Banking industry witnesses an increase in fraud incidents in last one year: Deloitte

In a survey conducted by Deloitte, titled “India Banking fraud survey – 2012”, shows that banks have witnessed a rise in the number of fraud incidents in the last one year, and the trend is likely to continue in the near future. While an overwhelming 93% of the respondents indicate that there has been an increase in fraud incidents, 75% of these respondents indicated that the same have increased by at least 5% as compared to the last one year. The survey points to the increased difficult scenario for banks with increased fraud incidents and low recoveries, thereby directly affecting their bottom-line. The average value of recovery for more than half of the respondents is less than 25% of the reported fraud losses. Also, the average loss per incident for nearly half the respondents is more than Rs 10 lacs.

Deloitte survey reveals that Retail banking is most vulnerable to frauds followed by corporate banking. A majority of the respondents who are actively involved in priority sector have also encountered significant number of fraud incidents in this area. The future trends show that fraud will increase in the years to come. An overwhelming 83% of the respondents have indicated that with the current economic scenario, the fraud incidents will increase. 64% of these respondents indicating that the increase will be between 6-25% and retail banking will continue to be the most vulnerable to fraud. The surprising revelation is that respondents feel that in the coming years priority sector will contribute to increased fraud incidents and the new areas of focus appear to be administration/procurement.

“Frauds are on the rise and no bank whether private, public or MNC is immune to fraud. As economic conditions continue to soften, it could lead to increased fraud risks. The disconcerting part is that the recovery has been less than 25% according to more than half the respondents, indicating that banks are not able to recover losses in case of frauds. This trend in the context of corporate banking environment is significant given the fact that the value of fraud losses will be higher” says Neeta Potnis, Senior Director, Deloitte in India.

Deloitte’s fraud survey for the banking industry was aimed at gaining an insight into the fraud scenario in the industry, the areas that incur the maximum number of fraud incidents and why, and the measures organisations are taking to fight the menace.

While “Fraudulent documentation” and “overvaluation/non-existence of collateral” are the types of fraud incidents which appear to rank high for all the areas of banking operations, i.e, retail, corporate and priority sector in public sector banks, frauds in private sector banking are attributed primarily to “identity theft” and “misuse of power of attorney/account takeover”.

According to the survey respondents, it appears that lack of oversight by the line managers or senior managers to the deviations from existing process/controls is cited as one of the major reasons for fraud followed by the current “difficult business scenario” and “business pressure” to meet targets. However only 37% of the respondents indicated that there was collusion between the employees and other third parties in perpetrating fraud.

It appears that a majority of the incidents are still detected through a formal and informal complaint mechanism. A significant 43% of the respondents detected frauds through anonymous complaints by external third party and another 37% through a whistleblower mechanism. More than half the respondents indicated that they detected fraud through internal audit reviews. However, the worrying sign is that 20% of the respondents indicated that they still detect fraud by accident. At the same time technology appears to be gaining prominence in fraud detection. Forty percent of the respondents indicated that they detected fraud using a fraud detection/analytics tool.

With increased regulatory scrutiny, banks are under increased pressure to implement best practices and fraud risk management framework. However, as indicated from the survey, this still appears to be work in progress in many of the organisations. Fraud risk management is being discussed at the board level at least every quarter as indicated by more than 93% of the respondents. As per 50% of the respondents, they have already implemented a fraud analytics solution, and overwhelming 73% of these respondents appear to be completely satisfied with the solution. The primary issue for others who have not implemented a fraud analytics solution is "issues in data integration from existing internal system" or data insufficiency.

While no organisation can be completely immune to fraudulent activity, steps can be taken to reduce the exposure to financial loss and reputational damage, which are common DEL_COLconsequences of fraud”, says Neeta Potnis. “Fraud Risk Management (FRM) emerges as the major step taken by RBI which underlines the need for controls related to the prevention, detection and deterrence of fraud and the roles and responsibilities of the senior management in fraud prevention and management function.”