Greater due diligence, fund utilisation audits can check bank frauds, say experts

The Reserve Bank in its latest annual report revealed that bank frauds, both in terms of numbers and volume, have gone up substantially during 2019-20.

New Delhi: Attributing the rise in reporting of bank frauds to greater scrutiny, experts said strong due diligence at branch level and periodic fund utilisation audits can check financial delinquencies. The Reserve Bank in its latest annual report revealed that bank frauds, both in terms of numbers and volume, have gone up substantially during 2019-20.

As per the annual report, "the total cases of frauds (involving Rs 1 lakh and above) reported by banks/FIs increased by 28 per cent by volume and 159 per cent by value during 2019-20."

The date of occurrence of these frauds are, however, spread over several previous years.


Both the borrowers and lenders should be held accountable for misuse of depositors' funds, said Gagan Puri - Partner, Leader Forensic services, PwC, adding "a culpable act of diversion of funds accompanied by ineffective or insufficient monitoring can be a recipe for disaster."

Strong culture of accountability, zero tolerance and effective enforcement is the key for ensuring that the instances of fraud decrease, he said.

"Enhancing the due diligence process taking into the learnings of the frauds that have been identified, and fund utilisation audits at the time of disbursements, instead of doing these once the account has been identified as a NPA, are measures that are the need of the hour," Puri added.
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Atul Pandey, Partner, Khaitan & Co, said the spurt in banking frauds mainly pertain to loan related frauds.

"It is important to note that the RBI has substantially strengthened the fraud recognition process and such spurt in cases may not necessarily indicate increase in banking frauds, but may instead reflect cases which had earlier remained undetected," he said.

Pandey further said that the RBI's directives on increasing monitoring of loans as well as imposing requirement of increased forensic audits seem to be a step in the right direction.

KV Karthik, Partner, Forensic - Financial Advisory, Deloitte Touche Tohmatsu India LLP, opined that over the years RBI has been active when it comes to providing timely guidelines to banks on emerging frauds, fraud prevention methods, compliance frameworks and pushing for stringent reporting norms and other enablers.
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It is up to the banks to implement these guidelines and implement a fraud risk management and Early Warning Signals (EWS) system in a comprehensive manner.

"This will require a shift towards a proactive approach for fraud risk management rather than reactive approach that is prevalent. This means banks will need to move from equipping oneself to respond to a fraud incident, to preventing it, periodically reviewing their risk and controls and implementing technology tools for prevention and early detection of frauds," Karthik said.
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Commenting on the issue, Vivek Jalan, Partner at Tax Connect Advisory services LLP, said the root cause lies in the lag between occurrence and detection of frauds.

"In large frauds (Rs 100 crore and above), the average lag was almost 5 years which by any standard is not acceptable. What is needed is Real Time Warning Signals (RTWS) instead of Early Warning Signals (EWS). Also the strengthening of concurrent audits in banks is a possible way forward," he said.

As per the central bank's latest annual report, banks and financial institutions (FIs) took an average of 2 years in detecting a fraud during 2019-20, while for high-value frauds of over Rs 100 crore, the time lag in occurrence and knowledge of fund misappropriation was much higher at over 5 years.

Presenting data of frauds involving Rs 1 lakh and above, RBI said a total of 8,707 frauds were detected during 2019-20 involving an amount of Rs 1,85,644 crore. This compares with 6,799 cases involving Rs 71,543 crore in the previous year.

RBI's report said frauds have been predominantly occurring in the loan portfolio (advances category), both in terms of number and value.

There was a concentration of large value frauds, with the top fifty credit-related frauds constituting 76 per cent of the total amount reported as frauds during 2019-20.

Weak implementation of EWS by banks, non-detection of EWS during internal audits, non-cooperation of borrowers during forensic audits, inconclusive audit reports and lack of decision making in joint lenders' meetings account for delay in detection of frauds, it added.
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