Fraud Detection and Reporting: A Crucial Step in Banking Sector

Strengthening Fraud Detection Mechanisms in Public Sector Banks

Mumbai, India - In an effort to combat the rising trend of non-performing assets (NPAs) and large loan advance frauds, several public sector banks (PSBs) have been taking steps to strengthen their fraud detection and reporting mechanisms.

The Study’s Findings

According to a recent study, PSBs account for 65% of total bank fraud cases, while private sector banks (PVBs) account for only 19%. This is attributed to stricter oversight by the Central Vigilance Commission (CVC) in PSBs. Additionally, PVBs may be underreporting or “evergreening” loans, which has led to RBI’s measures to curb such practices.

Collusion and Fraudulent Activities

The study also highlighted that big loan advance frauds often involve collusion between bank officials and borrowers, as well as third-party entities such as advocates or chartered accountants (CAs). In these cases, it is challenging for banks to prove criminal intent due to a lack of legal expertise and unwillingness to reveal sensitive data.

The Role of Auditors in Detecting Fraud

To combat fraud, auditors play a crucial role in detecting fraudulent activities. However, the study found that bankers often take projects at face value during inspections, leading to weak due diligence across several PSBs. This can result in financial losses for shareholders when bad debts are not classified promptly.

The Debate on NPAs and Fraudulent Activities

Experts believe that there is an ongoing debate about the nexus between rising NPAs and fraudulent activities in the banking sector. A former CBI director had raised concerns about the increasing amount involved in bank frauds, which has increased by almost 324% in the last three years.

Conclusion

The study concludes that strengthening fraud detection and reporting mechanisms is crucial to prevent large loan advance frauds and maintain the integrity of the banking system. PSBs must ensure stricter oversight, improve due diligence, and classify bad debts promptly to prevent financial losses.

Key Takeaways

• PSBs account for 65% of total bank fraud cases.
• Private sector banks may be underreporting or “evergreening” loans.
• Collusion between bank officials, borrowers, and third-party entities is a common occurrence in big loan advance frauds.
• Auditors play a crucial role in detecting fraud, but bankers often take projects at face value during inspections.
• The classification of bad debts is delayed considerably, leading to financial losses for shareholders.