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The urgent need to check bank frauds

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India saw more banking frauds in the first half of 2021-22 than in the same year-ago period. However, the amount involved in the frauds declined from 64,621 crore to 36,342 crore, according to the RBI’s Trend and Progress of Banking in India report. Mint takes a look:

India saw more banking frauds in the first half of 2021-22 than in the same year-ago period. However, the amount involved in the frauds declined from 64,621 crore to 36,342 crore, according to the RBI’s Trend and Progress of Banking in India report. Mint takes a look:

What are banking sector frauds?

A banking fraud is an attempt to siphon or take funds or other assets from a financial or banking institution. This may vary from data theft, cybercrime, and simple manipulation of books of accounts, to  fraudulent  documentation. They can be classified under various categories such as criminal breach of trust and misappropriation of funds, encashment done fraudulently through forged instruments, manipulation of books of accounts, irregularities in foreign exchange transactions, unauthorized credit facilities extended for illegal gratification, cheating and forgery, negligence and cash shortages.

What does the RBI data tell us?

Banking fraud cases rose to 4,071 in April–September FY22 from 3,499 in the year-ago period, according to the Reserve Bank of India’s (RBI’s) Trend and Progress of Banking in India, 2020-21, report. However, the amount involved declined from 64,621 crore to 36,342 crore in the same period. In FY21, more than half of the fraud cases were reported by private sector banks, while in terms of amount, the share of state-run banks was higher, a reflection of the prevalence of high value frauds. Internet or card transactions accounted for 34.6% of the cases; 47.54% were related to advances.

What do other studies say about banking frauds?

They are expected to rise in the next two years, says the Deloitte India Banking Fraud Survey, because of remote working models, customers increasingly using non-branch banking channels, and limited use of forensic tools. Also, banks are unable to consistently monitor loans given to small and medium businesses. Retail banking is a major contributor to fraud occurrences.

What is the impact of rising frauds?

Frauds erode customer confidence and pose challenges for the financial system in terms of reputational risk, operational risk, and business risk. Loans granted irrespective of norms or vested interests involved rightly belong to depositors. High-value frauds can lead to the collapse of banks or weaken their balance sheets, resulting in bad banks having to be merged with stronger banks. Productive economic activities would be deprived of credit support, which is the backbone of any business.

What can banks do to stop frauds?

The only way out for state-run banks is functional autonomy, with little scope for bureaucratic or political interference. Strict adherence to know-your-customer norms, as well as accountability among the banking officials concerned is the need of the hour. Banks must also be vigilant and should consistently monitor all accounts. Importantly, people with business interests should ideally be barred from getting onto the boards of banks.

Jagadish Shettigar and   are faculty members at BIMTECH.

 

 

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