The total cases of frauds (involving Rs1 lakh and above) reported by banks and financial institutions (FIs) increased 28% by volume and 159% by value during 2019-20, reveals the annual report of Reserve Bank of India (RBI). The report also shows a failure of early warnings system (EWS) in banks, where the average lag in detection of frauds was a whopping 63 months for frauds of Rs100 crore and more.
According to RBI, bank frauds during FY19-20 have been predominantly occurring in the loan portfolio or in advances category, in terms of number and value. "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," it says.
The report shows that during FY19-20 (July to June), total number of frauds in banks increased 28% to 8,707 cases, while by value it jumped more than one and a half times to Rs1,85,644 crore. During FY18-19, RBI had reported 6,799 incidents of frauds involving an amount of Rs71,543 crore. As expected, public sector banks (PSBs) lead in both, the number of frauds and amount involved. PSBs have reported 4,413 number of frauds, which are more than 50% of total number of fraud cases; however, the same State-run lenders contributed to almost 80% or Rs1,48,400 crore in these frauds, the report shows.
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 over 50% of cases, but these frauds are worth more than 98% of total amount of fraud cases during FY19-20. Number of frauds of card and Internet increased 30.8% 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.
As per RBI, while the frauds 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 central bank says.
However, it says, the dates of occurrence of these frauds are spread over several previous years.
According to RBI, 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.
It says, "The EWS mechanism is getting revamped alongside strengthening of the concurrent audit function, with timely and conclusive forensic audits of borrower accounts under scrutiny."
To overcome this, RBI says, in consultation with the central vigilance commission (CVC), it created the advisory board for banking frauds (ABBF). The ABBF functions as the first level of examination of all large value fraud cases before recommendations or references are made to the investigating agencies by PSBs. The jurisdiction of ABBF would be confined to those cases involving the level of general manager (GM) of banks and above, it added.