The curious case of the HDFC bank’s “sanctions” on fraudulent loan applications

A practice of India’s largest private lender, HDFC Bank Ltd., of charging a “processing fee” on loan applications submitted with fraudulent documents raises eyebrows.

A whistleblower, who has in the past exposed alleged wrongdoing within the bank’s vehicle lending division, wrote to the regulator suggesting that HDFC Bank, in exchange for a fee, allowed fraudulent applicants to escape regulatory or legal action.

The bank, on the other hand, sees it as a deterrent for non-serious inquiries but insists that it report all fraudulent cases to the authorities.

Typically, the processing fee for a retail loan ranges from 0.5 to 2% of the principal amount, depending on the type of loan. In some cases the charges are taken upfront from the customer, while in others they are deducted from the sanctioned amount. When collected in advance, a portion of the fee may be non-refundable, regardless of the success of the request.

In the case of HDFC Bank, no upfront fee is charged to customers when they apply for a loan. But the application form contains information that the bank may charge a fee at its discretion, even if the loan is not sanctioned or disbursed, according to a person familiar with the matter, who requested anonymity.

In letters written to the Reserve Bank of India dated July 1 and July 16, the whistleblower reported on several instances where HDFC Bank was charging fees against fraudulent loan applications submitted to it in exchange for lack of prosecution. .

According to the letters, this was most visible in applications for auto loans, unsecured business loans, and working capital facilities. BloombergQuint has reviewed copies of letters sent to the regulator.

“The bank agents call these customers to their office and pressure the customer to spit out a penalty and let him go,” the whistleblower said in his letter to RBI.

In response to questions from BloombergQuint, a spokesperson for HDFC Bank said the bank is taking a step-by-step approach.

First, when it sees discrepancies in the loan application, it gives the customer an opportunity to respond.

Once the customer responds, an explanation is sought for the deviation. If the documents are found to be defective or fraudulent, the bank charges a processing fee, without exception.

This is because the rejection process comes after a considerable investment of time, effort and cost to identify such shortcomings.

“However, we have widely observed in such cases that customers generally do not respond,” the spokesperson said.

Whether or not the customer responds to the bank, the application is uploaded to HDFC Bank’s internal negative database. As such, the bank denies that it is taking the fees in exchange for the release of a customer who tries to defraud the bank.

“Without exception, all cases of false documents are also reported in the Experian credit bureau’s ‘Hunter’ database,” the spokesperson said.

Hunter is a database of fraudulent and suspicious loan seekers, which helps banks screen these requests. All major banks and non-bank lenders submit data to Hunter.

HDFC Bank also files complaints against the police in some cases, in addition to collecting processing fees, the spokesperson said.

Other than blacklisting these customers and going to the police in serious situations, there is not much that the banks can do, this person said. Unless someone succeeds in defrauding a bank using loans with forged documents, banks are not really required to report such occurrences to the RBI. Banks can choose to do this on their own, the person said.

Law enforcement agencies also do not take immediate action against such things, unless they find a concerted or planned effort to defraud multiple banks, he said.

Officials from three large private banks said there may have been instances where banks have levied fees on loan applications when forged or faulty documents are submitted. However, this is an exception rather than a standard.

In most cases, there is no incentive for potential borrowers to pay these fees if they need to be reported to the credit bureaus or authorities anyway, said one of the previously mentioned bankers, who spoke under the guise of ‘anonymity. In cases where the applicant also has a savings or checking account with the same bank, the lender can take suo motu action, the person said.

A former official at a large public sector bank said government-owned lenders only charge a processing fee if a loan is sanctioned. A hypothetical scenario where a fee is charged in an application rejected due to forged documents could be considered “undue enrichment,” the person said.

According to the RBI code of good practice released in March 2007, lenders are required to disclose in advance all charges involved in processing documents submitted by a client. Banks or financial institutions are also required to submit in writing to the customer the reason for the rejection of a loan application, in accordance with the code of good practice.

“If the question was limited to whether a bank can charge a processing fee on an application, then there would be no debate on the issue,” said Chirag Bhatia, consumer rights advocate.

The complaint is now with the RBI.

The RBI performed a preliminary analysis of HDFC Bank’s actions in these cases, but has yet to find any reason for punitive action, said a second person with first-hand knowledge of the case.

Typically, the regulator avoids interference in a bank’s internal policies, unless there is a major violation of regulatory provisions, the person said.

The RBI did not respond to questions emailed on Tuesday.