Bank News: Why are cases of fraud in public sector banks increasing?

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Finance Minister Nirmala Sitharaman told Parliament on Tuesday that between six months of this year - April to September, there have been reports of fraud of Rs 95,760 crore in public sector banks.

In response to a question, he gave a written reply that during this time a total of 5,743 cases of frauds have been reported in banks.

The latest report of the Reserve Bank of India (RBI) released this year said that in the financial year 2018-2019, a total of 6,801 cases of fraud have been reported in all banks, including public sector banks. These scam cases are figures during the 12 months which show that during this period a scam of Rs 71,543.93 crore has taken place.

According to this report, most of these cases are related to loans which were taken from public sector banks. In the Indian market, public sector banks are at the forefront of loans from banks.

A year earlier, in the financial year 2017-18, a total of 5,916 cases of fraud were reported and 41,167.04 crore rupees were lost.

According to the RBI data, the cases of fraud are increasing year after year, as well as the damage due to this is also increasing. Due to this, the risk of economic stability is decreasing on the banks of the country.

The current situation should be a matter of concern for the RBI and the people holding their deposits in banks, as the government running the public sector banks, the regulatory body of the banks.
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After every few weeks, some fresh case of scam is coming in the news, due to which the trust of common people on the system of government banks is being broken. Also, this is a big question on banks, auditors of banks, credit rating institutions and RBI's regulatory body.

According to the RBI, a scam is defined as - "The benefit temporarily incurred by a person during a banking transaction by causing or causing harm to the bank manually or in accounts maintained under a computer system" Work done for the purpose of delivering or inadvertently benefiting. "

90% of the total fraud is in government owned banks. Cases of such fraud have increased four-fold in just five years since 2013-14. So why are the incidents of fraud in banks increasing so much?

Research has shown that whether it is small fraud or big fraud, both have been able to take undue advantage of the weaknesses of the system. The Reserve Bank (RBI) has an early warning signal (EWS) system to prevent such frauds, but as in the case of Nirav Modi, banks are not always able to take advantage of this.
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In June this year, former RBI governor Urjit Patel, through a presentation at Stanford University, showed that most of the fraud cases are due to poor management of risk management and ineffective internal audits in government-owned banks. According to the presentation, banks rarely analyze the risks or do not take appropriate steps about it.

A research conducted by the Indian Institute of Management, Bengaluru in 2016 found a link between fraud and non-performing assets (NPAs) or bad loans. This research suggests that the increasing case of NPAs and frauds in public banks indicates lack of expected standards of corporate action in cases of bank loans where the loan amount was not more than Rs 1 crore.

It also said that these are signs of collusion between corporate companies and high officials of the bank's loan department.

As reported in the IIM (Bombay) report, preliminary investigations into fraud cases at Syndicate Bank and Indian Bank showed that not only the mid-level employees but also senior officials of the bank management were involved.

According to this study, the most important reason behind the fraud is that the selection process of the high officials in these banks has been weakened and it has also been told that their salary is very low compared to the private banks.

Not only this, till the case of fraud is filed, they also retire. Once retired, the rules of pension apply to them and they protect them from any kind of financial penalty.
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Research has shown that it is not easy to commit fraud in large loan advances, and yet they happen because bank officials collude with creditors or sometimes even third parties such as lawyers or chartered accountants (CAs).

The study found that auditors in banks are paid relatively low wages, which means that they only try to an extent to do their jobs. Also, their level of training and on many parameters their skills are also low. As a result, auditors generally ignore fraudulent warning signs that may help identify any such possibility.

According to research by IIM Bengaluru, after the loan is passed due to lack of efficiency, modern technical resources and work-enthusiastic staff, its monitoring work is also very weak in comparison to private banks. At the same time, employees who detect fraud at an early stage are not given proper incentives.

Sitharaman on Tuesday tried to assure the Rajya Sabha that the government has taken extensive measures to curb the increasing incidents of fraud in banks.

For this, 3,38,000 bank accounts of inactive companies were closed during the last two financial years and the provision for the confiscation of assets of economic offenders has been linked to banking law.

While these are good steps, they are still insufficient to stop cheaters.
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These measures to discourage fraud are also less because the banks have not been very successful in blaming the persons responsible for the financial crime. There is a lack of expert financial investigation officer with a good understanding of fraud law along with knowledge of the nuances of forensic accounting to some extent.

Large loan fraud cases are handled by groups of banks. The RBI has seen a lack of coordination between these banks in the exchange of information related to fraud.

If the government wants to stop the risk of fraud, it should consider setting up an independent and specialized framework on the lines of All India Services, which is equipped with the most qualified officials with financial and legal information, to detect financial fraud. .

They should be trained to enable them to complete the investigation of financial irregularities successfully in a given time. If the government wants, it can build such a structure in a short time by creating a pool of officers of banks, RBI and CBI.
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Banks should also form an internal rating agency to evaluate it very rigorously before lending for a large project. The evaluation of the project should be based on the business model and the entire plan should be implemented strictly as per the laid down procedures without affecting the merit of the company's brand or credit.

In addition, banks should appoint the best people available in IT services and data analytics to effectively monitor the risky accounts and early warning signs. This will also help in better management of customer records.

Finally, the government should also manage to punish bank employees who have been tricked into cheating, as well as third parties such as chartered accountants, lawyers, auditors, and rating agencies who have been fraudulent in bank account data.