The quantum of financial frauds in the Indian banking system fell 46% year-on-year to ₹19,485 crore between April and September 2022, according to a report released by the Reserve Bank of India. Banks reported frauds worth ₹36,316 crore during the same period last year.

However, the number of financial frauds rose to 5,406 in the first six months of the financial year 2022-23 compared with 4,069 in the corresponding period a year ago.

Frauds reported in a year could have occurred several years prior to year of reporting, according to the RBI.

At ₹18,746 crore, loan-related frauds clocked the biggest share in the first half of FY23, as per RBI data. "Based on the date of occurrence of frauds, advances-related frauds formed the biggest category prior to 2019-20. Subsequently, however, in terms of number of frauds, the modus operandi shifted to card or internet based transactions," the RBI says, adding that cash frauds are also on the rise.

The number of fraud cases reported by private lenders outnumbered those by public sector banks (PSBs) for the second consecutive year in 2021-22. In terms of the amount involved, however, the share of PSBs was 66.7% in 2021-22, as compared with 59.4% in the previous year.

With the exponential growth of digital payments and expanding digitalisation of the financial ecosystem, cyber security risks for financial institutions are also increasing, the central bank says.

Bank profits may shrink

With global growth set to deteriorate in 2022 and with rising prospects of a recession in 2023, credit growth, could decelerate across major economies which, in turn, could shrink bank profitability, the banking regulator warns.

While banks weathered the pandemic with high capital buffers and improved asset quality, going forward, they face a highly uncertain outlook, with the possibility of continuing geopolitical tensions, tighter monetary and liquidity conditions and potential adverse spillover effects on profitability and asset quality, the RBI says.

The sharp acceleration in credit growth during 2021-22 was led by services and retail loans, especially housing, the RBI says.

In recent years, Indian banks appear to have displayed "herding behaviour" in diverting lending away from the industrial sector towards retail loans, the central bank says, adding that the decline was evident across banks groups. The regulator cautions that a buildup of concentration in retail loans may become a source of systemic risk.

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