Fraud Cases in Public Sector Banks

• 23 Dec 2020

Why in News

Public Sector Banks (PSBs) have been reviewing loan accounts and are expected to report more fraud cases in accounts which have earlier been put under their Early Warning Signals (EWS) system.

• The Reserve Bank of India (RBI) developed the EWS framework as it noticed a delay in the detection and reporting of banking frauds.
• The objective of the EWS framework is to prevent and detect these offences, to provide timely reporting to regulators and to initiate staff accountability proceedings thereby ensuring that the operations and risk-taking ability of the banks is not impacted.

Key Points

• Data Analysis:
  
  • The total cases of frauds (involving Rs. 1 lakh and above) reported by banks and financial institutions shot up by 28% by volume and 159% by value during 2019-20 despite the Reserve Bank of India (RBI) tightening the supervision and vigilance.
  • While there were 6,799 frauds involving Rs. 71,543 crore as of March 2019, the number of frauds jumped to 8,707 involving Rs.1,85,644 crore, says the RBI’s Annual Report 2020.
  • PSBs topped the fraud table with 4,413 cases involving Rs. 1,48,400 crore.
  • Private banks reported 3,066 frauds involving Rs. 34,211 crore.
• Current Scenario:
  
  • Banks are going through their accounts which were put on alert earlier. They will report fraud wherever such instances are found in case of large accounts, and make 100% provision against them.
    
    • These are being reviewed thoroughly to ensure that banks have adequately provisioned balance sheets.
  • The RBI also indicated that the frauds registered during 2019-20 actually occurred in the loans sanctioned during 2010-2014.
    
    • The average lag between the date of occurrence of frauds and their detection by banks and financial institutions was 24 months during 2019-20.
    • In large frauds, of Rs. 100 crore and above, the average lag was 63 months.
  • After forensic audit and investigation into these accounts, diversions and other issues were found.
    
    • RBI defines diversion of funds as utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanction; deploying borrowed funds for purposes/activities other than those for which the loan was sanctioned; and transferring borrowed funds to subsidiaries/group companies or other corporates by whatever modalities.
• Reasons:
  
  • Weak implementation of EWS by banks.
  • Non-detection of EWS during internal audits.
    
    • Internal audits evaluate a company's internal controls, including its corporate governance and accounting processes.
    • They ensure compliance with laws and regulations, help maintain accurate and timely financial reporting and data collection.
  • Non-cooperation of borrowers during forensic audits.
    
    • Forensic audit is an examination and evaluation of a firm's or individual's financial records to derive evidence that can be used in a court of law or legal proceeding.
  • Inconclusive audit reports.
  • Lack of decision making in Joint Lenders’ meetings account.
• Overcoming Measures:
  
  • The EWS mechanism is getting revamped alongside the strengthening of the concurrent audit function, with timely and conclusive forensic audits of borrower accounts under scrutiny.
  • RBI is engaged in interlinking various databases and information systems to improve fraud monitoring and detection.
  • Online reporting of frauds by the Non-Banking Financial Companies (NBFC) and the Central Fraud Registry (CFR) portal of Scheduled Commercial Banks (SCBs) augmented with new features, are likely to be operational by January 2021.
    
    • RBI has put in place CFR, which is a searchable database to help banks detect instances of fraud by borrowers early on.

Source: IE