At a time when India’s banking sector is fighting piles of bad debt, the Reserve Bank of India has sounded the alarm over rising cases of fraud – some of which it blamed on the laxity shown by banks in their loan dealings. In its Financial Stability Report released on Friday, the central bank said cases of fraud had risen 19.6% in the last five years, from 4,235 in 2012-’13 to 5,064 in 2016-’17. The value of money lost as a result had jumped 72% to more than Rs 16,700 crores in that period.

It added that a big share of the fraud cases came from the loan portfolio of banks, where 86% of frauds reported in the last financial year took place.

After two to three years of being declared a non-performing asset, almost all such corporate loan-related cases are reported as frauds, according to the banking regulator.

The Financial Stability Report is a biannual publication that assesses the risk present in the financial sector and provides comments from the central bank’s senior management on how to mitigate it.

In its latest edition, the report suggested that the gross bad loan ratio for the banking sector could rise to 10.2% of the total loan book in the next year if economic conditions stay the same. Banks are currently weighed down by about Rs 10 lakh crores in bad loans that have been classified as non-performing assets.

Public sector banks seem to have a bigger problem compared to their private sector counterparts as their bad loan ratio could go as high as 14.2% by March 2018, the Reserve Bank warned.

While the central bank, in its report, cut banks some slack on environmental risks, it did not spare them on bad loans that turn out to be cases of fraud:

While the fallout of adverse market conditions, recessionary trends, industry-specific  vulnerabilities and macro-economic risks on bank lending can be considered as relatively difficult to control and mitigate by banks, the same cannot be true in case of loan frauds.  

— Financial Stability Report for June, 2017

The Reserve Bank stated that it had noticed lax underwriting standards (guidelines to ensure the security of loans issued) in a large number of loans, implying that banks did not often do due diligence while approving credit for projects. The report pointed to gaps both at the loan-seeking company’s end and at the bank’s end, and mentioned “over-valuation, gold plating of projects” and “diversion of funds”.