Lok Sabha Question No. 177 (STARRED), answered on 2018-12-21
Subject: Banking Frauds
Ministry: FINANCE
Asked by: KAMAL NATH

## GOVERNMENT  OF INDIA MINISTRY  OF FINANCE DEPARTMENT  OF FINANCIAL  SERVICES

## LOK SABHA STARRED QUESTION NO. *177 TO BE ANSWERED ON THE 21 ST  DECEMBER 2018/ AGRAHAYANA 30, 1940  (SAKA) Banking Frauds

## *177. SHRI KAMAL  NATH:

Will  the Minister  of FINANCE  be pleased to state:

- (a) whether  the Government  is aware  that  banking  frauds have increased  by  20 per cent in the past two  years;
- (b) if so, the details  thereof;
- (c) whether  the Government  has asked banks  to enhance  their  fraud risk  management framework  and in spite of that  the incidents  of frauds have increased;  and
- (d) if  so,  the  details   thereof   and  the  steps  the  Government/banks propose   to  take   to remove  the security  gaps and ensure  proper  check  on banking  frauds?

## ANSWER The Finance  Minister

## (SHRI ARUN  JAITLEY)

- (a) to (d): A statement  is laid  on the Table  of the House.

***

## STATEMENT FOR LOK SABHA  STARRED QUESTION NO. *177 FOR 21 ST DECEMBER 2018  REGARDING  'BANKING  FRAUDS'  BY SHRI KAMAL NATH, MEMBER OF PARLIAMENT

(a) to (d): Reserve  Bank  of India (RBI)  monitors  frauds reported  by  banks,  in terms  of its Master   Directions   on  Frauds   Classification and  Reporting,   which   requires   banks   to furnish  Fraud  Monitoring  Return  (FMR)  in individual  fraud cases to RBI electronically within  three  weeks  from  the date of detection.

A number  of steps have been taken  to enhance  the fraud risk  management  framework  of the  banks   and  to  ensure   proper   check   on  banking   frauds,   including, inter  alia ,  the following:

It may  be noted that  fraud data reported  to RBI is by  the year  of reporting  and not the year   of  occurrence  of the fraud  or sanction of loan,  Letter  of Undertaking (LoU),  etc., which  may  be of an earlier  period.  As a result,  it is not possible  from  this  data to arrive  at year-wise  increase  in banking  frauds.  However,  RBI data as per the year  of reporting  by banks in respect of the number  of frauds involving  amount  of Rs. 1 lakh  and above is at Annexure.

- (1) Government  has issued 'Framework  for timely  detection,  reporting,  investigation etc. relating to  large  value  bank  frauds' to PSBs, which  provides, inter-alia , that ¾
2. (ii) examination  be initiated  for wilful  default  immediately upon reporting  fraud to RBI; and
3. (i) all   accounts   exceeding  Rs. 50 crore,  if classified  as Non-Performing Assets (NPAs),   be  examined   by   banks   from   the  angle   of  possible   fraud,   and  a report   placed  before  the  bank's   Committee for  Review   of  NPAs   on  the findings  of this  investigation;
4. (iii) report  on the borrower  be sought  from the Central  Economic  Intelligence Bureau in case an account  turns  NPA.
- (3) Central  Fraud  Registry  (CFR),  based on Fraud  Monitoring Returns  filed by  banks and  select  financial   institutions, has  been  set  up by   RBI  as  a  searchable   online central  database  for use by  banks.
- (2) Fugitive   Economic   Offenders   Act,   2018  has  been  enacted   to  deter   economic offenders  from  evading   the  process  of  Indian   law   by   remaining   outside   the jurisdiction  of Indian  courts.  It provides  for attachment  of property  of a fugitive economic  offender,  confiscation  of such offender's  property  and disentitlement of the offender  from  defending  any  civil  claim.
- (4) For  enforcement   of  auditing   standards   and  ensuring   the  quality   of  audits, Government   has  established the  National   Financial   Reporting   Authority as  an independent  regulator.
- (5) For management  of fraud risk  and to direct  the focus of banks  to early  detection of  loan   frauds,   prompt   reporting   to  RBI  and  investigative agencies  and  timely initiation of  staff  accountability  proceedings,   RBI  has  issued  a  framework for dealing   with   loan   frauds  and  Red  Flagged   Accounts   (RFA),   with   timelines   for actions   incumbent   on  banks,   for  dealing with   loan   frauds  of  Rs.  50  crore   and above,  requiring   banks   to  classify   potential   fraud   accounts   as  RFAs   based  on observation/evaluation of Early  Warning  Signals  noticed.  The red flagging  is done on an information  technology  platform  where  all banks  report  large  exposure to entities/individuals so that  other  banks  can be forewarned  about  fraud  risk.
- (7) RBI  has  instructed   banks   to  report   deficient   third   party   services   (such  as  legal search  reports,   property   valuers'   reports   etc.)  and  ineffective   action  against collusion   of  these  providers   with   fraudsters   to  the  Indian   Banks'   Association, which  maintains  a caution  list  of such service  providers.
- (6) RBI has issued a circular  to all banks  in February  2018 to implement  security  and operational  controls  such as straight-through process between  the Core  Banking Solutions   /  accounting   system and  the  SWIFT   messaging   system,   enable timebased restrictions in SWIFT, review logs at regular intervals, undertake reconciliation, etc. in a time-bound  manner.
- (8) Instructions  / advisories  have been issued-
12. (ii) by  Government   to  PSBs  to  obtain   certified   copy   of  the  passport   of  the promoters/directors and other  authorised  signatories  of companies  availing loan facilities  of more  than  Rs. 50 crore,
13. (i) by Government  to PSBs to decide on publishing  photographs  of wilful defaulters,  in terms  of RBI's instructions  and as per their  Board-approved policy,
14. (iii) by  RBI  to  Scheduled   Commercial Banks  to  implement   RBI  guidelines   to prevent  skimming  of ATM/debit/credit cards,
15. (v) by RBI to Scheduled  Commercial  Banks to strictly  ensure  rotational  transfer of officials/employees.
16. (iv) by  RBI  to  Scheduled   Commercial   Banks  to  ensure   legal   audit   of  title documents  in respect of large  value  loan  accounts,  and
- (9) As per inputs   received   from   PSBs,  banks   have  adopted, inter  alia ,  the  following fraud mitigating  practices:
18. (ii) processing, appraisal   and  sanction  of  loans  through   Loan  Originating Software,  Off-line  Transaction  Monitoring System  for internal  control;
19. (i) implementation of measures  such as   Fraud  Risk  Management  Solution  for prevention,  detection  and monitoring of fraudulent  transactions;
20. (iii) generation  of alerts  for Early  Warning  Signal  and red flagging;  and
21. (iv) online  verification  of credit  information report,  CFR,  wilful  defaulter  list,  etc.

## Lok Sabha Starred  Question  no. *177,  for  21.12.2018, regarding  'Banking Frauds'

## Frauds involving  amount  of Rs. 1 lakh and above, reported  by Scheduled Commercial Banks (SCBs) and Public Sector Banks (PSBs)

| Financial year   | Numberoffrauds reported**   | Numberoffrauds reported**   | ** Fraud data reportedto RBI is by the yearof reportingand not the year of occurrenceof the fraud or sanctionof loan, Letterof Undertaking (LoU), etc., whichmay be of an earlier period. As a result, it is not possible from this data to arrive at year-wise increase in banking frauds. However,RBI data as per the year of reporting by banks in respect of the number of frauds involving amount of Rs. 1 lakh and above is given.   |
|------------------|-----------------------------|-----------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  | SCBs                        | PSBs                        |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 2015-16          | 4,693                       | 2,789                       |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 2016-17          | 5,076                       | 2,718                       |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 2017-18          | 5,917                       | 2,885                       |                                                                                                                                                                                                                                                                                                                                                                                                                                            |

Source: RBI