Rising frauds expose banks to greater operational threats

Written by fe Bureaus | Mumbai | Updated: Aug 29 2009, 04:14am hrs
In 2008-09, there were 212 banking frauds that amount to Rs 1,404 crore, while in total there were 23,914 fraud cases involving Rs 1,883 crore.

However, the figures were less in 2007-08, as there were 177 cases of banking fraud totalling a Rs 659 crore, while on a whole there were 21,247 instances of frauds involving a Rs 1,883 crore.

During the year 2008-09, 102 caution advices were issued to banks by the Reserve Bank of India(RBI) through secured e-mail in respect of unscrupulous borrowers who perpetrated frauds of amounts exceeding Rs 25 lakh. The banks could, in turn, exercise due care while considering sanction of credit facilities to them, said the RBIs report released on Thursday.

With a view to putting in place some deterrent action against entities such as builders, warehouse owners, chartered accountants, lawyers and valuers of properties, who do not have any contractual relationship with banks, it was decided that banks could inform the Indian Banks Association (IBA) about the names of such entities so that the IBA could prepare a caution list for circulation amongst banks. A circular was issued to banks in March 2009 in this regard, said the report.

The fraud monitoring function of the RBI has assumed greater significance in recent years as there has been an increase in the number of frauds involving larger amounts. Frauds have been noticed in traditional as also in new areas, such as housing loans, credit cards, internet banking and outsourcing businesses.

The complexity of cases is increasingly exposing banks to greater operational risk. The RBI, as part of its supervisory process, has been intimating banks from time to time about common fraud-prone areas, modus operandi of frauds and the measures to be taken to prevent/ reduce the incidence of frauds.

During the economic slowdown in 2008-09, the need for proactive credit expansion for stimulating the economy, especially in certain specified segments, such as housing and infrastructure, was recognised. There is, however, a potential scope for internal controls getting relaxed due to the exigency of credit expansion. Weaker standards of control and risk management tend to facilitate frauds, especially when rapid credit expansion has to be achieved in a slowing economy.

Therefore, appropriate precaution needs to be integrated into banks oversight structure. In this context, the RBI proposes to evolve a prudential approach to fraud oversight as against the existing legal approach. The approach would seek to align the supervisory oversight on frauds with the Supervisory Review & Evaluation Process under Pillar 2 of Basel II by factoring in the sharp rise in frauds, while profiling the operational risks facing the banks.

Banks were also advised to be extremely cautious while continuing relationships with respondent banks located in countries with poor KYC standards and countries identified as uncooperative in the fight against money laundering and terrorist financing. The anti-money laundering (AML)/combating financing of terrorism (CFT) guidelines issued by the Reserve Bank are in consonance with the Financial Action Task Force (FATF) recommendations.