Riyaz Ahmed Bhat
In its financial stability report published in June 2016 The RBI has shown lot of concern on increasing trend of frauds which have been categorized as one of three emerging challenges before Indian Banking industry. This phenomenon expands from simple payment of fraudulent instruments to most sophisticated cyber attacks which siphon out the money from the accounts of depositors. As per the report of RBI during 2016-17 the frauds in Indian banks have increased 19.6% from 4235 to 5064 wherein amount involved has increased by 72% from Rs. 97.5 billion to 167.70 billion. In a recent reply GOI has informed that hundreds of crores have been lost to increased number of cyber frauds in Indian public sector banks. As per reports number wise the private sector banks are topping the list while as amount wise the public sector banks contribute 83% of total amount in frauds. Previously it had come to surface that in year 2016-17 almost 86% of frauds amount wise were from credit side of the business. These included Gold plating of the projects, diversion of funds from financed projects and double financing of individual borrowers for same business ventures by the banks. This implies that big ticket size financing of the banks is the area which has been found prone to frauds because in this segment the due diligence in appraisal or sanctioning of the proposals has been found wanting. A close segment wise analysis of frauds reveals that all the segments including deposits, credit disbursal and usage of traditional instruments like cheques or electronic systems like debit/credit cards and electronic gateways like ebanking have remained prone to committing of frauds. But as already reported that the major contribution has come from financing of corporate borrowers wherein influential clients have got their unviable projects or gold plated projects cleared by their accomplices sitting at important positions in Banks. Though the standing instructions by the RBI have comprehensively laid down guidelines to address this problem and encourage deterrence yet Banks feel hesitant to strictly abide by that mechanism. As a result, it is observed, whenever a fraud in financing is detected that the account would have been seasoned for some time.
To understand the subject one has to start with RBI definition of fraud which reads “A deliberate action of omission or commission by a person resulting in a wrongful gain with or without any monetary loss to the Bank.” Then we must also be aware that all types of frauds make the banks to cough up considerable amounts which affect their profitability. The emergence of a fraud also shakes the confidence of users of banking services thus affecting reputation of the banks. The RBI has been pro active in sensitizing the banks regarding this phenomenon and has been publishing a set of guidelines from time to time to put in place a set of comprehensive mechanism for individual banks. This way it intends to deter the occurrence of frauds or enforce a corrective action to be followed up after surfacing of any financial fraud. Though this mechanism has been adopted by the banks yet it is felt that supervision by RBI with a strict punitive action against erring financial institution will not only safeguard the interests of Indian Banking but also cement the confidence of banking users on the systems adopted/introduced in Banking. Furthermore to augment the resillence in Banking system against any major threats RBI has put in place a risk management system where in the track record of the individual banks envisages the requirement of provisions to mitigate the risk of emerging future frauds in operations of that bank. Such robust mechanisms by RBI are only intended to safeguard the banking system against failure of individual banks as a result of emergence of frauds or scams. The examples of such failures have been failure of Madhavpur central cooperative bank or Global Trust Bank.
As per laid down guidelines a fraud when detected needs to be provided from the earnings and simultaneously Bank needs to report this fraud to outside investigative agency like police, crime branch, Central Bureau of Investigation or serious frauds investigation. This gives an ample opportunity to the bank to increase the scope of investigation beyond internal accountability mechanism so that the perpetuator of that fraud is brought to justice. Most of the time the banks show hesitancy for filing of police complaint or an FIR for the reason that agencies usually begin with invoking of sec 120 b of Indian Penal code(IPC) and trail begins with Bank official who apprised the proposal. The section being non bailable hence works against any bank official who may have processed or sanctioned the loan proposal in normal course of business mitigating the risks involved as per his understanding. It is also advocated that bank staff in present environment works under tremendous stress chasing given targets of business may be in overstepping of norms and in the process may land in trouble. But at the same time it is also a fact that some wonder boys of banking also act in gross violation of guidelines with a malafide intention to benefit certain borrowers thus become black sheep of white flock. The glaring example has been in case of REI Agro and Kingfisher airlines.
Concluding the discussion it seems that the frauds have increased in line with usage of banking services by increasing population. It is also observed that mostly the corporate frauds involving major chunk of Bank money have been seasoned before being taken up for investigation by law enforcement agencies. Also the introduction of technology in the banking has opened up a new frontier for security experts to safeguard the public money, kept in banks as safe deposits, from being drained off by unscrupulous elements. In light of this observation the banks need to
* Regularly upgrade their security apparatus against technological frauds
* To strengthen the risk management apparatus so as future risks are adequately provided for.
* To be harsh with culprits inside and outside the bank that have been guilty of committing a fraud with malafide intent but at the same time have to be lenient with the persons who may have contributed inadvertently in commission of fraud during the performance of duties in normal course of business.
The banks need to defend stand by its innocent employees during investigation by outside agencies where some investigating officers may try to invoke sec.120 of IPC against officials performing their duties with dedication mitigating the risks in normal course otherwise the bank staff will feel discouraged affecting their productivity.
(The author is Secretary General Jammu and Kashmir Bank Officers Forum)
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