Frauds in the Indian banking system has more than doubled in value terms in 2019-20 to Rs 1.85 trillion. It was at Rs 71,543 crore in the previous year. Total number of cases (involving Rs 1 lakh and above) has also shot up by 28% during the year.
The figures from RBI's annual report are indeed worrisome but even more troubling is the inability of the banking system to detect these cases at an early stage. The annual report suggests that banks on average take 24 months to detect fraud. The duration is even longer for larger cases. The frauds involving an amount of more than Rs 100 crore takes 63 months from the time of occurrence to reporting by the bank.
According to G Padmanabhan, former executive director of the Reserve Bank of India, the spike is due to the stringent norms adopted by the department of financial services post-Nirav Modi case.
“The banks were forced to conduct a forensic audit of all its NPAs above Rs 50 cr. Hence, the jump in numbers is due to the enhanced recognization process and doesn't mean these cases occurred in the current financial year,” he added.
NS Vishwanathan, Former Deputy Governor of RBI, echoed similar sentiments. "The number should not be seen based on year on year increase in the number of fraud cases. The cases occurred in the past but they are being reported now.”
"This should be seen as a positive sign that recognition and reporting is happening, which was not the case in the past," he added.
While frauds are predominantly reported in the advances category, constituting 98% of the total amount involve in frauds, The cases in other areas of banking such as off-balance sheet and forex transactions, actually fell in 2019-20.
What's the solution?
The issue of financial frauds is not the one to be easily brushed aside. The involvement of bank staff in numerous fraud cases has pointed at compliance and supervisory related deficiencies within the banking system.
Apart from the need for strengthening the management, DK Mittal, former banking secretary also points at a need for banks to strengthen their recovery process. It is the general practice globally but unfortunately, Indian banks don’t put their best staff towards the recovery side and even boards do not regularly monitor it. It rules out the early chance of detection.
The loopholes in collateral loans also need to be addressed where collateralized properties are often registered in multiple names. A digital listing of statewide mortgaged properties could possibly rule out the possibility of multiple loans on a single property and curb the property-related frauds to a great extent.
The RBI's new rule on the opening of current accounts is also a great step in the direction of reducing fraud. The rule requires borrowers to open current accounts or cash-credit/overdraft accounts only with banks who have lent substantial loans to them. It will help the lender to maintain a holistic overview of the entity.
Financial fraud and corruption have been a bane for many developing countries where businesses and economies are yet to evolve. The onus remains equally on banks as well as RBI in India to tighten the process. It is an ongoing process to be developed over time. Hence, #Mandi outlook remains in the short run on RBI’s attempt of curbing the financial frauds.