sell
suddenly increasing from Rs. 60 lacs to Rs.1 crore? Sounds strange to me. Is it being done
only to get a higher loan amount?
Deepak: I see nothing wrong with that. Whateverplease note. I must disburse the case
tomorrow at any cost. Lot of future business from CPL is at stake. Mr.Reddy is a very
senior person. His salary is really comfortable for us to look at Rs.75 lacs loan. All
documents are in order and the loan is safe. Just do it.
Chandan: I would see what I can do.
Deepak left. Chandan then pulled out the file of Mr.Reddy and reviewed the documents.
2 days ago, Mr.Reddy had come to meet Chandan in the office for a Personal Interview.
All the details gathered by Chandan in the personal interview with Mr.Reddy and from
the documents given by the customer are summarized below:
1. Application Form:

Name: Aalok Reddy

Date of Birth: 12/06/1973
PAN No.: AHKPS3569E
Loan Amount Required: Rs.75 lacs
Cost of Property: Not provided
Dependants: Wife and 1 Child

Ownership of current residence: Self Owned

Purpose of Loan: To buy a new property for self-occupation
Total Work Experience: 12 years
2. Bank Statements Given for 12 months

Name: Aalok Reddy

Name of Bank : Syndicate Bank
Salary Credit Date: 29th of every month
Salary Credit Amount: Rs. 1,67,800 has been credited every month for the last 12 months.
Cheque Returns: Nil
Other EMI payments: Rs. 25,000 paid on 5th of every month for an Auto-loan.
3. PAN Card

Name: Aalok Reddy

PAN Number: AHKPS3569E
Date of Birth: 12/06/1973
4. Income Details

Salary Slip provided for Mar14

Annual Salary statement provided for 1 year (See Annexure 1)
Annual Interest Income Rs.100,000 (Taken from the Computation Statement)
5. Form 16 for FY 2012-13

Gross Income shown: Rs.25,25,000

Total Tax deducted at Source: 480,000
Total Tax Payable: Rs.480,000
Balance Tax Payable : Nil
Investments under 80 C : Rs.1,00,000 (LIC Premiums and PPF Investments paid)
6. Savings and Assets Details

Bank Balance : Rs.2,75,000

Fixed Deposits : Rs. 500,000
LIC Policies : 10,00,000
Annual Premium: Rs.35000
PPF paid in the year: Rs. 20000
Owned Car: Maruti Swift
No other savings details given
Last year customer liquidated some FDs, but no clear information available (or provided)
on where the amount has been used / reinvested.

7. Loan Details

One Auto-loan: Rs.4,50,000

Car Financed: Maruti Swift
Tenure of loan: 48 months
ROI 12%
8. Passport :

Name: Alok Kumar Reddy

Date of Birth: 12/06/1973
Date of Issue: 1/1/2014
9. Credit Bureau report:

2 CIBIL reports were generated for the case in the names of Aalok Reddy, and Alok Reddy.
Both the reports had NIL loans.
10. Residence Verification report

Staying in a middle class locality

Persons Met: Mr. and Mrs. Aalok Reddy
1 Bedroom, Hall and Kitchen accommodation
Reasonable interiors
Approach Road: Very Narrow (undeveloped kutcha road)
Discreet neighbor check gave the following information:
Reddys stay in a rented house
Reddys have 2 children
Unable to confirm employment status of Mr.Reddy
Mrs.Reddy is a housewife
11. Office Verification report

Single Room (appx. 400 sq.ft)

3 tables and 3 chairs
All tables had computers
There was one landline phone
Mr.Reddy met during the visit.
One another person seen in office sitting idle.
Sparsely furnished office
CPL Board seen outside
Rented Office

12. Company Financials (CPL)

(Since this was the first time a loan was given to an employee of CPL, as per process
Chandan had collected the Financials of CPL)
Turnover: Rs. 1275 crores
PAT : Rs. 103 crores
Balance Sheet Size: Rs. 2100 crores
Networth : Rs. 673 crores
Audited Financials
Closely held limited company
Chandan, after perusing all information, sends the file to the Fraud Management Unit for
investigation. His covering note to the Fraud Management Unit reads as below:
To
Head Fraud Management Unit
Capital Bank
Dear Sir,
I am sending herewith the file of one Mr.Aalok Reddy for a loan of Rs.75 lacs. I have
noticed certain issues in the file, which seem to indicate that the facts presented in the
case are not genuine. Kindly investigate and let me have your report asap.
The issues that I noticed in the file are as below:
1.
2.
3.
..
..

Warm Regards
Chandan

EXERCISE: Please identify and list down all the issues that Chandan would have covered
in his note to the Fraud Management unit.