When kiting is dangerous

Banks don’t like kite flyers
"You must be wondering why I am nostalgic about kite flying today. Actually, the celebration of Makar-Sankranti a few days back across the country marked kite flying as one of the festivities." [Representational Image]
"You must be wondering why I am nostalgic about kite flying today. Actually, the celebration of Makar-Sankranti a few days back across the country marked kite flying as one of the festivities." [Representational Image] ANI

If you belong to our generation, you’d have definitely indulged in one activity which was very popular not only in our neighbourhood but throughout the country.

Yes, I am talking about kite flying. It was a passion to fly tiny colourful quadrangulars in the sky, and I still remember all the joys kite flying used to bring to us, when we were kids.

You must be wondering why I am nostalgic about kite flying today. Actually, the celebration of Makar-Sankranti a few days back across the country marked kite flying as one of the festivities.

Makar-Sankranti is one of the few ancient Hindu festivals observed in line with solar cycles each year in January. A festival, believed to be as old as 5000 years, is celebrated by observing certain  social festivities. One of the festivities is kite flying. Thousands across the country fly colourful kites on the day.

Generally speaking, kite flying brings joy to the kite flyers as well as to the people who watch them. But, kite flying has a different connotation when discussed in the context of banking and finance.

Kite flyers are disliked in the banking system and their kiting is considered one of the most dangerous activities in the world of finance. Precisely, in the context of banking and finance, kite flying means swindling funds from the financial institutions.

Also known as kiting, the Investopedia explains it as ‘the fraudulent use of a financial instrument such as a cheque to obtain additional credit that is not authorized.

It has two variants. One, the act of misrepresenting the value of a financial instrument for the purpose of extending credit obligations or increasing financial leverage. Second, a fraudulent act involving the alteration or issuance of a cheque or draft with insufficient funds.

I am privy to many such cases where kiting was common when banks were not automated. The physical mode of clearing of cheques between banks used to take a lot of time. It used to be an uphill task to keep track of the movement of financial instruments for realization of their value.

It’s here fraudsters used to take advantage of this delay. They used to write cheques of bank accounts actually having no funds to realize the amount. These cheques were used by them at some other bank and got the amount deposited before the cheques were cashed.

However, integration of the advanced technology into the banking operations has considerably reduced times for cheques to clear and that has helped to reduce the incidence of cheque kiting.

In short, the act of kite flying is an unfair and illegal means of obtaining bank funds by drawing fictitious bills of exchange which have actually no exchange of consideration among the parties. 

Who can forget the fraud done in Punjab National Bank some years back through kite flying technique. Here the Letter of Undertaking (LoU) was used to swindle funds. 

This LoU is an explicit undertaking used to raise overseas loans. It is a facility through which a bank offers it’s undertaking to another bank on behalf of its customer, who is importing goods from overseas. The customers raise loans from the overseas banks through the LoU.

It’s a clear-cut responsibility of the issuing bank. The maturity of a Letter of Undertaking could be between 30 days and one year, depending on the type of business. The idea behind having such a scheme is to enable an importer to access low-cost foreign currency funds overseas.

Notably, the genesis of PNB fraud that surfaced by using LoU mode was that Nirav Modi, main accused in PNB Scam,  ‘devised’ a scheme to take route of bank loans ‘without actually taking a loan. This means using banks’ money without opening a loan account.

He managed LoU from PNB to raise overseas loans at cheap rates. Surprisingly, he didn’t pay any margin while arranging an LoU from PNB (otherwise banks ask for a margin for LoU and it could be even more than 100 per cent of the credit facility required). The overseas loans raised through these LoUs were also not repaid within the stipulated period of time. 

So, in this perfect example of kite flying, instead of paying his own money, Nirav Modi asked PNB to open another LoU, which could cover the principal plus interest of the previous LoU. Backed by new LoUs, he would get fresh and higher buyer’s credit, which would enable him to clear the previous loans and the chain continued.

Meanwhile, kite flying continues in the banking system in another form as the kite flyers too have capitalized on the power of technology to continue kiting. In fact, it has broad-based its presence into digital banking products and has now been extended to credit cards as well. 

So, we have kite flyers of another kind now. However, this form of kite flying, precisely card kiting, is not a fraud. But, its growing arena is not at all comfortable for the banks. A cardholder resorting to card kiting indicates that he/she is in a tight financial position and is not able to foot the credit card dues.

What is the modus operandi of this card kiting?

Ideally speaking, when a credit card holder gets a credit card statement, he/she should be paying the total amount due, also known as total outstanding balance, on the card every month.

For some reason, if the cardholder is unable to shell out the total outstanding balance, banks expect the cardholder to pay at least the minimum amount due on the card. It amounts to kite flying when the cardholder uses one or more credit cards to withdraw cash at an ATM as cash advance and pay dues on another credit card. 

Some cardholders also resort to card kiting on the same card, where they withdraw cash using their credit card at an ATM and make a minimum amount payment on the same card. However, in all circumstances card kiting isn’t the wisest thing to do. It will only swell the debt of the cardholder.

Remarkably, in order to put a check on the card kiting, banks are now diligently monitoring credit card activities of their cardholders.  This monitoring keeps close watch on any card kiting attempt, helps the banks to intervene well on time and prevent the cardholder from falling into a debt trap.

Here the cardholders need to understand that card kiting is a temporary solution to ease out in a tight financial situation. They need to work out a concrete financial plan to come out of the financial mess. Consulting a financial advisor won’t be a bad deal.

(The views are of the author & not the institution he works for)

DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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