More steps in the offing for timely fraud detection in banks: RBI

There is a need for timely recognition and reporting to reduce their economic costs and to address the vulnerabilities in a proactive and timely manner, RBI said in its Financial Stability Report

Concerned about surge in frauds in banks due to legacy cases, the Reserve Bank of India (RBI) will prescribe additional measures for timely detection of embezzlements and enforcement action against violations.  

According to the Financial Stability Report (FSR) released on Thursday, the RBI is reviewing its master direction on frauds. The increased number of reported incidents of frauds in recent years is being attributed to the prevalence of legacy cases, particularly in public sector banks (PSBs).

There is a need for timely recognition and reporting to reduce their economic costs and to address the vulnerabilities in a proactive and timely manner, the FSR said.

It was observed that in many cases frauds being reported now were perpetrated during earlier years. The recognition of date of occurrence is not uniform across banks.

To ensure timely and assured detection of frauds in large accounts, the government issued a direction in February 2018 to all PSBs to examine non-performing asset (NPA) accounts exceeding Rs 50 crore from the angle of possible fraud.

The systemic and comprehensive checking of legacy stock of NPAs of PSBs for fraud during 2018-19 (FY19) has helped unearth frauds perpetrated over a number of years. This is getting reflected in increased number of reported incidents of frauds in recent years, compared to previous years, the FSR added.

The time lag between the date of occurrence of a fraud and the date of its detection is significant. The amount involved in frauds that occurred between 2000-01 and 2017-18 formed 90.6 per cent of those reported in FY19.

With regard to frauds reported, the relative share of PSBs in the overall fraud amount reported in FY19 was in excess of their relative share in the credit

Similar to earlier trends, loans and advances-related frauds continued to be dominant, in aggregate constituting 90 per cent of all frauds reported in FY19 by value.

In the advances-related fraud category, cash credit/working capital loans-related frauds dominated in PSBs, whereas retail-term loans (non-housing) were a major contributor to advances-related frauds in private banks.

As on December 31, 2018, 204 borrowers, who had been reported as fraudulent by one or more banks, were not classified as such by other banks with exposure to the same borrower. One of the major areas of non-uniformity in processes pertains to identifying red-flagged accounts (RFAs). The red-flagging of accounts based on an indicative list of early warning signals is not uniform across banks.

In several cases, banks are unable to confirm RFA-tagged accounts as frauds or otherwise within the prescribed period of six months, it added.