5 precautions banks can take to avoid fraud

Updated: Dec 12, 2020 11:52 AM

Here are the five key preventive measures banks in India can adopt to avoid fraud, right from pre-sign up to collection.

An additional layer of preventive actions that financial institutions and banks can incorporate is the analysis of financial patterns of the entity or individual.

Banks and lending institutions have been at the receiving end of loan defaulters and credit fraud for many decades now, and it has become even more challenging in current times. With the increase of digitization, the scope for fraudulent activities has increased further, as diligence procedures haven’t kept pace with the fast-changing technologies and their subsequent misuse.

It has become essential for financial institutions to step up their diligence methods to curb financial losses that occur due to miscalculated onboarding of customer accounts. Several tech-enabled fraud-detection services that are tailor made for the BFSI sector have emerged in recent years. However, the sector itself is slowly inching towards digitization and optimizing digital services. To limit damage caused by fraudulent activities, banks need to adopt digitization and ensure the right safeguards are in place.

Let’s go through five key preventive measures banks in India can adopt to avoid fraud, right from pre-sign up to collection. There are several places in the customer journey where actioning timely checks and preventive measures is likely to reduce frauds significantly.

One of the most important precaution a bank can take towards fraud prevention, is integrating emerging technologies in their systems. Many traditional banks are yet to take advantage of the digital revolution in the country. Procuring and submitting forged documentation is not as difficult as it used to be even 5 years ago, and the quantum of such applications has only increased. Digital verification of documentation via integrated tech is an essential step towards fraud prevention. Integrating Artificial Intelligence and Machine Learning enabled technology has been a game changer for businesses across the world, and the banking sector will only benefit from adopting these into their systems.

Once documents have been verified to be authentic and original, we move on to the next step in fraud prevention, due diligence. Due diligence covers a lot of aspects that need to be considered before extending loans to individuals or business entities. Within this the first preventive measure banks can adopt is to screen public records of the applicants, thereby ensuring their credit worthiness. There are several sources, verified by the government, to assess credit histories, employee information, and other details that can contribute towards assessing their financial status and hence, their creditworthiness. All of this of course needs to be carried out without compromising the security and privacy of applicants.

An additional layer of preventive actions that financial institutions and banks can incorporate is the analysis of financial patterns of the entity or individual. Tax filings, be it ITR or GST filings, are a good indicator of the business health and validity of an entity. Lack of GST or ITR data is cause for concern for any lending institution, as it can be an indicator of fraudulent intention or activities. In this case the next preventive measure banks can take is to screen the entities for any negative news that might have been published in a given time period against the applicant. News agencies are a good source of information for banks to assess the validity of applicants. In this case, no news is good news and one can go on to the next step in due diligence, however negative news flags off concern, requiring a deeper dive into the applicant’s financial and business health.

Lastly, banks should leverage on the advancements in AI & ML technology, to preemptively analyze patterns and learn from historical cases. Integrating technology in banking processes, without relevant interpretation and analysis of data collected through them over time, is suboptimal use of that particular resource. Banking institutions should ideally build or integrate advance models that help predict future instances of fraud to proactively catch irregularities, and weed out suspicious applicants. Additionally, keeping a track of announcements, updates and lists released by regulatory bodies such as SFIO and SEBI also help banks put checks in place to avoid fraudulent activities.

One must, at this point, understand that despite ensuring all preventive checks have been done against an application, there is still a chance that the applicant is likely to be fraudulent, since no process is foolproof. However, with the measure enlisted above, the probability of onboarding a fraudulent customer is reduced significantly!

(By Omkar Shirhatti, Co-Founder & CEO, Karza Technologies)

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