Former RBI governor Urjit Patel has called for governance mechanisms to prevent or reduce bank frauds in his new book, Overdraft: Saving the Indian Saver, which hit the stands on July 24.
"In anticipation of such disruptive outcomes that might cause loss of control, management and board members may put in place governance mechanisms to prevent or reduce the incidence of fraud and/or hold larger buffers in the capital structure to bear losses when fraud materializes,” Patel said.
Over the last few years, India has seen a rise in bank frauds. A look at the latest data of large banks shows a spike in the number of such cases and the money involved over the previous year. Subsequently, there is a corresponding rise in provisions made.
Punjab National Bank, hit by an alleged Rs 14,000-crore fraud committed by diamond jeweller Nirav Modi in 2018, has reported a sharp jump in such cases in the fiscal 2019-20.
The bank has reported Rs 14,633 crore worth of frauds in FY 20 from 509 cases, double than that of 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 provided Rs 7,320 crore to cover the fraud, data showed.
In January 2018, PNB disclosed a Rs 14,000-crore alleged scam perpetrated by Nirav Modi and his uncle Mehul Choksi, where the duo allegedly used fake letters of undertaking to syphon off money for several years. Both Modi and Choksi escaped abroad before the alleged irregularities were made public.
“Fraudulent activity can be a net loss to the bottom line; in this case, bank investors would impose deterrence, for example, uninsured creditors might run on the bank inducing liquidity problems, or shareholders might exit, effectively raising the cost of capital and inducing solvency questions,” Patel has said.
Citing the RBI data on banking frauds, Patel said only a handful of cases over the past five years have had a closure and cases of substantive economic significance remained open. As a result, the overall enforcement mechanism–at least until now–is undoubtedly not a deterrent to frauds relative to private economic gains from frauds, Patel said.
The country’s largest lender, State Bank of India (SBI), too, has reported a substantial increase in the fraud cases. SBI’s fraud cases (in terms of amount) tripled in FY20 over the previous year.
According to official data, the lender was hit by Rs 44,622.45 crore in 6,964 cases in FY 20 against Rs 12,387.13 crore in 2,616 cases 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 for the outstanding balance as on March 31, 2020 in respect of frauds reported during the year, the data shows.
Among private banks, Kotak Mahindra Bank reported 643 fraud cases involving an amount of Rs 579.60 crore as against Rs 14.10 crore from 376 cases last year.
Axis Bank, another leading private lender, reported 52 cases of fraud that cost Rs 2,030 crore in FY20 against just Rs 529 crore from 145 cases the previous year. Provisions shot up to Rs 1,272 crore against Rs 172 crore in the previous year.
HDFC Bank seems to have had a better run. It reported Rs 222 crore worth frauds in FY20 from 7,580 cases against Rs 498 crore from Rs 5,484 cases in the previous year. The bank made a provision of Rs 168 crore last year.
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