Vulnerability reminder

Synopsis: The RBI needs to ensure stricter oversight over large-value credit-related corporate frauds.


The U.K. Home Secretary Priti Patel’s decision to allow absconding diamond dealer Nirav Modi’s return to India, three years after state-owned Punjab National Bank admitted it had been deceived of over ₹14,000 crores.

  • This is a reminder that there is a serious need to address the banking system’s vulnerability to fraud. India’s creditors have had to deal with the growing number and increasing value of frauds.
  • The RBI noted in its recent Annual Report, that the total number of cases of fraud (minimum size of ₹ 1 lakh) at banks and financial institutions spiked 28% by volume. It surged 159% that is more than 2.5 times, by value to ₹85-lakh crore in the 12 months.
  • The trend of frauds from the past years is very troubling from multiple angles. Frauds mostly occur in the loan portfolio. The RBI noticed that there was a concentration of large value frauds, with the top 50 credit-related frauds creating 76% of the total amount.
How vulnerable banks are to fraud?

The central bank has created a framework to assist the prevention, early detection and prompt reporting of such frauds. The average delay in noticing these transactions was 24 months during 2019-20.

  • Firstly, the RBI’s found out that the average delay was 63 months, or more than five years in cases of sizeable fraud, where the sum involved exceeded ₹ 100 crores.
  • Secondly, the public sector banks (PSBs) were severely impacted by the hit from fraudulent borrowing. They accounted for 80% share in 2019-20 but the private sector lenders overtook their PSBs both in terms of the number of cases and the increase in value of frauds.
    • Fraud at a single private lender tilted the increase in the collective value of transactions that year. Private Banks witnessed a fivefold surge in value to ₹34, 211 crores and a 34% jump in the number of fraud cases while the PSBs suffered only a 24% increase.
  • Thirdly, these facts are very useful as the government has been on mission mode in trying to accelerate partnership among the PSBs. The government is trying to open up the sector as a whole to greater private sector participation.
  • Fourthly, according to RBI weak implementation of early warning signals, non-detection of signals during internal audits and non-cooperation of borrowers during forensic audits are the key reasons for delayed detection of fraud.
The way forward
  • The forthcoming concentration of risk in fewer lenders is far from reassuring. The RBI as an industry regulator needs to ensure tighter oversight. Any negligence threatens overall financial stability.

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