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 opt out. to avoid regulatory or legal action.

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

Typically, the processing fee for a retail loan application ranges from 0.5 to 2% of the principal amount, depending on the type of loan sought. In some cases the charges are levied in advance on the customer, while in other cases they are deducted from the sanctioned amount. In cases where they are withdrawn in advance, a portion of these processing fees may be of a non-refundable nature, regardless of the success of the request.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 processing 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 several instances where HDFC Bank levies fees on fraudulent loan applications submitted to it in exchange for not prosecuting .

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.

How the bank explains it …

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

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

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

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

“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 participate in the submission of data to the database.

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

Apart from blacklisting these customers and resorting to the police in serious situations, there is little that the banks can do, said the person. Unless someone succeeds in defrauding a bank using loans with forged documents, banks are not really required to report such events 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, potential borrowers have no incentive to pay these fees if they need to be reported to credit bureaus or authorities, said one of the bankers named above, who spoke on condition of anonymity. In cases where the applicant also has a savings or checking account with the same bank, the lender can take action on the motorcycle, 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. This person added that a hypothetical scenario where a fee is charged in an application rejected due to forged documents, which could be considered “undue enrichment”.

According to the RBI code of good practice released in March 2007, lenders are required to disclose in advance all fees 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 levy 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 has performed a preliminary analysis of HDFC Bank’s actions in these cases, but has yet to find a 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 sent on Tuesday.

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