The report by the central bank indicated that frauds have been predominantly occurring in the loan portfolio, both in terms of number and value.
Public sector banks (PSBs) accounted for bulk of the frauds reported in the fiscal year 2018-19 (FY19) at 55.4% of the number of cases reported and 90.2% of the amount involved, that mainly reflected the lack of adequate internal processes, people and systems to tackle operational risks, said a report released by the Reserve Bank of India (RBI). PSBs’ share in the value of large frauds was even higher at 91.6% in FY19, the RBI said.
At the same time, private banks accounted for 30.7% of the number of cases reported and 7.7% of the amount involved. Foreign banks’ share in the number of cases reported stood at 11.2% while they accounted for 1.3% of the amount involved.
The report by the central bank indicated that frauds have been predominantly occurring in the loan portfolio, both in terms of number and value. “Incidents relating to other areas of banking i.e. card/internet, off-balance sheet and forex transactions, in terms of value, have reduced (in terms of date of reporting) in 2018-19 vis-à-vis the previous year,” the report stated.
The RBI also pointed out that the modus operandi of large value frauds involving Rs 50 crore or above — that account for 86.4% of all frauds reported during the year in terms of value —involved diversion of funds by borrowers through various means, mainly via associated or shell companies; accounting irregularities; manipulating financial or stock statements; opening current accounts with banks outside the lending consortium without a no-objection certificate from lenders; and devolving of letter of credits (LCs).
In February 2018, the government issued a framework for timely detection, reporting and investigation relating to frauds in PSBs, which required them to evaluate NPA accounts exceeding Rs 50 crore from the angle of possible frauds, to supplement the earlier efforts to unearth fraudulent transactions. This appears to have caused the sharp jump in reported frauds in 2018-19, the report said.
The central bank explained that while supervisory and regulatory measures are designed to strengthen the early warning signals (EWS), the prime responsibility of identifying and managing fraud risks rests with the respective financial institution.
“A number of initiatives such as dedicated market intelligence units and increased use of data analytics are being taken up, following the recommendations of the expert committee set up by the RBI and chaired by YH Malegam. In addition, banks have been advised to monitor unconventional sources of information on a continuous basis confined not only to the borrowing entity but to the group as a whole,” the RBI said.