Survey reveals rise in retail banking fraud

Deloitte reports hike in numbers, improved method; better recovery

Most banking frauds in India occur in the retail segment, according to a survey by Deloitte.

A majority of the respondents to the survey, ‘India Banking Fraud’, indicate that they had experienced more than 50 such experiences, with the loss per each being Rs 10 lakh.

The number and the sophistication of frauds have increased over the last two years, claimed the survey, now in its second edition. Ninety-three per cent of the respondents pointed out a substantial rise in fraud, with half of them claiming a 10 per cent increase within their organisation.

In the non-retail segment, respondents reported an average of 10 incidents with an approximate loss of Rs 2 crore for each. Most of the respondents also claimed that they were able to recover less than 25 per cent of the reported fraud.

“While the study shows that frauds are on the rise, overall recovery has improved. About 49 per cent of the respondents have been able to recover more than 25 per cent of the losses due to fraud,” said K V Karthik, senior director, Deloitte Forensic.

Some of the reasons that have been identified for the increase in fraud are lack of overview by line managers or senior management on deviations from existing processes, business pressures to meet unreasonable targets, lack of tools to identify potential red flags, and collusion between employees and external parties. The common causes of frauds observed in corporate banking included diversion and siphoning of funds, whereas fraudulent documentation and absence or overvaluation of collateral were cited as the main reasons for fraud in retail banking.

Approximately, 30 per cent of the survey respondents indicated that it took them six to 24 months to detect fraud, relying largely on customer complaints, anonymous tips received through whistleblowers and account audit or reconciliation. The action taken by a majority of the respondents, upon detection, was to carry out an internal investigation, while some others also chose to report the incident to a law enforcement agency.

Only half of the survey respondents indicated having an effective fraud-risk assessment program. However, more than two-thirds of the survey respondents indicated that they had effective fraud control strategies and policies in place.

In addition to conducting periodic fraud-risk assessments, banks can also focus on investing in an intelligence gathering mechanism and using dedicated forensic tools during an investigation process, the survey report stated.

Survey respondents indicated that the top three challenges faced by banks in preventing fraud were: (1) the lack of customer and staff awareness about the impact of fraud; (2) integration of data from various banking systems; and (3) inadequate fraud detection tools.

Most of these challenges can be addressed by implementing a dedicated pro-active fraud detection and analytics solution, as one in every three survey respondents were not entirely satisfied with their existing fraud solution.

With respect to investments in data analytics, Karthik said public sector banks are catching up with private and foreign banks in this space.

There has been a substantial increase in the dependence on technology in the banking sector. The top three areas giving sleepless nights to the survey respondents were internet banking and ATM fraud, e-banking fraud and identity fraud. In addition, mortgage portfolio also appeared to be increasingly vulnerable to the risk of fraud, survey respondents indicated.