Emerging Economic frauds in the banking sector

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Emerging Economic frauds in the banking sector Women

Written By: Khushi Gupta

Introduction

The banking sector of India turned over a new life post the liberalization made in 1991 as an attempt to cure the disastrous fall of the economy of the country. Since then there has been no looking back, this sector has made quantified jumps in terms of progress. The banks have been reforming the global prudential framework and enhancing supervision. The key goals of these reforms have been to increase banks’ resilience through stronger capital and liquidity buffers, and reduce implicit public subsidies and the impact of bank failures on the economy and taxpayers through enhanced recovery and resolution regimes.

 At the same time, the dynamic adaptation of the system and the emergence of new risks warrant ongoing attention. In adapting to their new operating landscape, banks have been re-assessing and adjusting their business strategies and models, including their balance sheet structure, cost base, the scope of activities, and geographic presence. Some changes have been substantial and are ongoing, while a number of these banks are also confronted with low profitability and legacy problems. Is this where the problems in the banking sector ends or is this where it actually begins?

The lurking thief in the banking sector

Just like the banks, the banking frauds also have always been there, but post-liberalization, these frauds have increased in terms of their frequency and complexities, what has also grown is the cost of these frauds, as their scale of the crime increases. A good thing is that 2021 records lower bank frauds in relation to the previous thing, it could have been an occasion of celebration if you don’t hear the actual figures, so while the number did decrease this year, the amount of money involved in frauds have been 1.38 Trillion Indian Rupees! A reduction from the 2020s 1.85 Trillion INR!

Fraud at this scale cannot be done only from outside, this became rather evident in the case of the Indian bank and the Syndicate bank, where it was found that the bank fraud had involved not only people at the managerial posts but also post as high as the senior management, making it a rather concerning affair. A serious blow to the banking sector has also come in the form of non-performing assets. They effectively decrease the profitability of the banks, especially affecting the public sector banks, and e it reflects financial distress of borrower clients or inefficiencies in transmission mechanisms

The protection laws against possible frauds

RBI, the regulator of banks in India, 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 accounts maintained manually or under computer system in banks, resulting in wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank

While the essential obligation regarding forestalling cheats lies with banks themselves, the Reserve  Bank of India has been encouraging banks every now and then with regards to the significant extortion inclined regions and the shields important for anticipation of fakes. The reserve bank has likewise been circling to banks the subtleties of fakes of a quick nature, not announced prior so that banks could present essential defend/preventive measures via fitting strategies and interior checks. banks are likewise instructed about the insights about corrupt borrowers and related gatherings who have executed cheats on banks so that banks could practice alert while managing them. To work with this continuous cycle, it is fundamental that banks report to rbi complete data about cheats and the subsequent activity taken consequently.

The reserve bank of India has also made a classification on frauds, dividing them into several broad types by collaborating them with the criminal acts mentioned under the Indian Penal Code(IPC), These are:-

  1. Misappropriation and criminal breach of trust.
  2. Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts and conversion of property.
  3. Unauthorised credit facilities extended for reward or for illegal gratification.
  4. Negligence and cash shortages.
  5. Cheating and forgery.
  6. Irregularities in foreign exchange transactions.
  7. Any other type of fraud not coming under the specific heads as above

Cashing out solutions

The problem exists and so do the laws, but by the evident increase and number of frauds in this sector, it is quite clear that the existing legal system is not enough to tackle the frauds in this sector. The gap exists open and wide, waiting to be fixed. This idea of change did not escape the minds of people at authority either, just on Tuesday, the finance minister of India, Ms. Nirmala Sitharaman said in the Rajya Sabha, “We have been engaging with the RBI to ensure that the regulatory functions and supervisory function of the RBI are strengthened. I am assured by the RBI Governor that internally an institutional mechanism is being further strengthened,”

The finance minister is moving in the right direction because to tackle the problem at its roots we have to work on internal strengthening of the system. The regulation has to be made stronger with the use of technology, man can be corrupt in lieu of things but technology is a good guard against the ill-intentions of man. The second way can be to keep a strict eye on the third parties involved such as the auditors, lawyers, etc even though they are not part of the system they can be the source of fraud.

The third and the last of my solutions is that an agency should be set up to tackle fraud either centralized or a state-wise agency to keep a better check on local banks too.

Conclusion

Thus with the scale of transactions and use of banking facilities the economic frauds have also been on a rise. The problems have been highlighted with the mention of laws in India made to tackle fraud. The attempts made to control have been mentioned and why they have been failing is also devised. At last, some more possible solutions have been offered. while the essential obligation regarding forestalling cheats lies with banks themselves, the reserve bank of India has been encouraging banks every now and then with regards to the significant extortion inclined regions and the shields important for anticipation of fakes. the reserve bank has likewise been circling to banks the subtleties of fakes of a quick nature, not announced prior so that banks could present essential defend/preventive measures via fitting strategies and interior checks. banks are likewise instructed about the insights about corrupt borrowers and related gatherings who have executed cheats on banks so that banks could practice alert while managing them. to work with this continuous cycle, it is fundamental that banks report to rbi complete data about cheats and the subsequent activity taken consequently.

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