The fourth edition of the Indian Banking Fraud Survey by Deloitte in 2021 claimed that no bank wants to deal with the risks associated with frauds, but it is a fact of life that stares at them. Frauds have been on the rise and would continue to rise under the current business environment. It asserts that even though the banks have lately been investing their time, resources and energy to enhance their capabilities to monitor, detect, deter, and control frauds, it has not been proving sufficient.
The latest data on bank frauds exceeding Rs 1 Lakh contradicts as well as reinforces the above statement at the same time. It is contradicted because the amount involved in financial fraud has been going down during the past two years.
In absolute terms the figure has declined from a peak of Rs 185,466 crores in 2019-20 to 138,211 crores in 2020-21 and further to Rs 60,414 crores in 2021-22. On the flip side, however, the number of fraud cases in the country has continued to rise unabated as it has gone from 7,359 in 20201-21 to 9,103 in 2021-22.
It must also be a matter of grave concern that in recent years the number and magnitude of financial frauds committed in the private sector banks have been on the rise. The data reveals that the number of fraud cases exceeding Rs. 1 Lakh in the private sector banks has gone up from 1,975 in 2017-18 to 5,334 in 2021-22. In terms of the amount involved, it has gone up from Rs 2,478 crores in 2017-18 to Rs 17,588 crores.
It is often argued that this is a bane of the post-liberalisation period. The phenomenal expansion in the number of bank branches, vast scale diversification of their businesses, speedy computerisation, and large-scale networking caused rapid growth in businesses and their profits. But it also led to a massive rise in the cases of frauds and scams reported by banks.
The situation seems to have worsened in the first two decades of this millennium. As late as 2004-05, the number of financial fraud cases in the country was 2,519 involving an amount of Rs 926 crores only. By 2012-23, the numbers had gone up to 4,233 cases involving a sum of Rs 8,624 crores. Since then the numbers have been galloping.
Some of the biggest bank scams that have recently made stakeholders of the banking industry shiver, included the 2018 scam by a billionaire jeweller that caused a massive loss of Rs 11,000 crores. The size of the scams has been rising over the years. A shipyard scam dented the banking industry by Rs 23,000 crores in February 2022. A housing finance corporation suffered a scam of more than Rs 34,615 crores in June 2022. It took down a consortium of 17 banks in the country.
Such large-scale bank fraud incidents cause massive losses to the banking sector and shake consumer confidence badly. At the same time, they also unravel the vulnerabilities of the banking system. A system that survives on trust can pose an existential challenge. Scams and frauds thus cause serious concerns among stakeholders. Fraud poses three types of risk to financial institutions, operational, business, and reputational risks. All of these undermine customers’ confidence and stakeholders’ trust in the institutions.
For consistency in reporting, the Reserve bank of India (RBI) divides frauds into several categories, mainly based on the provisions of the Indian Penal Code. The most prevalent amongst them are cheating and forgery with numerous mortgages and fake documents being the most frequent modus operandi.
Banking frauds are predominant, in number as well as in magnitude in the category of loans and advances. Such frauds reflect badly on the deficiencies in the credit appraisal and monitoring processes. The also comments on negligence in due diligence by the staff and management. The instances of negligence at the board level also are becoming a common occurrence.
It should be assuring to the deposit holders that the RBI has put in place a detailed framework for banks to prevent frauds. It provides for a robust appraisal and an effective credit monitoring mechanism, early detection via Early Warning Signals (EWS) and declaration of Red-Flagged Accounts (RFA) for suspicious and fraudulent activity. It also triggers prompt reporting to the RBI and other agencies, and staff accountability through timely initiation of proceedings.
Next in number and magnitude, though off-balance sheet, are the cyber frauds. Their rise is directly attributable to massive digitalisation and the use of financial technology (FinTech) in the financial sector. Online and mobile banking and digital payments have further exacerbated the risks to banks and their deposit holders.
Scams with cyber attacks are becoming a big threat to consumer confidence, as they affect a fairly large number of account holders. Hacking, data breaches, identity theft, social engineering frauds, and authorised push payment scams are just some of the most common methods of defrauding common people.
The global banking fraud survey by KPMG asserts that the rise in digital banking and cashless payments reduces in-person interaction between banks and their customers. The facelessness of the clients makes it a breeding ground for criminals and fraudsters not only from within the country but also from across the borders. The digitally networked environment makes hacking, phishing, identity theft etc. far easier than expected.
To tackle the menace, a series of measures have been taken up. These include the Financial Fraud Reporting and Management System (FFRMS) operationalised by the Indian Cyber Crime Coordination Centre (ICCC) under the Ministry of Home Affairs (MHA). It intends to immediately report financial frauds and prevent fraudsters from siphoning off funds.
The Central Fraud Registry (CFR) of RBI maintains 2016 a centralised searchable database of fraud reported by banks through the Fraud Monitoring Return (FMR). It provides the much-needed pieces of information for efficient credit risk governance and fraud risk management. It as well works for timely fraud risk identification, control, reporting, and mitigation.
Institutional set to deter, prevent, detect, and report are important but consumer awareness and consumer education programmes on safe banking practices and cyber fraud are of utmost importance. Hence such programmes are held regularly.
Authorities claim that the astounding rise in financial fraud is reflective of the effectiveness of the above measures. Stronger detection mechanisms have been able to uncover the scams and frauds that may have been committed many years ago. At the same time, they also detect them on a more current basis.
There may be some merit in the claim. Yet the data on the decline in the magnitude of financial frauds may not be taken as conclusive evidence of their absolute effectiveness. A large portion of frauds committed in the current or recent years may be unearthed only after a few years.
Bad lending decisions may be at the root of the bad assets but frauds and scams are no less culprits. Besides they erode consumer confidence and trust in the baking system and thereby pose a serious threat to their survival and growth.
Indians have been known as savers and the banking sector has been able to channel a significant proportion of their savings into capital formation. The banks, nation and the regulators must make all out efforts to continue to win and retain the trust of their deposit holders at all cost.
(Furqan Qamar is a professor in Department of Management Studies in Faculty of Management Studies in Jamia Millia Islamia. He was the Vice Chancellor of Central University of Himachal Pradesh and University of Rajasthan.
S. M. Minhaj Ud Din is junior research fellow with the Department of Management Studies in Faculty of Management Studies in Jamil Millia Islamia.