August 2013 Issue

As we enter into a New Year in celebrating India's Independence this month, we focus on India's Banking Fraud topography.

Our 'Newsletter on Financial Fraud' is your monthly insight into the various new fraud types and methods used by fraudsters globally in the banking space.

State-run banks soft targets for fraud

Nationalised banks account for just 17.5 per cent of the fraud cases that have been registered in India’s banking system in the past four years. But what is alarming is that over 83 per cent of the cumulative losses of Rs 29,910 crore due to such acts occurred at state-run lenders, raising a question over the efficacy of systems in place in the wake of the Cobrapost expose.

The data on frauds in the banking system was compiled by RBI based on information filed by the banks.

A total of Rs 24,828 crore was involved in 29,653 cases of fraud detected in India’s nationalised banks between 2009-10 and 2012-13, the latest RBI data show. Overall, the amount lost to fraud in the banking sector quadrupled from Rs 2,038 crore in 2009-10 to Rs 8,646 crore in 2012-13.

In all, a mind-boggling 1.6 lakh frauds took place between 2009-10 and 2012-13.

Less Susceptible

Private sector banks saw frauds that involved smaller sums than the public sector banks. Among the lot, old private sector banks seemed the least susceptible to fraud as they accounted for just 1.3 per cent of total fraud cases, the sum involved was 5.7 per cent of the total. In the case of new private sector lenders, despite registering 55.2 per cent of the total cases, the total sum involved was 7.2 per cent of the total quantum lost to fraud.

Foreign banks, too, seem to have a better track record than state-run lenders when it comes to preventing fraud. Despite lodging 27.3 per cent of the total cases, the money lost to such frauds was just 4.1 per cent of the total amount. The smaller amounts involved in fraud cases in private and foreign banks seem to indicate a greater level of due diligence when it comes to large sums of money.

The private sector, on the other hand, reported only six such cases and foreign banks three.

But in the case of frauds involving a sum less than Rs 1 lakh, the numbers clearly show that the public sector exercises more restraint than the private sector. Not only did the nationalised banks report less cases, the sum lost to such frauds was less than in the case of private and foreign banks.

Courtesy: The Hindu

Number of bank fraud cases down but amount involved zooms 324%

Between FY10 to FY13, number of fraud cases in banks declined by about 50%, however at the same time the amount involved in such frauds increased by a whopping 324% to Rs8,646 crore, with public sector banks accounting for 83% of the amount.

There is good news and bad news for bank customers. The good news first – the number of banking fraud cases has come down by 46.4%, to 13,293 cases in 2012-13 from 24,791 cases in 2009-10. And the bad news-despite the lower number of cases, the amount involved in bank fraud has zoomed 324% to Rs 8,646 crore from Rs 2,037.8 crore during the same period. In simple words, large value fraud cases are on the rise.

According to Dr KC Chakrabarty, deputy governor of Reserve Bank of India (RBI), during the past few years, banking and financial service industry was most commonly victimized by fraud, which arose with sweeping changes in scope and magnitude of banking transactions, the emergence of hybrid financial products, increasing trend of overseas transactions, and dynamics of real-time fund movement and transformation.

“Banking frauds can be divided into three main sub-groups – technology related, KYC related and advance related. The predominance of the new private sector banks and the foreign banks in the number of technology related frauds is intuitive as they lead technology enabled service delivery in the Indian banking sector,” explained Dr Chakrabarty.

According to the deputy governor, 65% of fraud cases reported by banks were technology related frauds, including frauds committed through internet banking channels, email and phishing attacks, ATMs and other alternate payment channels like credit debit and prepaid cards.

“It is also important that we insulate ourselves from fraudulent activities by strengthening the fraud detection, mitigation and control mechanism through prompt identification, investigation and exchange of information. This is necessary not just for the safety of banks but also for ensuring the stability and resilience of the overall financial system and sustaining the confidence that various stakeholders have in financial system’s strength and integrity” Dr Chakrabarty added.

Courtesy: MoneyLife

Bank frauds take new hue with duplicate mobile SIM cards

If your mobile phone goes out of network for a prolonged period, you better check your bank account first.

Some fraudsters might be using your phone connection with a duplicate SIM card to access your bank account online with a one-time password sent by banks to the registered mobile number.

The spurt in mobile banking and internet banking transactions have led to ‘innovative’ frauds in cyberspace, as shown by data with the Reserve Bank of India and banking ombudsmen.

Take, for instance, this case of a person losing over Rs 2.5 lakh in this manner, who was shocked when his bank told him that it had even sent alerts on the transactions. The investigation later revealed that all that was handled through a duplicate SIM card obtained illegally.

There are a variety of ways in which data is being acquired by fraudsters. Right from cloning of debit/credit cards to shoulder surfing in ATMs in which a bystander steals data from a customer.

Customers seem left in the lurch. “I lost Rs 23,000 from my account with a large, tech-savvy private bank two months back. I am still struggling to get my money back,” Sudhakar Kattimani, a railway officer in Bangalore told Business Line. “Can’t banks be technologically fool-proof?” he asked.

Hopefully, things may improve as RBI has now mandated a second-level authentication (double PIN or password) for card-based transactions from November 1 this year.

Source: Bank Innovation

Banks and the F-word

The following article is an excerpt from C.P. Chandrasekar's column.

Liberalisation was supposed to reduce financial fraud, but the reality today is that the number of cases and the sums involved have risen to such an extent that fraud is considered systemic.

RESERVE Bank of India Deputy Governor K.C. Chakrabarty is not one to mince his words. So when he was invited recently to speak at an Associated Chambers of Commerce and Industry of India (Assocham) conference on financial fraud, he chose to tell it as it is, by drawing attention to the salient features of the number of rising cases of bank fraud in India. First, that fraud in Indian banking is substantial. Second, that instances of large-scale fraud were many. And third, the problem lies at the top.

“Majority of the frauds are wrong sanctions at the highest level of the banks,” Chakrabarty said. The problem is compounded by the failure to take action within a definite time frame. Thus, according to information garnered by the newspaper DNA (January 8, 2012) through a query under the Right to Information (RTI) Act, of the 4,099 cases registered in Mumbai since 2006, only 564 had been closed. And, finally, the fraudsters are more rich than poor. “When the times are good, the rich steal. When the times are bad, the poor people also steal. But this means rich people are stealing more,” Chakrabarty reportedly said.

All this is of relevance because a myth has been spread for some time now that financial liberalisation that involves regulatory forbearance but emphasises better accounting standards and stringent disclosure requirements is accompanied by reduced fraud. The evidence is to the contrary. The problem has increased post-liberalisation.

What constitutes fraud?

What is the nature of this fraud and why has it been rising? The RBI’s Study Group on Large Value Bank Frauds defines fraud as “a deliberate act of omission or commission by any person, carried out in the course of a banking transaction or in the books of account maintained manually or under computer system in banks, resulting into wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank”.

A 2012 survey by consulting firm Deloitte Touche Tohmatsu India found that a high proportion of respondents identified retail banking (77 per cent), corporate banking (57 per cent) and private sector lending (33 per cent) to be the principal areas in which fraud occurs. The latter two are likely to be the areas where the big fraud cases lie, whereas retail banking has a large number of small instances of fraud that drive down the average size of frauds.

Large frauds are of many kinds, varying from incorrect sanctioning to asset stripping, diversion of loans sanctioned for one purpose to other activities, fraudulent documentation and overvaluation or non-existence of collateral. While 53 per cent of the respondents identified internal audit as the means of fraud detection, anonymous complaints (43 per cent) and a whistle-blower mechanism (37 per cent), which are not proactive means of detection, were extremely important. Many frauds were being detected by accident.

The fact of the matter is that liberalisation — by allowing for much flexibility in functioning, reduced supervision and a celebration of success as measured by profits — encourages deviant behaviour. The result is a significant increase in lending to projects that banks would have abjured in the pre-liberalisation era on the grounds that they involve exposure to a single project or borrower of a magnitude not considered proper. Given the benefits to the borrower involved, such lending could be associated with the provision of incentives and rewards (by the borrower to the lender) that render the act fraudulent. In fact, the evidence in recent times suggests that there is a nexus of fraud of different kinds that has developed. A sting operation by Cobrapost, for example, showed bank relationship managers, who are only looking to boost their careers, recommending ways to convert black money into white through investments that would expand the business they mobilise for the bank.

Given these tendencies, it is not surprising that instances of identified fraud, and the sums involved, are rising. But, as it emerges, the actual size of fraud in the system is definitely even bigger. And in many cases, in the effort to protect bank balance sheets from being overwhelmed with non-performing assets, such fraud is being covered up through restructuring of some of the largest debts. Fraud is now systemic.

To read in detail, go to

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