The topic of fraud management, particularly in the area of corporate lending, has been vexing bank managements in the last few years. Given that it is time to look at the problem de novo and identify the right approach to manage fraud risk in an effective manner, the third edition of the Business Leaders Forum - a joint initiative between CAFRAL and ReBIT - took ‘Corporate Loan Fraud Management’ as the chosen theme. The event, held at the Malabar Hall, Taj Lands’ End, Mumbai, on 2 August 2018, witnessed a gathering of select senior, experienced bankers in the country and invoked an effective deliberation, replete with actionable insights.
The Welcome Address
Mr Chandan Sinha, Additional Director, CAFRAL, in his welcome address, underscored that the forum has been conceived with the goal of engaging with the Indian banking community to build resilient practices. “Fraud Risk mitigation strategies, just like cyber security practices also deals with people, process and technology and a fraud management framework might be explored by the business leaders.” He emphasized that the exclusive by-invitation-only forum would provide the business leaders opportunity for interaction in a closed ambience setting to discuss topics most relevant to operational risk management.
Mr Manish Kumar Sinha, Deputy Inspector General of Police, Central Bureau of Investigation, remarked that recent fraud risks have led to controversies on corporate governance and ethics. Quoting that private bankers are also considered ‘public servants’, as per the Supreme Court ruling in the Global Trust Bank case, he also enumerated some of the important features of ‘Framework for dealing with loan frauds,’ and referred to the circular of RBI issued on May 7, 2015.
He had several tips to offer for early fraud detection, including using data available with the Ministry of Corporate Affairs website, and movement of funds, anomalies and diversions to catch the early warning signals.
Insights – Corporate Lending Frauds
Mr Vikram Babbar, Partner, EY drew upon his experience of forensic audits to narrate modus operandi of borrower frauds.
“It is important to be diligent at the time of lending and banks must use appropriate tools to assess the quality of financial statements, money trail and also perform an audit of income receivables,” suggested Mr Babbar.
According to him, tone at the top, proactive procedures and tech tools are the three pillars of banking fraud investigations. “The complex web of shareholding and promoter relationships, related party transactions come in handy for borrowers who resort to deceit and banks should be extra-vigilant when dealing with them,” he cautioned.
Best Practices for Fraud Management in Corporate Lending
Mr Paresh Sukthankar, Deputy Managing Director, HDFC Bank, recommended institutional adoption of whistle blowing processes, investigation of all complaints received through this mechanism, as well as protection of the identity of the whistleblower.
“Culture is the most important piece, the other being governance and diligence,” Mr Sukthankar remarked with reference to best practices on fraud management in corporate lending. He outlined the salient components of an effective fraud management governance framework, which would include comprehensive policies, strong processes, and effective control and review mechanisms.
“Inflated capex, unusually long working capital cycles, and intent of the borrower are some of the signs to look for during due diligence,” advised Mr Sukthankar. He mentioned that credit discipline has an important voice at the board and anyone involved in loan processing should be able to reach out to senior management confidently, in case of issues.
He added that strong adherence to code of conduct and ethics by employees and defining boundaries between sales and loan approval teams are two non-negotiable areas in fraud prevention.
Mr Nandkumar Saravade, CEO, ReBIT, facilitated the discussions during the session that highlighted challenges and opportunities in front of the practitioners and regulators.
Confluence of Fraud and Cyber Risks
Mr R Ravikumar, Chief General Manager, Department of Banking Supervision (DBS), referred to RBI’s circular on ‘Frauds – Classification and Reporting’ and advised banks to declare lending frauds at the right time to the board and law enforcement agencies.
His talk also covered the growing problem of cyber frauds and RBI measures to tackle it. “Cyber security working groups, cyber drills, constitution of crisis management group, assessing the cyber security posture of banks are some of the initiatives of Cyber Security and IT Examination (CSITE) Cell of DBS,” revealed Mr Ravikumar. He also called for adequate empowering of CISOs and made a note of IMF’s recent modelling exercise on cyber risk estimation.
Mr M P Baliga, Senior Program Director, CAFRAL, thanked the speakers for sharing their experiences and bringing several perspectives to the table.
Business Leaders’ Forum, will convene again next quarter and continue the conversation on risk management in Indian banking.