As the fraud at Karvy continues to unravel, the spotlight has now expanded onto broking firms across India. Karvy's mess is no solitary incident, nor is it merely a stockbroking issue. Instead, Karvy symbolizes a worrying trend in the Indian economy: growing instances of fraud and economic crimes. These economic offences are dangerous because their damage can extend far beyond the immediate losses or the immediate victims. Economic offences disrupt financial stability, curb economic growth and, even, threaten national security.
No sector has demonstrated the damage from economic offences more than India's banks. The bank fraud at the Punjab & Maharashtra Co-operative Bank (PMC), for instance, may have triggered the deaths of nine depositors. Taken together, bank frauds such as the one at PMC have grown steadily over the past decade, according to data from the Reserve Bank of India (RBI). In its latest annual report, the RBI estimated the amount involved in frauds (of above ₹1 lakh) in Indian banks' at ₹71,543 crores in 2018-19, up by 74% from ₹41,168 crores in 2017-18. The 2017-18 figure itself is a four-fold increase compared to four years ago.
Almost all of this has stemmed from malpractices at public sector banks (PSBs) which accounted for 90% of the fraud value and 55% of the number of frauds. More recent data suggest that PSB bank frauds have continued to worsen in the current financial year (2019-20). In response to a recent question in the Rajya Sabha, the finance minister reported that PSB bank frauds had reached ₹95,760 crores between April to September 2019 compared to ₹64,509 crores during 2018-19. Within PSBs, the State Bank of India recorded the highest losses amounting to ₹25,417 crores followed by Punjab National Bank ( ₹10,822 crores ) and Bank of Baroda ( ₹8,273 crores).
While the rise in bank frauds is worrying, it is worth noting that the greater focus on fraud detection in recent years could also be responsible for the higher reporting of bank frauds in India. For instance, the RBI has mandated that all non-performing assets with a value exceeding ₹50 crore should be examined for possible fraud, and a Central Fraud Registry has been established to track these cases.
Large-scale bank frauds may dominate headlines but they are only one part of economic offences. Overall economic offences too are on the rise. One measure of this comes from the National Crime Records Bureau. The 2017 report, released after a delay, suggests that the rate of economic offences (as reported under Indian Penal code) rose to 111.3 crimes (per million people) in 2017 from 110 in 2014. Economic offences here includes several different crimes ranging from ATM-related fraud to forgery to counterfeit notes.
Taken together, forgery, cheating and fraud accounted for 86% of all economic offences. A less important offence was counterfeiting. In 2016, during demonetization, the government cited the dangers of counterfeit notes in funding terrorism as an important reason for their decision. But new NCRB data suggests that demonetization may have had little effect in curbing counterfeit notes. In 2017, a year after demonetization, the value of fake currency seized stood at ₹28 crores (based on around 1000 FIRs registered). And more than half of this fake currency ( ₹15 crores) were in fake versions of the new ₹2000 notes.
Given their financial nature, economic offences reported in cities are usually higher than in the countryside. Within India's cities, unsurprisingly, Delhi, the capital city, and Mumbai, the financial capital, reported the most number of economic offences in 2017.
After adjusting for population, though, Jaipur and Lucknow were the worst-performing cities. According to one analysis, the rise in economic malfeasance in Jaipur is linked to the burst of the city's real estate bubble around demonetization. Following Jaipur's real estate crash, several dubious real estate players were forced into other activities such as chit-funds and cooperative societies. This led to a surge of chit-fund scams and cooperative society frauds.
More generally, frauds could worsen in times of slowdown. One theory suggests that as firms struggle for growth and reel under greater debts, they may be tempted to engage in fraudulent activity. If this is the case, then more than regulation, policies encouraging growth may be needed to address India's fraud problem.