Banking Central| Five ways Indian banks can tackle rising frauds

The RBI must wield its regulatory stick harder

The Reserve Bank of India’s (RBI) latest edition of the Report on Trend and Progress of Banking (2023-24) drops a bombshell: there has been 18,461 bank fraud cases in the first half of FY25 (April-September 2024) -- a 27.4 percent spike from 14,480 cases a year earlier.

The amount involved?

A staggering Rs 21,367 crore, which is an eightfold leap from Rs 2,623 crore in H1 FY24.

Don’t mistake this as a statistical blip; it’s a screaming alarm about systemic vulnerabilities eroding trust in a sector that’s otherwise a global standout with 2.5 percent gross NPAs and 16.8 percent capital adequacy. This also suggests that as digital transactions soar—UPI alone clocked 16.73 billion transactions in December 2024—the number of bank frauds are rising as well.

Numbers paint a grim picture.

Bank frauds have been on the rise in India

Within the bank groups, private sector banks, which are tech-savvy, reported 67.1 percent of fraud cases in FY24, as per RBI, driven by card and internet scams that accounted for 85.3 percent of cases and 44.7 percent of the amount involved.

Public sector banks (PSBs), holding 55.2 percent of the sector’s balance sheet, bore the brunt of high-value frauds, particularly in loan portfolios, contributing 75.3 percent to FY24’s Rs 13,930 crore fraud losses.

The surge in H1 FY25 reflects a worrying trend: digital frauds, fuelled by social engineering and mule accounts, are outpacing banks’ defences. The RBI notes a “significant time-lag” in detection, with 89.2 percent of FY24 fraud values tied to prior years, exposing weak monitoring.

Penalties doubled to Rs 86.1 crore in FY24, signalling regulatory frustration. Yet, the fraudsters keep winning.

So, why this explosion?

Let’s say India’s digital leap is a double-edged sword. With 80 percent of adults under formal banking and UPI transactions up 8 percent month-on-month, the attack surface for fraudsters has widened. Social engineering— like phishing and vishing—targets gullible customers, while mule accounts, often opened with lax KYC (Know Your Customer) verification, launder illicit funds.

Microfinance and unsecured loans, where 11 percent are overdue and 60 percent of borrowers juggle multiple loans, are breeding grounds for fraud.

The RBI’s own data shows 40 percent of new bad loans in private banks stem from these segments. Add to this the rise of fake digital lending apps, falsely claiming ties to regulated entities, and you have a perfect storm. The reputational and operational risks, as the RBI warns, threaten financial stability itself.

The government and RBI can’t afford complacency. There are a few areas where the stakeholders must work on urgently to tackle rising frauds.

First, banks must overhaul customer onboarding and transaction monitoring. Real-time AI-driven systems, like those used by global banks, can flag anomalies—unusual login locations, rapid fund transfers—before frauds escalate.

The RBI’s plan for a public repository of digital lending apps is a start, but it needs teeth: mandatory verification and swift delisting of rogue apps.

Second, coordination with law enforcement agencies must intensify. The 22-month average detection lag, as per RBI, is unacceptable. A dedicated cybercrime task force, linking banks, police, and the Indian Cyber Crime Coordination Centre, could slash response times.

Third, customer education is non-negotiable. The RBI’s awareness campaigns are laudable but underfunded; a nationwide push, akin to Swachh Bharat, targeting digital literacy for rural and elderly customers, could curb social engineering scams.

Fourth, banks need to tighten KYC for small-ticket loans and microfinance, where lax checks fuel mule accounts. Blockchain-based identity verification, piloted by some fintechs, could ensure traceability without stifling inclusion.

Finally, the RBI must wield its regulatory stick harder. Penalties of Rs 86.1 crore are pocket change for banks with Rs 228.92 lakh crore in deposits. Fines tied to fraud losses—say, 5 percent of the amount involved—would force accountability. The RBI’s expected credit loss framework, effective April 2025, could also incentivise proactive risk management.

India’s banking sector is a global success, with Rs 3.5 lakh crore in FY24 profits and a 13-year NPA low. But this surge in fraud—Rs 21,367 crore in just six months—threatens to erode trust and stability.

To sum up, the RBI and banks must act decisively, blending tech, enforcement, and education to outsmart fraudsters. Anything less risks turning India’s banking boom into a costly bust.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)