While private sector banks reported the maximum number of frauds, public sector banks continued to contribute the maximum to the fraud amount during 2022-23, according to an assessment of group-wise fraud cases over the last three years.

While small value card or internet frauds contributed maximum to the number of frauds reported by private sector banks, the frauds in public sector banks were mainly in loan portfolios, the Reserve Bank of India says in its annual report.

In 2022-23, state-run banks accounted for a quarter of frauds in the banking system. The number of frauds at PSBs rose to 3,405 in FY23 compared with 3,075 in FY22. For private lenders, the number of frauds jumped to 8,932 in FY23 as against 5,332 in the previous fiscal. Foreign banks reported 804 instances of fraud.

In value terms, public sector banks reported frauds worth ₹21,125 crore, cornering a 70% share of the total fraud amount in FY23. Meanwhile, private banks reported frauds worth ₹8,727 crore, down from ₹17,387 crore reported in FY22.

There was a 55% decline in the amount involved in the total frauds reported during 2021-22 over 2020-21. Further, proportionately, the decline in the total amount involved in frauds continued during 2022-23, with a reduction of 49% over 2021-22, the RBI report shows.

An analysis of the vintage of frauds reported during 2021-22 and 2022-23 shows a significant time lag between the date of occurrence of fraud and its detection, the RBI points out.

The amount involved in frauds that occurred in previous financial years formed 93.7% of the frauds reported in 2021-22 in terms of value. Similarly, 94.5% of the frauds reported in 2022-23 by value occurred in previous financial years.

In March, the Supreme Court held that borrowers must be given an opportunity to be heard before their accounts are classified as 'fraud' by banks. The bench noted that classifying accounts as fraud results in serious criminal and civil consequences for borrowers and amounts to 'blacklisting' which impacts credit scores. The RBI's master circular in 2016 allowed banks to unilaterally classify accounts of willful defaulters as 'fraudulent'.

The top court had said that a reasoned order must be passed by the bank while classifying an account as fraudulent, as it will act as a "check on the arbitrary exercise of powers".

The principles of natural justice demand that the borrowers must be served notice, given an opportunity to explain the conclusions in the forensic audit report and be allowed to represent the banks and joint lenders forum before their accounts are classified as fraud, the apex court said.

The RBI annual report comes a day after RBI governor Shaktikanta Das cautioned that the banking regulator has come across gaps in the governance of certain banks, with the potential to cause some degree of volatility in the banking sector. According to Das, this happened despite guidelines issued by the RBI on corporate governance in banks.

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