Financial performance and operational efficiency of banks is objectively reflected in their annual financial statements. As per the existing framework, under various applicable laws, all banks including Public Sector Banks (PSBs) are required to have their annual financial statements approved by their respective Board of Directors, transparently disclose the same to stock exchanges, furnish copy thereof to the Reserve Bank of India (RBI), and present these at the annual general meeting of their shareholders for approval and adoption after discussion. As part of this, bank’s Board and shareholders discuss and review the bank’s performance and, in addition, markets and the regulator also take note of the performance, which serves to strengthen accountability by subjecting the bank to market discipline and regulatory supervision.

Further, bank-wise performance regarding implementation of reforms in PSBs for enhanced efficiency and strengthened arrangements for accountability is being tracked and measured through an independent agency, using an objective, transparent and publicly reported ‘Enhanced Access and Service Excellence (EASE)’ Reforms Index.

Government has issued ‘Framework for timely detection, reporting, investigation etc. relating to large value bank frauds’ to Public Sector Banks (PSBs), which provides, inter-alia, that-

1. all accounts exceeding ₹ 50 crore, if classified as Non-Performing Assets (NPAs), be examined by banks from the angle of possible fraud;
2. examination be initiated for wilful default immediately upon reporting fraud to RBI; and
3. report on the borrower be sought from the Central Economic Intelligence Bureau in case an account turns NPA.

In addition, a number of other measures have also been taken to improve prevention, detection and reporting of frauds, including, inter-alia, the following:

Central Fraud Registry (CFR), based on Fraud Monitoring Returns filed by banks and select financial institutions, has been set up by RBI as a searchable online central database for use by banks;

1. for enforcement of auditing standards and ensuring the quality of audits, Government has established the National Financial Reporting Authority as an independent regulator;
2. for management of fraud risk and to direct the focus of banks to early detection of loan frauds, prompt reporting to RBI and investigative agencies and timely initiation of staff accountability proceedings, RBI has issued a framework for dealing with loan frauds and Red Flagged Accounts (RFA);
3. RBI has issued a circular to all banks in February, 2018 to implement security and operational controls with respect to SWIFT messaging system in a time-bound manner;
4. RBI has instructed banks to report deficient third party services (such as legal search reports, property valuers’ reports etc.) and ineffective action against collusion of these providers with fraudsters to the Indian Banks’ Association, which maintains a caution list of such service providers; and
5. Government has formed an inter-agency coordination committee to look into the large value bank frauds.

 Further, all PSBs have a well-established vigilance mechanism headed by a Chief Vigilance Officer (CVO) directly appointed by the Government of India. CVOs of banks keep a close watch on various aspects of the bank’s functioning. RBI has issued various guidelines on examining staff accountability under various circumstances. As per RBI instructions on the internal control and inspection/audit system in banks, banks are advised regarding fixing of staff accountability aspect of irregularities, malpractices etc., at all levels, at the appropriate time. Further, as per inputs received from PSBs, PSBs impose penalty against erring employees after due process including dismissal/removal from service/ compulsory retirement from service etc. and complaint is lodged with the police or the Central Bureau of Investigation.

 This was stated by Smt. Nirmala Sitharaman, Union Minister of Finance & Corporate Affairs in a written reply to a question in Lok Sabha today.

Fraud detection framework mandates prompt scrutiny of deteriorating bank accounts and coordinated reporting to strengthen accountability. Public sector banks must secure board approval and public/regulatory disclosure of annual financial statements, with performance monitored via an independent EASE Reforms Index. A regulatory framework requires enhanced scrutiny and prompt examination of deteriorating accounts for possible fraud, a Central Fraud Registry, protocols for Red Flagged Accounts, security controls for payment messaging, and inter-agency coordination. Banks maintain vigilance units led by Chief Vigilance Officers and apply disciplinary and investigative measures to fix staff accountability and report deficient third-party service providers.