RBI warns of the increasing rise in bank frauds

The number of bank fraud cases which averaged 4,500 a year in the past 10 years, increased to 5,835 in 2017-18, according to RBI reports. Public sector banks (PSBs) accounted for 92.9 pc of the amount involved in frauds of more than INR 0.1 million in 2017-18, while private sector banks accounted for 6 pc.

It has not been a good year so far for the banking sector. The media is still talking of the INR 100 billion fraud committed by famous diamantaire Nirav Modi on Punjab National Bank, the nation’s second largest public sector bank.  Subsequently many others including the State Bank of India (SBI) and Canara Bank uncovered banking frauds, one after another.

The annual report by the Reserve Bank of India (RBI) that came out on August 29 has revealed that the number of cases of fraud reported by banks increased both in terms of numbers and value in 2017-18. The number of fraud cases which averaged 4,500 a year in the past 10 years, increased to 5,835 in 2017-18, as per the report.

“Similarly, the amount involved in frauds was increasing gradually, followed by a significant increase in 2017-18 to INR 410 billion. 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,” the report said.

At the end of March 2018, twelve out of every INR 100 lent by Indian banks had turned sour. According to the annual report this number is only expected to increase by the end of the current financial year.

Public sector banks easier to defraud                        

Public sector banks (PSBs) accounted for 92.9 pc of the amount involved in frauds of more than INR 0.1 million in 2017-18, while private sector banks accounted for 6 pc. With regards to PSBs also accounted for about 85 pc of the cumulative amount involved in frauds till March 31; private sector banks accounted for a little over 10 pc.

At the system level, loans in terms of value accounted for more than 75 pc of frauds, in amounts involving INR 0.1 million and more, while deposit accounts accounted for just over 3 pc of frauds, it added.  In the loan category of frauds, PSBs accounted for a major share with 87 pc, followed by private sector banks at 11 pc.

The share of PSBs in frauds relating to ‘off-balance sheet items’ such as Letter of Credit (LCs), Letter of Undertaking, and Letter of Acceptance was even higher at 96 pc, RBI said in the report. Off-balance sheet items accounted for 14.68 pc of fraud cases. New private sector banks accounted for more than 20 pc of the frauds related to ‘cash/cheques/clearing’ and ‘foreign exchange transactions’.

Cheating and forgery

Out of the seven classifications of frauds in alignment with the Indian Penal Code, ‘cheating and forgery’ has been considered 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.

Banking frauds on rise

The quantum jump in the numbers mostly happened because of the biggest frauds of the banking system of the country, mainly affecting one public sector bank that is the Punjab National Bank. The USD 2.1 billion fraud, were allegedly committed by diamantaire Nirav Modi and his uncle Mehul Choksi, the promoter of Gitanjali Gems, who raised credit from overseas banks based on fraudulent guarantees issued in collusion with staff members of PNB.

After the Gitanjali Gems scam PNB uncovered another credit-guarantee fraud at its Brady House, Mumbai, branch which is also at the centre of the Nirav Modi scam. The alleged fraud of around INR 90 million involved executives of a company called Chandri Paper and Allied Products, according to a complaint filed with the Central Bureau of Investigation (CBI).

Also SBI was duped by Chennai-based jeweller Kanishk Gold Pvt Ltd (KGPL) that has been accused of defrauding a consortium of 14 banks led by SBI to the tune of INR 8.24 billion in the form of loans that have now been declared as non-performing asset (NPA). Canara Bank was also defrauded of about INR 10 million by one of its former chairmen.

How to tackle frauds?

According to the former RBI Governor Raghuram Rajan, some of the banks in India have antiquated systems that are not adequate to stop rogue people from committing fraud. He said that a part of the Punjab National Bank scam was cyber-related and there is a need to go into the details of how the fraud came to be.

While India is still trying to figure out on how to stop these frauds foreign banks saw a 95 pc drop in frauds to INR 266.09 as they beefed up the security of their electronic systems and the business degrew in the country.

According to RBI’s annual report an Expert Committee under the chairmanship of Y.H. Malegam had been constituted to look into the reasons divergences in asset classification and provisioning in the credit portfolio of banks as well as the rising incidence of frauds. In addition to strengthen the cyber security posture of Indian banks, focused and theme-based IT examinations are planned during 2018-19.

With the increase in number of digital transactions and net banking the RBI has also made clear as to who will bear the financial liability in case of all unauthorised electronic banking transactions. According to the central bank if the bank is at fault then the customer will have zero liability, as the entire loss will be borne by the bank. If the customer is at fault then the customer has to bear the entire loss until the unauthorised transaction is reported to the bank. And if the fault lies within the system and neither the bank nor the customer is at fault, then the customer’s liability will be zero if he or she reports it to the bank within three working days of receiving the communication from the bank about the unauthorised transaction. If the days increase, then the customer’s liability will depend on the bank’s Board approved policy.