The Curious Case Of HDFC Bank’s ‘Penalties’ On Fraudulent Loan Applications

A practice at India’s largest private lender HDFC Bank Ltd. to levy a “processing fee” on loan applications submitted with fraudulent documents is raising eyebrows.

A whistleblower—one who has in the past brought to light alleged malpractices at the bank’s vehicle lending division—has written to the regulator suggesting that HDFC Bank, in return for a fee, was allowing fraudulent applicants to evade regulatory or legal action.

The bank, in contrast, sees it as a deterrent for non-serious applications but insists that it reports all such fraudulent applications to the authorities.

Typically, a processing fee for a retail loan application ranges from 0.5-2% of the principal amount, depending on the type of loan sought. In certain cases the fee is levied upfront on the customer, while in other cases it’s deducted from the sanctioned amount. In cases where it is levied upfront, a portion of this processing fee may be non-refundable in nature, irrespective of the success of the application.

In HDFC Bank’s case no upfront fee is charged to customers when they apply for a loan. But the application form has disclosures which say that the bank may charge processing fee at its discretion, even if the loan is not sanctioned or disbursed, according to a person familiar with the matter, who spoke on condition of anonymity.

In letters written to Reserve Bank of India, dated July 1 and July 16, the whistleblower has pointed out several instances of HDFC Bank levying a fee against fraudulent loan applications submitted to it in return for not pursuing further action.

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

“Bank officers are calling such customers to their office and pressurising the customer to cough up some penalty and let him go,” the whistleblower alleged in his letter to RBI.

“Not only are they not reporting such fraud attempts to anybody, they [HDFC Bank] also behave as an extra-judicial authority and quietly extract fines to achieve some internal revenue target,” the whistleblower alleged in his letter dated July 1. “This whole exercise is the basis of HDFC Bank’s internal laid out policy.”

How The Bank Explains It…

In response to BloombergQuint’s queries, a spokesperson at HDFC Bank said that the bank follows a step-by-step approach.

Firstly, when it notes any discrepancies in the loan application, it provides the customer with a chance to respond.

Once the customer responds, they’re shown the discrepancy and an explanation is sought. If the documents are proven to be faulty or fraudulent, the bank charges a processing fee to them, without exception.

This is because the process of rejection comes after extensive investment of time, effort and costs to identify such discrepancies.

“However, we have largely observed in such cases, customers usually do not respond,” the spokesperson said.

Whether the customer responds to the bank or not, the application is uploaded to HDFC Bank’s internal negative database. As such, the bank denies that it’s taking the fee in return for letting off a customer who is trying to defraud the bank.

“Without exception, all cases with forged documents are also reported to the ‘Hunter’ database of credit bureau Experian,” the spokesperson said.

Hunter is a database of fraudulent or suspected loan applicants, which helps banks filter through such applications. All leading banks and non-bank lenders participate in submitting data to the database.

HDFC Bank also files police complaints in some cases, in addition to levying processing charges, the spokesperson said.

Further, the person cited anonymously earlier said the bank does levy such fees, but only on repeat offenders who have previously tried to submit fraudulent documents. The processing fee helps in deterring these people from continuing to apply with forged documents.

Apart from blacklisting such customers and going to the police in serious situations, banks can do little, this person said. Unless someone is successful in defrauding a bank by availing loans through forged documents, there is no real requirement for banks to report such events to the RBI. Banks may choose to do so of their own accord, the person said.

Law enforcement agencies also don’t immediately take action against such things, unless they find a concerted or planned effort to defraud multiple banks, he said.

Are Other Banks Doing This As Well?

Officials at three major private banks said there may have been instances where banks have levied charges on loan applications where forged or faulty documents are submitted. However, this is an exception rather than a norm.

In most cases the prospective borrowers have no incentive to pay that fee if they’re going to be reported to credit bureaus or authorities in any case, said one of the bankers cited earlier, who spoke on condition of anonymity. In cases where the applicant also holds a savings or current account with the same bank, the lender may take suo moto action, this person said.

A former official at a large public sector bank said that government-owned lenders only charge a processing fee if a loan is sanctioned. This person added that a hypothetical scenario where a fee is being charged in a rejected application because of forged documents, that could be seen as “undue enrichment”.

As per the RBI’s fair practices code issued in March 2007, lenders are required to disclose upfront any charges involved in processing the documents submitted by a customer. The banks or financial institutions are also required to submit the reason for rejection of a loan application in writing to the customer, as per the fair practices code.

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

But the question here is if banks are empowered to take any punitive action against a borrower because of fraudulent documents. A bank may verify a document, but it is up to the court to adjudicate on the matter and decide any penalties.

Chirag Bhatia, Consumer Rights Advocate

Complaint With The RBI

The complaint is now with the RBI.

The RBI did a preliminary analysis of HDFC Bank’s actions in these instances, but has not yet found any reason for punitive action, a second person with direct knowledge of the matter said.

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

The RBI did not respond to queries mailed on Tuesday.

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Neal Bhai has been involved in the Bullion and Metals markets since 1998 – he has experience in many areas of the market from researching to trading and has worked in Delhi, India. Mobile No. - 9899900589 and 9582247600

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