Amount involved in reported cases of ‘Bank Fraud’ increase over three-fold in four years
Sai Krishna Muthyanolla
June 10, 2021
The RBI’s annual report has a separate section on bank frauds. Data from the recently released annual report for 2020-21 indicates that the total amount in reported cases of bank fraud increased by over three times in the four years between 2017-18 and 2020-21. Here is analysis of the trends.
Bank fraud is considered a federal crime in many countries as it involves fraudulent activities to wrongfully gain property or money from a federally insured financial institution. There have been umpteen cases of money misappropriated in bank frauds in the country even to the tune of 100s of crores.
Though the Reserve Bank of India (RBI) does not have a standardized definition for fraud, Section 17 of the Indian Contract Act, in contractual terms, suggests that fraud means and includes any of the acts by a party to a contract or with his connivance or by his agents with the intention to deceive another party or his agent or to induce him to enter into a contract. In simpler terms, it is a dishonest act or behaviour by which a person gains an advantage over another. This can be the concealment of facts, false claims, promises without the intention to carry it out, or any deceptive act.
RBI has classified fraud into mainly six categories
Every year, a significant number of bank fraud cases are reported in India. According to RBI’s Master Circular on ‘Frauds – Classification and Reporting‘, frauds have been classified as misappropriation and criminal breach of trust, encashment through forged instruments, manipulation of books of account, an extension of unauthorized credit facilities for reward or for illegal gratification, cash shortage, cheating and forgery, and fraudulent transactions involving foreign exchange. Bank fraud can be an act of insiders or others.
The RBI has a dedicated section on fraud analysis in its annual report, which is a statutory report of its Central Board of Directors. In the latest 2020-21 annual report, the working and functions of the RBI for the transition period of nine months (July 2020 – March 2021) have been covered, following the decision in 2020 to change its accounting year from July-June to April-March cycle to align its financial year with that of the government. In its annual report, the RBI data on frauds corresponds to frauds of Rs 1 lakh and above only.
More than 28,000 cases of bank fraud have been reported in the last four years
Data from 2017-18 to 2020-21 reveals that the total number of bank frauds involving a minimum of Rs. 1 Lakh went up from 5,916 in 2017-18 to 8,703 in 2019-20, and then dropped to 7,363 in 2020-21. In other words, the number of reported cases of fraud went up by 47% in three years between 2017-18 and 2019-20 and then dropped by 15% in the pandemic year, 2020-21. A total of 28,780 cases of bank fraud involving at least Rs. 1 lakh have been reported in the last four years. It should be remembered that the data for 2020-21 is only for a period of 9 months, unlike the other years. Furthermore, the statistics pertaining to the number of cases reported in a particular year though the fraudulent activity could have taken place earlier.
Private sector banks account for 50% of fraud cases in 2020-21, overtaking the share of PSBs
Until 2019-20, the majority of the frauds, about one-half, were reported in public sector banks and the private sector banks accounted for around one-third of all the frauds reported across all bank groups. However, the share of frauds in public sector banks of the total frauds in the system decreased in 2020-21 while that of private sector banks increased. In 2020-21, public sector banks accounted for 39% of the fraud cases reported while private sector banks accounted for more than 50%.
Meanwhile, the share of foreign banks, which accounted for the third-highest number of bank frauds, has reduced from 16.5% in 2017-18 to 7.1% in 2020-21. There has been an increase in the number of frauds reported in payments banks from just 3 in 2017-18 around the time when payments banks were introduced in India, to 88 in 2020-21. There has not been a significant change in the numbers reported by other bank groups such as financial institutions, small finance banks, and local area banks.
According to a report in The Hindu in December 2020, the Central Bureau of Investigation had registered about 190 cases of bank fraud in 2020 alone, involving alleged misappropriation of close to ₹ 60,000 crores. In about a dozen cases, the companies and their top functionaries were accused of cheating the banks of more than ₹ 1,000 crores each, stated the report.
Rs. 4.37 lakh crores involved in bank frauds in four years
In terms of the amount involved in frauds, the total amount witnessed a more than a four-fold increase from Rs. 41,167 crores in 2017-18 to Rs. 1.85 lakh crores in 2019-20. However, it reduced by 25% to Rs.1.38 lakh crores in 2020-21. In the four years under consideration, a total of Rs. 4.37 lakh crores were involved in bank frauds. The total amount involved in fraud could be much higher since the RBI report only considers cases of fraud involving Rs. 1 lakh and above.
In 2017-18, nearly 93% of the amount involved (Rs 38.3 thousand crores) was in public sector banks. Since then, though there has been an increase in the amount involved in public sector bank frauds, its share among all bank groups has gradually declined. That is, the amount involved in public sector bank fraud increased by nearly three times between 2017-18 and 2019-20. But the amount as a share of the total amount of fraud in the system decreased from 93% to 80% during the same period. In 2020-21, public sector banks accounted for 59% of the total amount reported in fraud.
During this period, the share of the amount involved in private sector bank fraud has been increasing from a mere 6% in 2017-18 to 33.5% (one-third) in 2020-21 while the amount involved increased from Rs. 2,478 crores to Rs. 46,335 crores during the same period. Concomitantly, there has also been an increase in the amount involved in foreign bank fraud cases and other financial institutions. Foreign banks have witnessed a 13-fold increase in the fraud amount while financial institutions witnessed an increase of 40 times.
Advances account for highest share of bank frauds both in terms of number and amount
Advances or lending operations constituted the highest share of bank frauds each year between 2017-18 and 2020-21. The number of frauds pertaining to advances was the highest in 2019-20 with over 4,608 cases accounting for 53% of all bank frauds above Rs. 1 lakh reported that year. In 2020-21, advances accounted for 3,501 fraud cases- a decrease of 24%. Meanwhile, the share of fraud cases pertaining to cards and internet banking increased to almost 35% in 2020-21 as compared to 27.5% in 2018-19, while the actual number of frauds increased by 36%. The number of cases of fraud related to deposits, cheques, and clear accounts which together constitute less than 1% of the cases, has come down over the years, while cash-related fraud cases have increased.
99% of amount involved in frauds were related to advances in 2020-21
In terms of the amount involved, 99% of the total amount involved in 2020-21 was in the area of advances. In fact, the amount involved in frauds of advances was about Rs.1.37 lakh crores in 2020-21, which is much higher than the total amount involved in frauds in 2017-18 and 2018-19, put together. In 2019-20, nearly Rs.1.82 lakh crores were involved in advances related to fraud. In the four years, the amount involved in advances-related fraud was more than Rs. 4 lakh crores or 93% of the total amount involved in frauds. On the other hand, the amount involved in frauds surrounding foreign exchange, off-balance sheets, cards and internet banking, clear accounts, and others have decreased over the years.
Enhancement of fraud risk management system is part of RBI’s agenda for 2021-22
Among the key areas of focus in the agenda for 2021-22, RBI aims to work towards enhancement of fraud risk management system including improving the efficacy of the early warning signal (EWS) framework. RBI also aims to strengthen fraud governance and response system through augmenting data analysis for monitoring of transactions, introduction of dedicated market intelligence (MI) unit for frauds and implementation of automated unique system generated number for each fraud.
According to previous reports, the date of occurrence of these frauds are, however, spread over several previous years. The average lag between the date of occurrence and its detection by banks was 22 months in 2018-19, 24 months in 2019-20, and 23 months in 2020-21. The same for large frauds involving Rs. 100 crores and above was 55 months in 2018-19, 63 months in 2019-20, and 57 months in 2020-21.
Featured Image: Cases of ‘Bank Fraud’