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Leashing Banking Frauds

19/09/2020 at 6:00 AM

Fraudulent incidents in banks or financial sector are a global phenomenon. Banks in India are not immune to this. In fact, fraudulent incidents in banks in India is on ascent, of late. During 2019-20, the total cases of frauds (involving Rs.1 lakh and above) reported by banks and financial institutions increased by 28% by volume to 8,707 and 159% by value to Rs.1,85,644 crore.

Dr Manas R Das

Excessive greed and dishonesty manifests in frauds or malpractices. Frauds occur both in the real and financial sectors. However, the financial sector is a more fertile ground for breeding frauds, and within it, banks stand out due to their size and scope of businesses. Frauds, which form part of operational risks as per the Basel classification of risks, also lead to huge reputational and legal risks, which at times can be larger than some of the conventional risks including regulatory risks. Instances of large-value frauds pulling down banks are not rare (e.g., Barings). Moreover, many large-value frauds have precipitated in adverse macroeconomic consequences. Unravelling the frauds, after those have been detected, punishing the guilty and recovering the financial losses, besides the non-financial parts, usually take considerable time, though it varies from country to country depending on, inter alia, their legal systems.

Fraudulent incidents in banks or financial sector are a global phenomenon.Banks in India are not immune to this. In fact, fraudulent incidents in banks in India is on ascent, of late.During 2019-20, the total cases of frauds (involving Rs.1 lakh and above) reported by banks and financial institutions increased by 28% by volume to 8,707 and 159% by value to Rs.1,85,644 crore. Advances-related frauds are common, both in terms of number and value. Large-value frauds dominated during 2019-20 with the top 50 credit-related frauds constituting over three-fourth of the total amount reported as frauds.

Human instincts like greed cannot be eliminated, but can be bridled. At the bank-level, internal control systems can play a vital role in this respect. Inspection and audit, and vigilance systems constitute an integral part of the internal control systems which can prevent occurrences of fraudulent incidents and manage their after effects. Here, banks need to increasingly focus on fraud ‘prevention’ rather than fixing the fraud after it has occurred. ‘Prevention’ must be buttressed with ‘eternal vigilance’.

The internal control systems must be manned by highly competent personnel. Banks need to accord increased weight to the support systems, including, majorly, the whole gamut of HRM, besides becoming proactive,as the nature of frauds is mutating day by day just like viruses are getting increasingly resistant to antidotes. There is also truth in the saying that the operators always remain ahead of regulators. Training the staff in ethical practices should be another objective.

It is the Board and the Audit Committee therein of a bank with which the ultimate responsibility should rest.

IT-enabled infrastructure has a big role to play, especially when cyber frauds are growing by leaps and bounds. Further, Data Analytics techniques have been found to be quite useful as evident from the advanced countries’ experiences. Some banks in India are apparently investing in technology to combat cyber frauds.

Monitoring and supervision of banks by the central bank as well as the designated government agencies, both on- and off-site, is essential, especially in respect of those banking activities which are vulnerable to fraudulence. RBI has been sprucing up its regulation and supervision in many ways in this context (e.g., introduction of Central Fraud Registry and revamping of Early Warning Signal).

Fixation of responsibility after a fraud has occurred and the subsequent investigation are very important. It should not be the case that the lower rank officials are sacrificed, and the higher ones go scot-free. An agile and competent legal system to deal with financial sector frauds is the need of the hour. 

About the Author:Dr. Manas R. Das is a former senior economist of State Bank of India. He has over 30 years of experience as an economist in two large commercial banks. Academically, he is a gold medallist in Bachelor of Arts with Economics Honours from Utkal University, followed by Master’s in Economics from Delhi School of Economics and Doctorate in Economics from Gokhale Institute of Politics and Economics. He is also a Certified Associate of Indian Institute of Bankers. He has won several awards, besides being a prolific writer.

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