The fourth edition of Deloitte’s ‘India Banking Fraud Survey’ found 78% of respondents expect frauds in the banking sector to increase over the next two years. This comes in the backdrop of “growth in digital transactions, continually evolving regulatory guidelines, and new fraud trends”, spurred by the pandemic.

While banks have increased investments towards fraud risk management and monitoring systems and controls, these efforts seem insufficient, says the Deloitte India report on bank frauds. The agency pointed out that the siloed approach towards controlling frauds would no longer be effective and banks will have to undertake a number of measures to protect their business from fraudsters looking to use the pandemic for their own gains.

The report noted that digitisation and electronic banking have gained popularity during the pandemic and are likely to grow more, with more changes appearing in the way the banking industry operates.

“In line with these trends, data theft, cybercrime, third-party induced fraud, bribery and corruption, and fraudulent documentation have been identified as the top five concerns with over 42% of respondents (cumulative) reporting to be victims of these,” the Deloitte report said.

Loan frauds, mobile or internet banking frauds and identity or data theft were identified as the biggest concerns for banks in the survey.

Banks need to make a concerted effort to proactively identify the root cause of these fraud risks to be better prepared in the future, the survey said, adding that rising cases of data theft and cybercrime could be especially alarming for banks, as they could hurt consumer confidence and trust.

The report suggested banks to increase vigilance towards new loans and loan extensions as fresh or renewed facilities do not undergo required monitoring after disbursement. The survey found that limited asset monitoring after disbursement (38%) was the foremost reason behind stressed assets, followed by economic slowdown (24%), and insufficient due diligence prior to disbursement (21%).

Deloitte said that “banks should consider an integrated approach that applies the findings of pre-disbursement due diligence to on-going monitoring and identifies anomalies and red flags.”

“In the post-disbursement phase, monitoring needs to be robust and all-encompassing of EWS (early warning system), new fraud scenarios, and integrating intelligence gathered from internal and external data sources,” it added.

Most of the respondents, at 33%, cited end-source monitoring as the most vulnerable stage within the corporate/MSME loan cycle, posing the greatest fraud risk. Sourcing was quoted as the second-most vulnerable phase at 19%, followed by appraisal or renewal, sanction and disbursement at 16% each.

Banks have grown aware of the rising risk of frauds, and have been acting accordingly. Half of the respondents said that they conduct fraud risk assessments and update fraud risk register once a year, whereas 45% conduct this exercise every two-three years. Only 5% respondents said they have not carried out process reviews in the last five years.

Almost three-fourth of respondents, at 73%, said that they continuously monitor transactions for any discrepancies that might indicate fraud.

The Deloitte survey showed 21% of respondents relying on a dedicated team with FRM experience to handle high value credits, meanwhile 15% of respondents use data analytics tools such as EWS. Other approaches adopted by survey respondents include a dedicated market intelligence unit attached to the FRM team (12%) and use of external sources of information (11%).

The low adoption of data analytics tools poses a bit of a concern, Deloitte said, adding that reliance on only one or some of these approaches in isolation will not yield effective results.

The report recommended banks to review scenarios and rules to reflect the “new normal”. With many regulators across the globe releasing guidelines, banks need to take the time to measure the effectiveness, appropriateness, and efficiency of existing controls against an updated risk assessment, it further added.

The lenders should also reflect on the technology used/strategy to prevent, monitor, and detect financial crime, Deloitte said.

The survey gathered the views of 70 key C-suite stakeholders/ senior management responsible for compliance and fraud risk management, audit/ finance, asset recovery from varied financial institutions based in India. Banks and financial institutions who participated in the survey included private, public, foreign, co-operative and regional rural banks in India.

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