prpri How to Control Financial Frauds In Banks How to Control Financial Frauds In Banks

Introduction :

During the Year 1993, we had gone to Audit an PSU Bank in Shimoga as an Articled Clerk and since it was a Statutory audit of the Branch, we were going through all the physical documents since there were no core banking or the banks were not computerized, one particular account which I was reviewing had only interest being debited every quarter and the outstanding was a huge amount, since the amount was fairly large I asked the Branch Manager for an explanations and I got a reply from the Branch Manager that nobody dares to touch this account, since there were no norms of NPA those days a note was written in the annual report saying that almost 1.9 crores of bank advances has gone kaput, later I completed my CA and left for abroad and now that I am back, what has surprised is that in the past 2 decades and half, the quantum of frauds have gone in Geometric progression and there seems to be no solution to it.

Let us quickly go through the figures given by RBI on Financial Frauds (In Crores)

Year’s 2018-2019 2019-2020
PSU’s 63283 148400
Pvt Sector Banks 6742 34211
Foreign Banks 955 972
Financial Institutions 553 2048
SFB 8 11
PB 2 2
GRAND TOTAL 71543 185644

Also it is pertinent  to note the segment wise distrubution of Financial Frauds ( In Crores)

Year’s 2018-2019 2019-2020
Advances 64548 182051
Off B/S Items 5538 2445
Forex 695 54
Cards 71 195
Deposits 148 616
Cash 56 63
Cheques 34 39
C / I 209 7
Others 244 174
Grand Total 71543 185644

Segment wise frauds

So if you look at the above 2 charts it is evident that PSU’s and Advances contribute to the most abuses in the Financial Fraud which is not correct for any Healthy Economy, Weak implementation of EWS (Early warning signals) by banks, Non-detection of EWS during Internal audits, Non-cooperation of borrowers during forensic audits, Inconclusive audit reports and lack of decision making in joint lenders’ meetings account for a delay in detection of frauds.

So the RBI has Come With Revised LFAR (Long Form Audit Report) 2020-2021, which includes

Annexure 1 for Statutary Central Auditor

Annexure 2 for Branch Auditors  with (Appendix  for the Specialised Branches)

Annexure 3 (Large & Irregular/ Critical Accounts for Branch Auditors)

So what needs to be done ?

Now that there will be 2 types of LFAR Reports, there is going to be big problem of going through each one  of them, usually a PSU will Have more than 3,000 Branches on All India Level Basis or more, so who is going to keyin the inputs received in a proper way and to tabulate the findings, I don’t think any Statutary Central Auditor has the resources or personnel to go through such massive data because he has other Audit Jobs to be taken up and bank audits are one of their jobs, there has to be a check on Auditors / Top Management as well as BBB ( Banks Board Bureau) which is resposnsible for appointement of Senior staff in the Management level of banks, if you go through majority of the fraudelent cases the top management is directly responsible for favoring some parties for some personal financial gains, this age old practice needs to be stopped ,Since the Financial Fraud amounts involved is quite high literally on Y-O-Y Basis , it is better for RBI to establish a separate Independent Authority to do the Audit works of all types of Banks backed with adequate powers on a Regular Basis, to supervise it needs to have a good number of Personnel who can be drawn from the vast pool of Talented Professionalsincluding Engineers ,Actuaries,Lawyers, Etc since Auditing has failed all these years despite the best practices it is better to have an organisation on the lines of IRDAI, SEBI, NFRA TRAI, Exclusively to do the Bank Audits.The practice of recapitalising PSU banks by the GOI  has to be stopped because the Banks have to be held responsible for their actions which is sorely missing.


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August 2021