Mumbai, February 14, 2017

Will help lenders take action quickly and invoke penal measures in high-value fraud cases

The Reserve Bank of India wants banks to create a common pool of forensic audit firms so that they can pick one of them quickly whenever a high-value fraud needs to be investigated.

This is aimed at ensuring that precious time is not lost in evaluating eligibility criteria of audit firms.

This development comes in the wake of the central bank finding that advances-related frauds constituted nearly 92 per cent of the total frauds reported by all banks in FY16.

Given that the common pool will only have forensic audit firms that have already been evaluated for professional competence and proven track record in forensic and investigative auditing, all that a bank, irrespective of whether it is a sole lender or leader of a consortium of lenders, wanting to engage a firm needs to do is call for price bids, said a senior public sector bank official.

The idea behind creating a common pool of forensic audit firms to investigate instances of high-value frauds is that banks can quickly take appropriate action, including fixing staff accountability, lodge complaints with law enforcement agencies, and invoke penal measures, such as debarring fraudulent borrowers from availing bank finance or raising funds from capital markets, explained the official.
Advances-related frauds

In a recent speech SS Mundra, Deputy Governor, Reserve Bank of India, observed that advances-related frauds were more pronounced in the case of public sector banks and less at private and foreign banks.

In almost all cases, the central bank found that the exposure had got seasoned as a non-performing asset (NPA) for three-four years before the borrower was declared fraudulent. As a consequence, the gap between the date of occurrence and detection has been widening, said Mundra. Further, the gap between first bank and the last bank reporting the borrowal account as fraud to the RBI is also very long.

Fraud classification

The RBI has classified frauds based mainly on the provisions of the Indian Penal Code. Among others, misappropriation and criminal breach of trust; fraudulent encashment through forged instruments, manipulation of books of accounts or through fictitious accounts and conversion of property; unauthorised credit facilities extended for reward or for illegal gratification; cheating and forgery; and fraudulent transactions involving foreign exchange are considered as fraud.

To deal with concerns relating to banking sector frauds, the RBI operationalised a Central Fraud Registry (CFR), a web-based searchable database of frauds containing data for the last 13 years, on January 21, 2016. This was aimed at timely identification and mitigation of frauds and also serve as a potent tool for banks in taking informed business decisions.

[The Hindu Business Line]