Fraudsters leave tons of breadcrumbs. But banking radars are glitching

Just two operational segments in banking contribute to a whopping 95% of all banking frauds.

That’s right — Advances and Cards/Internet banking — together account for 95% of all banking frauds. 

All other operational segments like forex, deposits, cash, cheques, and clearing accounts are tiny problems, in comparison, accounting for less than a percent of total banking frauds. 

Advances and Cards/Internet banking spotlight the most vulnerable areas for banks, and sidelining frauds in these areas builds up two formidable risks: 

1. They attract negative glare from the banking regulator, and 
2. The frauds whittle away — slowly and steadily at first, and then rapidly — at the bank’s precious capital.

Exponentially multiplying frauds are overburdening compliances

The rise in the number of frauds in these two segments has been jaw-dropping.

The total number of frauds in the Advances and Card/Internet segment leapfrogged by 10% and 708% respectively. When we take a bird’s eye view of frauds spanning all banking operations, total fraud incidents exploded from 9,046 in FY22 to 36,075 in FY23.

That’s a leap of almost 300%.

Fraud cases — area of operations

Source: RBI annual report 2023-24

Yep, we weren’t exaggerating about the jaw-dropping bit.

So, how can banks get on top of this situation? Is there a way to resolve this ungodly mess?

With IDfy, there sure is. 

But, first, we need to unravel the dense layers of the fraud epidemic in Indian banking.

Blind spots in the system

Banks, of course, have dedicated tons of resources towards nipping frauds that stem during and after loan disbursal.

But, most of the systemic defences have a miserable track record, evidenced by the mounting number of fraud cases.

Simply put, systemic guardrails like

• Early Warning Signals
• Transaction Monitoring System
• Stock Statement Verification
• Borrowers’ due diligence

are doing a sub-par job in capturing and reporting fraudulent episodes.

Why is loan disbursal so fraud-prone?

The explanation is two-fold. 

Firstly,  borrowers — both corporate and MSMEs — are conning banks by either masking shady transactions or completely forging bank statements. Borrowers are now going the extra mile in forging identification papers. 

Aadhar, driving license, PAN card, bank statements, education certificates, bank statements, salary certificates — all these and more are being forged by shady operators at the drop of a hat. 

Second, dated and juddering fraud radars have fallen behind the curve. Many of these systems — operating in silos — are as good as dead weight. The fact that these fraud radars are not fed with new data streams and do not have any real-time updation means that they are, at best, cosmetic and superficial.

Take the latest bank fraud case of Mandhana Industries, which seems to be gracing headlines in business dailies these days.

Indian fraud detection is in shambles

In the Mandhana Industries case, the CMD of Mandhana Industries — Purushottam Chhaganlal Mandhana and his family — managed to dupe a consortium of banks, led by the Bank of Baroda, out of a whopping ₹975 crore. 

The modus operandi was nothing out of the blue, and more-or-less followed the banking fraud playbook to the T. 

The CMD incorporated fictitious entities in the name of his employees and dummy transactions were conducted with these fake companies to build up an inflated turnover for Mandhana Industries. The inflated turnover was then furnished to the banks, who would go on to enhance Mandhana Industries’ credit facilities. 

The Enforcement Directorate also found that the funds were diverted from the company, camouflaged in third-party transactions, to the bank accounts of the promoter/ director and their family members. 

In the end, the funds were channelled towards rigging the company’s share price, purchasing real estate and jewellery, and settling personal debts. 

All along, none of the banks woke up to the fraudulent transactions and circular trading, until it was too late.

Where did the banks fail?

First and foremost, banks often fail to sniff out siphoning and diversion of funds at the group level of the borrower. Existing fraud detection systems need to be upgraded. Features like 

• Systemic guardrails that monitor transactions with related parties
• Higher supervision of creditors and debtors of borrower company 
• Elevated monitoring of funds transferred from parent company to subsidiaries
• Expanded scope of stock audit review and account monitoring

can dent the currently ballooning fraud levels but banks often junk these proposals given the massive burden it can place on their existing resources.

The tragedy is that all these underhand gambits could be nipped in the bud, and the borrower could be put under the spotlight, the moment the first sign of a shady transactions surfaces. 

This is where IDfy comes in…

How can IDfy help?

Bank frauds don’t operate in vacuums. Borrowers always leave behind fraudcrumbs, that unfortunately only pop into view, when seen retrospectively. However, alert banks can zero in on suspicious transactions and raise red flags before errant transactions become full-blown scams.

Onboarding IDfy as your risk-assessment partner will bolster your bank’s compliance and team’s risk underwriting heft. With IDfy’s solutions operating behind the scenes, the Mandhana scam would have been marked out at a nascent stage, scuttling it from snowballing into a large ₹975 crore NPA.

• Our thorough checks verify a business’s income against GST, ITR, bank statements, and MCA database. Our comprehensive checks ensure due diligence is conducted using AML, legal history, and statutory payment checks. 
• IDfy’s solutions offer seamless KYC, KYB, and UBO (Unified Beneficial Owner) confirmation as per RBI’s norms.
• Our databases can help you run real-time checks on companies, group companies and directors. Legal and statutory checks can alert banking staff to potentially suspicious borrowers before loan disbursals.
• Our exhaustive database can run employment background checks helping banks weed out borrowers with sketchy or dubious professional trajectories.
• Our digitised court record database can scan through 23 crore court records and documents. Criminals, fraudsters and conmen often tend to repeat their modus operandi. Every borrower with a criminal background or FIR lodged against him will be red flagged by our database, and alert bank officials. 
• With us, banks can accelerate their work processes by enabling customers to E-sign/E-stamp legal or loan documents through Aadhaar e-sign during loan disbursal.

For more details on how IDfy can help you eliminate fraud and establish trust, write to us at shivani@idfy.com