The Reserve Bank of India is reviewing its master direction on frauds and considering additional measures for timely recognition of frauds and enforcement action against violations, it said in its financial stability report (FSR).

"There is a significant time-lag between the occurrence of a bank fraud and its detection," RBI said. For instance, the amount involved in frauds that occurred between FY01 and FY18 formed 90.6% of those reported in FY19. Interestingly, the relative share of public sector banks (PSBs) in the overall fraud amount reported in FY19 was in excess of their relative share in the credit.

For this exercise, RBI took into account frauds with amounts involving ₹1 lakh and above reported during the last 10 years.

“It was observed that in many cases frauds being reported now were perpetrated during earlier years. The recognition of date of occurrence is not uniform across banks," said RBI.

To ensure timely and assured detection of frauds in large accounts, the government issued a direction in February 2018 to all PSBs to examine all non-performing asset (NPA) accounts exceeding ₹50 crore from the angle of possible fraud.

“Systemic and comprehensive checking of legacy stock of NPAs of PSBs for fraud during 2018-19 has helped unearth frauds perpetrated over a number of years, and this is getting reflected in increased number of reported incidents of frauds in recent years compared to previous years," it said.

The Reserve Bank of India (RBI) report also found that frauds related to loans continued to be dominant, in aggregate constituting 90% of all frauds reported in FY19 by value. In this category, cash credit, working capital loan frauds dominated in PSBs whereas retail term loans (non-housing) were a major contributor to such frauds in private banks (PVBs).

As on 31 December, 2018, 204 borrowers who had been reported as fraudulent by one or more banks were not classified as such by other banks having exposure to the same borrower.

According to RBI, one of the major areas of non-uniformity in processes pertains to identifying Red Flagged Accounts (RFA). The red flagging of accounts based on an indicative list of early warning signals is not uniform across banks, RBI said.

“In several cases, banks are unable to confirm RFA tagged accounts as frauds or otherwise within the prescribed period of six months. As per central repository of information on large credits (CRILC) data, at the end of 31 March, 2019, the RFA reported by banks exceeded the stipulated six-month period in 176 cases," RBI said, adding that it is looking to revise the master direction on frauds and issue necessary guidance to banks.

During July 2018 to June 2019, the Enforcement Department (ED) undertook enforcement action against 47 banks (including nine foreign banks, one payment bank and a co-operative bank), and imposed an aggregate penalty of ₹122.1 crore for non-compliance with and contravention of directions on fraud classification and reporting, violations of directions on know your customer (KYC) norms and Income Recognition & Asset Classification (IRAC) norms, among others. #casansaar (Source - RBI, LiveMint)