The deadweight of banking fraud in India: What's the weak link?

Fraud doubled in value to Rs 1.85 trillion in FY20, which is nearly equal to the recapitalisation amount injected into state-run banks during the year

Just when you thought another big fraud like the heist at Punjab National Bank by diamantaires Nirav Modi and Mehul Choksi will not hit the headlines, lands ABG Shipyard with its Rs 22,848-crore mess — the biggest, at that. Fraud spoils the feel-good factor in more ways than one. Apart from eroding customer confidence, fraud affects reputational, operational and business risks.

What’s the weak link? The RBI’s Financial Stability Report of December 2019 tells you that in H1:FY19, state-run banks accounted for 89.8 per cent of fraud by value, followed by private banks at 9.2 per cent, and foreign banks at 0.4 per cent. It says a lot about the internal controls in state-run banks. Remember, that despite the Rs 20,000-crore hit that Punjab National Bank took, no heads rolled.

Now, cut to the present. The RBI’s Report on Trend and Progress of Banking in India 2020-21 notes that during the year, the reported number of cases of fraud declined. In terms of amounts involved, the bulk of the fraud had happened earlier, but was reported during the year. In terms of area of operations, an overwhelming majority of cases reported in terms of number and amount involved related to advances, while fraud concerning card or internet transactions made up 34.6 per cent of the number of cases.

Surprisingly, the RBI’s Trend and Progress of Banking in India says, “there was a marked increase in frauds related to private banks, both in terms of number as well as the amount involved. During H1:2021-22, this accounted for more than half of the number of reported fraud cases.”

To put this in perspective, fraud doubled in value to Rs 1.85 trillion in FY20, with the number of such cases increasing 28 per cent. It’s nearly equal to the recapitalisation amount injected into state-run banks during the year. In its Report on the Trend and Progress of Banking 2016-17, the RBI had pointed out that the process of migration of batch-processed fraud databases to a web-based reporting architecture is largely complete, with regulated entities having started live reporting of Fraud Monitoring Returns from April 1, 2017.

And “banks will also update developments in fraud cases on ‘as and when required’ basis instead of doing it on a quarterly basis.” But fraud continues to plague the system.

With capital at a premium, the system can ill-afford vast sums locked in fraud and its provisioning at the expense of shareholders and depositors. The sub-committee of the Financial Stability and Development Council, at its meeting on September 27, 2019, chaired by RBI Governor Shaktikanta Das, had discussed measures to strengthen the system against fraud and for revisiting the framework for early-warning signals. The central bank can be expected to quicken its stride on this front and may even hike the penalties on the laggards among banks.