Frauds in the banking sector are expected to increase over the next two years even as the banks brace themselves to the new challenges thrown up by the Covid-19 and pandemic induced digital adoption, the latest edition of the Deloitte India Banking Fraud Survey has revealed. 

As many as 78 per cent of the respondents, which comprised 70 key C-Suite stakeholders/senior management responsible for compliance and fraud risk management, audit/finance, asset recovery from varied financial institutions in India, believed that frauds in the banking sector will increase over the next two years, the survey findings showed. The key reasons identified for the expected increase in fraud incidents over the next two years include large-scale remote working models, an increase in customers using non-branch banking channels and the limited/ineffective use of forensic analytics tools to identify potential red flags. 

The survey findings also revealed data theft, cybercrime, third party-induced fraud, bribery and corruption, fake/fraudulent documentation as the main types of frauds that were experienced in the last two years. As many as 42 per cent of respondents (cumulatively) had been victims of such frauds in recent years.

KV Karthik, Partner, Financial Advisory, Deloitte India, said, “The impact of the pandemic has resulted in institutions across the globe operating in an entirely new environment. An increase in the use of digital channels for transactions by customers, on the one hand, has contributed to the ease and speed of transactions. On the other, with evolving and complex business models and increased use of technology, existing fraud risk management frameworks have been introduced to newer and more complex challenges.”

This has  inadvertently created new vulnerabilities for banks and opportunities for fraudsters. Whilst we adjust to the new normal, we will look to exploit gaps and weaknesses in processes and systems. “Reimagining their fraud risk management framework and controls should therefore be a significant priority,” he added.

The fourth edition of the Deloitte India Banking Fraud Survey attempted to understand banks’ mechanisms to tackle fraud risks, the impact of new operational models on fraud risk management, and perspectives on making strategic investments for the future.

The survey showed that retail banking was identified as a major contributor to fraud incidents, with 53 per cent of respondents indicating that they had experienced more than 100 fraud incidents (over the last two years)— a 29 per cent increase since the previous edition. Similarly, the non-retail segment saw an average of 20 fraud incidents, highlighted by 56 per cent of survey respondents—again, a rise from the previous 22 per cent. 

Survey respondents indicated that the top three outcomes of Covid-19 on their Fraud Risk Management (FRM) function would be increased dependence on analytical tools for fraud monitoring and detection (25 per cent), the need to create awareness about fraud amongst customers and employees (23 per cent), and a change in the target operating model to enhance capabilities of the remote FRM function (21 per cent). 

This reflects (in part) in the top three measures taken by banks (over the last six months) to mitigate fraud, with survey respondents highlighting optimising existing Early Warning Signals (EWS) and fraud monitoring systems by using AI/ML and integrating external databases (23 per cent), enhancing case management solutions to effectively respond to/report fraud incidents (18 per cent), and arranging training/workshops to upskill the staff involved in fraud-monitoring functions (17 per cent). 

With a constant uptick in transaction volumes, changing patterns in consumer behaviour, and new emerging risks, detecting “red flags” using traditional rule-based solutions has become obsolete.

“The pandemic has forced banks to enact significant organisational and operational changes within a short timeframe to avoid service interruptions. With myriad changes being deployed at the front end but processes and systems possibly remaining untouched, it begets the question—have all such changes been assessed for their vulnerability to fraud?” said Nishkam Ojha, Partner, Deloitte India. 

“As new fraud risks start to emerge, financial institutions need to remain vigilant to ensure that they continue to effectively mitigate these risks. Exploring the use of technology can enhance the way banks operate to ensure that they stay on top of preventive, detective, and enforcement measures. The relatively static compliance or policy-centric approach to FRM found in many financial institutions may now be outdated. Today, the industry needs to focus on a dynamic, intelligence-driven approach.” 

Remote and electronic channels

Only half of the survey respondents indicated that they conduct fraud risk assessments and update their fraud risk register once a year. With fraud risks such as loan frauds (24 per cent), mobile/internet banking frauds (14 per cent), identity/data theft (13 per cent), and phishing (9 per cent) being identified as the top four/biggest concerns facing banks currently, the frequency of fraud risk assessments is severely wanting, the Survey showed.

Stressed assets

  Survey respondents have cited limited asset monitoring after disbursement (38 per cent), the economic slowdown (24 per cent), and insufficient due diligence prior to disbursement (21 per cent), as the top three factors leading to higher stressed assets. These suggest that banks need to overhaul their due diligence and monitoring frameworks.

Forensic audits 

Survey respondents indicated that the top four challenges faced by banks in performing an in-house forensic audit include technological limitations to read and analyse the borrower’s accounting records (26 per cent), lack of data analytics capabilities (21 per cent), lack of requisite skill sets (20 per cent), and lack of a dedicated team (17 per cent).

Artificial Intelligence/Machine Learning

Survey respondents cited areas such as KYC/anti-money laundering (21 per cent), fraud risk assessment (17 per cent), and fraud detection (15 per cent) that would benefit from deploying AI/ML technology. Challenges in effectively implementing EWS/ EFRMS, including the lack of data integrity due to siloed systems making it difficult to identify risks (21 per cent) and inadequate data being captured in the system (21 per cent), were highlighted by survey respondents. 

The need-of-the-hour is for banks to consider an integrated approach that applies the findings of pre-disbursement due diligence to on-going monitoring and identifies anomalies and red flags. 

Advanced technologies such as AI/ML can analyse large amounts of data, filter out false alerts, and identify connections and patterns that are too complex to be picked up by straightforward, rule-based monitoring or the human eye. This will position financial institutions to respond faster/better and cope with future economic crises with resilience, Deloitte has said.

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