RBI Financial Stability Report: Bank Frauds On The Rise Due To Delayed Recognition

The quantum of bank frauds reported by banks has risen significantly between 2018 and 2019 due to delayed recognition, the Reserve Bank of India said in its Financial Stability Report on Thursday.

The recognition of an occurrence of a fraud is not uniform across banks, the RBI said, adding that this is why around 90.7 per cent of the frauds reported in the last year were related to cases between 2000 and 2018.

Nearly 40 percent of the frauds took place between 2013 and 2016, the report said, indicating that there is a significant time-lag between the date of occurrence of a fraud and the date of its detection.

The share of frauds reported by public sector banks out of the overall frauds reported stood at 96 percent at the end of March 2019, against a banking industry average of 60.9 percent.

In February 2018, the government issued a direction to all PSBs to examine non-performing asset accounts exceeding Rs 50 crore, to see if there were possible frauds committed.

“Systemic and comprehensive checking of legacy stock of NPAs of PSBs for fraud during 2018-19 has helped unearth frauds perpetrated over a number of years, and this is getting reflected in increased number of reported incidents of frauds in recent years compared to previous years,” the RBI said.

Further, the RBI found that as of December 2018, 204 borrowers who had been reported as “fraudulent” by one or more banks were not classified by other banks which also had exposure to these borrowers.

This is mainly due to non-uniformity in fraud reporting standards and in the identification of Red Flagged Accounts, based on an indicative list of early warning signals.

BloombergQuint had earlier found that due to various factors the implementation of the EWS/RFA system, as mandated by the central bank back in 2015, was varied and inconsistent across the banking system.

The RBI said that in several cases banks are unable to confirm the RFA-tagged accounts as frauds within the prescribed six-month timeline. In fact, banks red-flagged 176 cases after exceeding the six-month period, according to Central Repository of Information on Large Credits data as of of March 2019.

“The reasons cited for delays in recognising frauds include delays in completing forensic audits or inconclusive findings of forensic audits,” the report said, adding that the RBI is reviewing its norms on frauds and considering additional measures for timely recognition of frauds and enforcement action against violations.

For PSBs, frauds by borrowers were mainly committed with regard to cash credit advances, followed by term loan borrowers and other advances.

For private banks, however, the majority of frauds were committed by term loan borrowers, followed by those who availed cash credit and other advances.