Bank frauds involving Rs1 lakh and above reported by banks and financial institutions increased 28 per cent by volume and 159 per cent by value during July-June 2019-20, as per the annual report of the Reserve Bank of India (RBI).
Frauds during RBI’s accounting year (July-June 2019-20) have been predominantly in the loan portfolio or in advances category, both in terms of number and value, RBI noted. "There was a concentration of large value frauds, with the top 50 credit-related frauds constituting 76% of the total amount reported as frauds during 2019-20," says the report.
According to the report, during RBI’s fiscal year 2019-20 the total number of frauds in banks increased 28 per cent to 8,707 cases, while the frauds have increased by 159 per cent to Rs1,85,644 crore during the year. RBI had reported 6,799 incidents of fraud cases involving an amount of Rs71,543 crore during the previous fiscal.
As expected, public sector banks lead in both the number of frauds and amount involved. PSBs have reported 4,413 number of frauds, which are more than 50 per cent of total number of fraud cases. State-run lenders also contributed almost 80 per cent or Rs1,48,400 crore of these frauds, says the report.
The report attributes the spike in bank frauds to a failure of early warnings system (EWS), where the average lag in detection of frauds was a whopping 63 months for frauds of Rs100 crore and more.
Incidents relating to other areas of banking, like off-balance sheet and forex transactions, fell in 2019-20 vis-à-vis the previous year. Advances contribute with over 50 per cent of cases, but these frauds are worth more than 98 per cent of total amount of fraud cases during FY2019-20. Number of frauds of card and internet increased 30.8 per cent to 2,678 cases from 1,866 cases, while the amount involved jumped more than two times to Rs195 crore from Rs71 crore a year ago, the report shows.
While the regulatory framework focuses on prevention, early detection and prompt reporting, the average lag in detection of frauds remains long.
"The average lag between the date of occurrence of frauds and their detection by banks and FIs was 24 months during 2019-20. In large frauds, worth Rs100 crore and above, however, the average lag was 63 months. The sanction of the credit facility in many of these accounts was much older," the report says.
However, it says, the date of occurrence of these frauds are spread over several previous years, pointing to weak implementation of EWS by banks, non-detection of EWS during internal audits, non-cooperation of borrowers during forensic audits, inconclusive audit reports and lack of decision making in joint lenders' meetings account for delay in detection of frauds, RBI noted.
"The EWS mechanism is getting revamped alongside strengthening of the concurrent audit function, with timely and conclusive forensic audits of borrower accounts under scrutiny," the report adds.
RBI, in consultation with the Central Vigilance Commission (CVC) had created an Advisory Board for Banking Frauds (ABBF), which functions as the first level of examination of all large value fraud cases. PSBs recommend or make references to investigating agencies if cases are not detected by ABBF.
The jurisdiction of ABBF, however, is confined to those cases involving the level of general manager (GM) of banks and above, it added.