04/07/2017
Banks lose Rs 16,770 crore in frauds last fiscal year
The financial sector registered a loss of Rs 16,770 crore in 2016-17 owing to banking frauds. This was a rise of 72 percent over the last five years, finds an RBI report.
Banks lose Rs 16,770 crore in frauds last fiscal year
Beena Parmar
Moneycontrol News
The financial sector registered a loss of Rs 16,770 crore in 2016-17 owing to banking frauds. This was a rise of 72 percent over the last five years, finds an RBI report.
"During the last five financial years, frauds have increased substantially both in volume and value terms. During this period, the volume of frauds has increased by 19.6 percent from 4,235 to 5,064," RBI said in the biannual Financial Stability Report (FSR) released on Friday.
It said that one of the emerging risks to the financial sector is increasing trends in frauds in commercial banks and financial institutions.
The value (loss incurred) has increased by 72 percent from Rs 9,750 crore to Rs 16,770 crore.
According to the FSR, a high 86 percent of the frauds reported during 2016-17 (in value terms) were frauds in advances or loan portfolio.
"In a number of large value frauds, serious gaps in credit underwriting standards were evident," the report highlighted.
Almost all corporate loan related fraud cases get seasoned for 2 to 3 years as NPAs (non-performing assets) before they are reported as fraud.
Some of the often-seen gaps are liberal cash flow projection at the proposal stage, lack of continuous monitoring of cash flows and cash profits (EBITDA), lack of security perfection and over
valuation, gold plating of projects, diversion of funds, double financing and general credit governance issues in banks.
While the fall-out of adverse market conditions, recessionary trends, industry-specific vulnerabilities and macro-economic risks on bank lending can be considered as relatively difficult to control and mitigate by banks, the same cannot be true in case of loan frauds, the central bank added.
On cyber frauds, the RBI said that recent incidents of risks of an interconnected technology ecosystem exemplified the dictum that the ‘strength of the chain lies in its weakest link’.
The banking regulator pointed out that no system can be considered safe unless the entire ecosystem is secure, which is very challenging to ensure.
The RBI has provided comprehensive IT examination of the major banks to assess their cyber risk resilience and response.
Going forward, the RBI has proposed to adopt risk-based approach by focusing on critical functions/channels and offsite assessment of key risk indicators in cyber security in banks.
The FSR report is published every six months by a department of the RBI and endorsed by a sub-committee of the Financial Stability and Development Council.
It gives a macro view of the banking sector, the overall regulation, development and risks in the industry.
In the FSR, the RBI has warned that risks to the banking sector’s stability have worsened, with asset quality and profitability deteriorating further.
