Reserve Bank of India Governor Raghuram Rajan’s doubts about the efficacy of fraud detection systems in banks are pertinent. It has come at a time when incidents of bank fraud have been increasing, the most recent being the foreign exchange scam of over ₹3000 crore at the Bank of Baroda. Nonperforming assets and frauds are the biggest threats faced by the banking sector; fraudulent deals amounting to ₹28,000 crore were reported over the last five years. However, the reported cases may well be only the tip of the iceberg. According to Deloitte’s 2015 Banking Fraud Survey, a staggering 93 per cent of respondents admitted that there has been an increase in the incidents of fraud in the banking industry over the last two years, with more than half estimating an increase by over 10 per cent. However, other than in some high profile cases, banks have rarely taken swift deterrent action against insiders involved in fraudulent deals.
The authorities would do well to heed Rajan’s call to pursue such cases to their “logical conclusion” and ensure that the guilty “pay the price”. More often than not, cases involving bank frauds are simply hushed up because banks fear a loss of reputation. Also, the focus is more on recovery of funds and less on punishing the guilty. Even when action is taken, cases tend to meander and guilty bankers are allowed to get away with nothing more than a rap on the knuckles — a denial of promotion or increment or, in extreme cases, the demand for a quiet resignation. According to the Deloitte survey, in 45 per cent of cases where a fraud was detected, the response was only an internal investigation. Only in 32 per cent of cases was the matter reported to an external investigative agency such as the police. In 14 per cent of cases, those involved were simply asked to quit. Very rarely have banks prosecuted cases against employees vigorously and ensured that punishment was meted out in a public manner.
When it comes to bank frauds, swift closures — and disclosures — are important. Not only because public money is involved, but also because delays affect the morale of bank staff. At the same time, the lack of adequate punishment encourages the temptation to commit fraud. As Rajan himself pointed out, “if they (frauds) are not pursued quickly and pursued to their logical conclusion, it creates an atmosphere of impurity, which then breeds more such practices”. While the Reserve Bank of India has put in place some systems to assist banks in prevention and early detection, the internal mechanisms at most banks tend to rely on traditional channels, such as audits and internal whistle-blowers. Sophisticated tools such as computer analytics and fraud detection algorithms are practically non-existent. The RBI must push bank managements to focus on improving internal fraud control mechanisms.