Indian banks reported at least one fraud every hour in 2017

Leaks in the system.
Leaks in the system.
Image: Reuters//Mukesh Gupta
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The crisis of confidence in India’s banking sector has come to a head, particularly over the last two months.

First, there was the $2 billion loan fraud at Punjab National Bank (PNB) in February 2018 and then, in March, the alleged irregularities at ICICI Bank.

However, data show that long before PNB hogged the headlines, Indian banks had reported frauds at an average of at least one every hour in financial year 2017.

Between April 2016 and March 2017, Indian lenders reported 12,533 cases of fraud, totaling Rs18,170 crore ($2.79 billion), according to a report by Institutional Investor Advisory Services, a proxy advisory firm.

“Such high quantum of frauds can be attributed to weak internal controls, which are capable of leaving an indelible dent on the balance sheet of the bank,” the report said. KC Chakrabarty, former deputy governor of the Reserve Bank of India, had earlier told Quartz that these frauds are a result of poor control and oversight by the management as well as the regulator.

Ironically, public sector banks (PSBs), which lost the most amount of money to frauds, spent significantly more on audits than their private sector peers. “But this has failed to improve audit quality. The focus now needs to shift to strengthening the audit quality by plugging process gaps and streamlining the checks and balances,” the report said.

In certain banks, even though the aggregate quantum of losses due to frauds is low, the average fraud size is high. Like in the cases of Bank of Maharashtra, Bank of India, South Indian Bank, PNB, and Dena Bank.

In the Pune-based Bank of Maharashtra’s case, the fraud amount as a percentage of total assets of the state-run lender was 1.02%. “Added to a gross NPA of about 19%, this means more than one-fifth of the asset size is at risk every year due to weak controls and lack of adequate due diligence,” the report outlined.

Meanwhile, the overall pile of bad loans (Rs9.5 lakh crore) and such a high incidence of loan frauds have exposed the dire state of governance at India’s banks like never before. The repair and reform of this system, and reviving public and investor confidence, are going to be a long and arduous tasks.