Financial Stability Report: Bank Frauds Surge To A Record In First Half Of FY20

The value of bank frauds reported in the first half ended September rose to a record, largely because of delayed recognition.

Banks reported 4,412 cases of frauds worth Rs 1.13 lakh crore in the first half of the ongoing fiscal, according to the Reserve Bank of India’s Financial Stability Report. That compares with 6,801 cases of frauds worth Rs 71,543 crore reported in the entire 2018-19.

About 97.3 percent of the frauds reported in the first half of this fiscal, in value terms, actually occurred in previous financial years, the report said. The RBI had flagged delayed recognition of frauds by banks in June 2019 report as well.

“An analysis of the vintage of frauds reported during the FY19 and H1 of FY20 shows a significant time-lag between the date of occurrence of a fraud and its detection,” the report released on Dec. 27 said. “The amount involved in frauds that occurred between FY01 and FY18 formed about 90.6 percent of the frauds reported in FY20 in terms of value.”

The number of large-value frauds of Rs 50 crore or more each spiked. In the first half of FY20, there were 398 such cases worth Rs 1.05 lakh crore compared to 322 cases involving Rs 61,579 crore in the previous fiscal.

The number of outlier frauds involving Rs 1,000 crore shot up from just four cases involving Rs 6,505 crore in the whole of FY19 to 21 cases worth Rs 44,591 crore in the first six months of this fiscal.

As of September, around Rs 63,854 crore worth of frauds were reported by public sector banks compared to Rs 6,535 crore by private banks. Which means that 89.8 percent of all frauds were reported by state-run banks compared to 9.2 percent by private banks and 1.1 percent by foreign and others banks.

Loan-related frauds continued to dominate contributing 97 percent of all frauds reported in the first half compared with 90 percent in the entire FY19.

Regulatory Actions

Between July 2019 and Dec. 15, 2019, the enforcement department of the RBI took action against 29 banks and one non-banking financial company, imposing an aggregate of Rs 47.92 crore worth of fines.

Banks were fined for non-compliance or contravention of directions on fraud classification and reporting, monitoring end use of the funds, among other violations by lenders.

The RBI said it was “taking steps to integrate fraud reporting of NBFCs and urban co-operative banks in its central fraud registry database. Such interlinking would serve as an invaluable resource in effective fraud detection and monitoring.”

The central bank will ensure there is a special emphasis on the conduct of the board of banks and NBFCs, and other regulated entities, its committees and senior management towards monitoring and managing frauds, it said. “A sharpened focus on fraud response plan is being sought from the banks and for this, stricter timelines and clear cut guidance with respect to reporting of frauds and declaration and processing of red flagged accounts will be prescribed,” the RBI said.

Banks have to set up specialised units to make use of market intelligence and data analytics and also put in place transaction monitoring system, according to the report.

The central bank will also examine the role and scope of forensic auditors and ensure that banks effectively implement early warning signals prescribed for early detection and pre-emptive actions, it said.

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