The recent newsbreak is that Public Sector Banks (PSBs) are conducting an in-depth review of loan accounts, with expectations of reporting more cases of fraud. This is particularly relevant for those accounts previously tagged under the Early Warning Signals (EWS) system. The EWS framework is an initiative by the Reserve Bank of India (RBI), developed in response to a notable delay in detecting and reporting banking frauds. Its primary objective is to prevent and promptly detect these crimes, facilitate timely reports to regulators, and prompt staff accountability proceedings. This way, the banks’ operations and risk-taking capacities remain unaffected.
Data Analysis
Surprisingly, despite RBI’s increased supervision and vigilance, cases of significant frauds (involving Rs. 1 lakh and above) reported by banks and financial institutions have spiked. During 2019-20, there was a 28% volume surge and a 159% value increase. In March 2019, there were 6,799 fraud cases amounting to Rs. 71,543 crore, but this skyrocketed to 8,707 cases involving Rs.1,85,644 crore by the end of the fiscal year as per RBI’s Annual Report 2020. PSBs topped the fraud table with 4,413 cases involving Rs. 1,48,400 crore, while private banks reported 3,066 frauds involving Rs. 34,211 crore.
The Current Scenario
At present, banks are meticulously going through their accounts that were earlier placed on alert. There will be fraud reports for any large accounts where such instances are discovered, and 100% provision will be made against them. This thorough review aims to ensure appropriately provisioned balance sheets. Interestingly, the RBI has highlighted that the frauds registered during 2019-20 can trace their roots back to loans approved during 2010-2014. On average, the detection lag for fraud was 24 months during 2019-20, and for substantial frauds of Rs. 100 crore and more, this lag was a whopping 63 months.
Reasons behind the Frauds
Several factors contribute to these alarming numbers. These include weak EWS implementation by banks, non-detection of EWS during internal audits, lack of borrower cooperation during forensic audits, inconclusive audit reports, and poor decision making in Joint Lenders’ meetings account.
Overcoming Measures
To overcome these challenges, the EWS mechanism is being revamped concurrently with strengthening the audit function. This involves ensuring timely, conclusive forensic audits of borrower accounts under scrutiny. RBI is also harnessing the power of technology by interlinking various databases and information systems to enhance fraud monitoring and detection. The anticipated operationalization of online fraud reporting by the Non-Banking Financial Companies (NBFC) and the Central Fraud Registry (CFR) portal of Scheduled Commercial Banks (SCBs) by January 2021 is another promising step. Additionally, the RBI has already established the CFR as a searchable database, helping banks identify fraudulent activities by borrowers at the earliest possible stage.