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It’s not just bad debts that are troubling banks. The Reserve Bank of India has expressed concern over the quantum jump in overall frauds in the banking sector, to ₹41,000 crore in 2017-18 from ₹23,000 crore in the previous year.
The number of fraud cases reported by banks, which averaged 4,500 a year in the past 10 years, increased to 5,835 in 2017-18, according the RBI annual report.
Flagging its concern on the issue, the RBI said there is a need for improvement in the audit function and its governance.
The central bank wants the various types of audits undertaken by banks such as statutory audit, risk-based internal audit, concurrent audit, information systems audit and special audits to be tightened. The RBI said the concurrent audit has to be carried out on a real-time, or near-real-time, basis, and is expected to set the tone for the subsequent internal audit, which happens with a time lag.
“Many instances of repetitive and similar audit findings over the years were seen. Further, internal audit could not detect many frauds, which came to light after accounts turned NPA,” the RBI said.
“Fraud detection and reporting, as well as preventive steps, need to be more risk-focussed to identify red flags at an incipient stage,” it added.
PNB scam impact
The central bank observed that the quantum jump in the amount involved in frauds during 2017-18 was on account of a large-value fraud committed in the gems and jewellery sector, mainly affecting one public sector bank (Punjab National Bank).
During 2017-18, public sector banks (PSBs) accounted for 92.9 per cent of the amount involved in frauds of more than ₹1 lakh, as reported to the Reserve Bank; private sector banks accounted for 6 per cent.
PSBs also accounted for about 85 per cent of the cumulative amount involved in frauds till March 31; private sector banks accounted for a little over 10 per cent.
At the system level, frauds in loans, by amount, accounted for more than 75 per cent of frauds involving amounts of ₹1 lakh and above, while frauds in deposit accounts were at just over 3 per cent.
Within the loan category of frauds, PSBs accounted for a major share (87 per cent) followed by the private sector banks (11 per cent).
The RBI said the share of PSBs in frauds relating to ‘off-balance sheet items’ such as Letter of Credit, Letter of Undertaking, and Letter of Acceptance was higher, at 96 per cent.
Cheating & forgery
Of the seven classifications of frauds in alignment with the Indian Penal Code, ‘cheating and forgery’ was the major component, followed by ‘misappropriation and criminal breach of trust’.
In ‘cheating and forgery’ cases, the most common modus operandi was multiple mortgage and forged documents. Mumbai (Greater Mumbai), Kolkata and Delhi were the top three cities in reporting of bank frauds through ‘cheating and forgery’.
In respect of staff involvement in frauds, banks reported that it was prominent in the categories ‘cash’ and ‘deposits’, which had a much smaller share in the overall number of fraud incidents and the amount involved.
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