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Last Updated : Jul 15, 2020 04:11 PM IST | Source: Moneycontrol.com

Bank fraud cases see a major spike in 2019-20: How prepared is the RBI?

A look at the latest data of large banks shows a spike in number of fraud cases and the money involved over the previous year. Subsequently,there is a corresponding rise in provisions made.

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Many banks, across private and public sector, have seen a significant spike in number of fraud cases in 2019-20 and the quantum of money involved, indicating that challenges on risk management continues, for the industry and the banking regulator, in a big way. This is despite banks being hit by several instances of frauds in recent years.

A look at the latest data of large banks shows a spike in number of fraud cases and the money involved over the previous year. Subsequently,there is a corresponding rise in provisions made.

Punjab National Bank, which was hit by the Rs 14,000 crore Nirav Modi scam in 2018, has reported a sharp jump in the number fraud cases in the bank in fiscal year 2019-20. The bank has reported Rs 14,633 crore worth frauds in FY 20 from 509 cases, more than double compared with Rs 5,903 crore from 216 cases in FY 19, according to the official figures.


To cover this, the bank has made a provision of Rs 14,625 crore in FY 20. In FY19, the bank has provided Rs 7,320 crore to cover the fraud, data showed. In January, 2018, PNB had disclosed a scam worth over Rs 14,000 crore perpetrated by Nirav Modi and his uncle Mehul Choksi, where the duo defrauded the bank using fake LoUs (Letter of Undertaking) for several years. Both Modi and Choksi had escaped to foreign countries much before the scam became public.

Early this month, PNB had reported its Rs 3,600 crore exposure to Dewan Housing Finance (DHFL) as a fraudulent account.

“A fraud of Rs 3,688.58 crore in the NPA account of Dewan Housing Finance (DHFL) at Large Corporate Branch at Mumbai, Zonal Office, Mumbai. A fraud of Rs 3,688.58 crore is being reported by the bank to RBI in the accounts of the company (DHFL),” in an exchange filing, dated July 9, the bank said.

The filing undersigned by Company Secretary Ekta Pasricha further mentioned that the bank has already made provisions amounting to Rs 1246.58 crore as per prescribed prudential norms, which is in compliance with Sebi regulations. As per Sebi rules, 100 percent provisioning is required in fraudulent accounts over a period of four quarters, and PNB has made a provision of Rs 1,246 crore thus far.

SBI fraud cases triple

It’s not just PNB, country’s largest lender, State Bank of India (SBI) too have reported substantial increase in the fraud cases. In fact, SBI’s fraud cases (in terms of amount) has tripled in FY20 over previous year. According to official data, the lender was hit by Rs 44,622.45 crore in 6,964 cases in FY 20 as against Rs 12,387.13 crore in 2,616 cases in the previous year. Of this, an amount of Rs 44,419.46 crore in 651 cases represents advances declared as frauds as against  Rs 12,310.90 crore in 581 cases in the previous year. The bank has made full provision has been made for the outstanding balance as on 31 March, 2020 in respect of frauds reported during the year, the data shows.

What about private banks?

Kotak Mahindra Bank reported 643 fraud cases involving fraud amount of  Rs 579.60 crore as against  Rs 14.10 crore cases from 376 cases in last year.

In the cases of Axis Bank, another leading private lender, the bank has reported Rs 2,030 crore worth frauds in FY20 from 52 cases as against just Rs 529 crore from 145 cases in FY20. Provisions made on frauds shot up to Rs 1,272 crore against Rs 172 crore in previous year.

As against this, private sector lender, HDFC Bank was relatively less impacted. It reported Rs 222 crore worth frauds in FY20 from 7,580 cases against Rs 498 crore from Rs 5,484 cases in previous year. The bank made a provision of Rs 168 crore in last year.

How prepared is RBI?

In the recent years, the Reserve Bank of India (RBI) has been tightening regulation and supervision of banks to prevent frauds and financial irregularities focusing more on field level supervision and creating a separate unified cadre in the central bank.

The cadre was formed on November 1 last year to strengthen and consolidate the supervision functions, presently scattered across different departments. But, there is a difference of opinion between top management and officers about the effectiveness of the new division. Officers believe the existing infrastructure needs to be strengthened through training instead of creating a new cadre.

The central bank's plan was to bring in more accountability to the supervision department by making it directly responsible for failures in the supervisory functions, an official said on condition of anonymity. But since beginning, majority of the RBI officers were skeptical to join the division citing human resource (HR) problems, including chances of promotion and pay hike.

Till November last year, the supervision of financial sector entities was undertaken through three separate departments, viz., Department of Banking Supervision, Department of Non-Banking Supervision and Department of Co-operative Bank Supervision. Similarly, the regulatory functions relating to financial sector entities were carried out through three separate departments, viz., Department of Banking Regulation, Department of Non-Banking Regulation and Department of Cooperative Banking Regulation.

One of the reasons that alerted the regulator was the fraud at Punjab and Maharashtra Cooperative Bank in September last year, where management fudged accounts for several years in collusion with one of its corporate borrowers. The RBI imposed deposit withdrawal restrictions and superseded the Board of the bank. Till now PMC resolution is pending.

“It is highly critical that the RBI should have frequent on-site inspections to check fraud. The number of cases going up ,” said a senior RBI executive on condition of anonymity.

Last week, RBI governor, Shaktikanta Das had stressed the need for closer monitoring of financial transactions to prevent frauds and other financial irregularities. Das said the central bank has been focusing on a “sharper and more forward-looking” off-site surveillance framework and will use technology tools to ramp up the supervision framework.
First Published on Jul 15, 2020 04:11 pm