Reconciliation of inter-branch accounts::
The close monitoring and periodical discussions with the Chairmen of banks by the Deputy Governor had an impact in reduction of old unreconciled entries in inter-branch accounts of banks, a fraud prone area. The continued pressure on banks has been yielding the desired results inasmuch as the unreconciled entries have been substantially reduced over the last three years.

To promote effective concern in reconciliation of debit entries in inter-branch accounts the concept of making provision for net debits outstanding for more than three years in inter -branch accounts has been introduced. The cut off period for provisioning has been reduced to more than two years from the period ended March 2001.

Similarly, to have an effective monitoring on remittance transactions, the banks have been advised not to route entries on account of such transactions through normal inter branch account but evolve a separate account for this purpose. The banks have also been asked to ensure that outstanding entries under remittance transactions are reconciled on a weekly basis.

Banks are required to ensure that the practice of forced matching of inter-branch entries should be subject to appropriate checks and balances. Any forced matching practice adopted by banks for adjustment of old unreconciled entries in inter-branch accounts should have the approval of their Audit Committee of the Board and the Board of Directors should be apprised of the full details of such practice. The statutory auditors of the bank should also look into the justifiability from the angle of fair accounting practice.

There has been considerable improvement in the reconciliation of inter-branch accounts in public sector banks and the position of un-reconciled entries pending for more than two years. Total number of un-reconciled entries over two years, which stood at 22.58 lakh entries (Rs. 50706 crore) as on March 31, 1996, had declined to 14.74 lakh entries (Rs. 3824 crore) as on March 31, 2000.

Balancing of books:
A related concern that required a close monitoring was the progress in reducing the arrears in balancing of books at branches of banks. A reporting system for banks was introduced in July 1995 for monitoring progress in respect of banks having more than 5% of branches having arrears in balancing of books. A detailed report on banks which had arrears in balancing of books at branches accounting for more than 40% of business are reviewed at periodical intervals. There has been a considerable improvement in balancing of books in public sector banks since June 1997 inasmuch as the total number of branches where books were not balanced came down from 4245 as on June 30, 1997 to 1356 branches as on June 30, 2000. Further the number of branches with balancing arrears for more than two years had also come down from 1650 to 630 branches during the above period.

Reconciliation of Nostro accounts:
A Working Group consisting of three bankers and a chartered accountant, (besides RBI officials) has gone into the system of accounting of Nostro accounts transactions by banks and proposed solutions for speedy reconciliation of Nostro accounts entries in pubic sector banks. Top Management of banks which have reported high pendency in this area are called for a monitoring discussion by the Deputy Governor and Executive Director. The number of entries pending for reconciliation in public sector banks had come down from 14.68 lakh entries (Rs. 224539 crore) as on March 31,1996 to 8.60 lakh entries (Rs. 83491 crore) as on March 31, 2000.

Strengthening of internal audit /control system:
Banks were advised to reconstitute the Audit Committee of the Board (ACB) with a view to making them more independent and with larger representation of non-executive directors. The ACBs are to be invariably headed by a Director who is a chartered accountant from among the non-executive directors of the bank. The minutes of ACB are to be placed before the Board of Directors on an ongoing basis to serve as a link between their functioning.

All public sector banks were advised to appoint a senior officer of the bank as Compliance Officer who should act as a nodal agency to ensure compliance of internal management controls as well as regulatory and guidance.

Audit system in banks:
The Bank has evolved systems and norms of empanelment and appointment and remuneration of statutory auditors in banks and payments for special validation audit and provided guidance on accountability aspects under statutory audit of banks, quality and coverage of statutory audit reports, system of concurrent audit and its coverage in banks.

Further, the banks were advised to review the present system of concurrent audit immediately and incorporate necessary changes therein based on the guidelines of RBI. The banks are also to review once a year the effectiveness of the system and take necessary measures to correct the lacunae in implementation.

Fraud monitoring:
The system of internal control and follow-up in respect of cases of large frauds of Rs.1 crore and above reported to the RBI is reviewed periodically. The emphasis on house keeping aspects has helped in detecting large frauds and instituting fraud prevention measures.

Banks are cautioned about the details of individuals/companies/firms/ proprietary concerns involved in perpetration of frauds, furnishing details of their directors/partners /guarantors/associates. In addition, modus operandi of new types of frauds is also circulated among banks and financial institutions, to put them on guard. RBI also conducts special scrutiny in respect of large value frauds at the branch/controlling office level to find out lapses contributing to the frauds.

All cases of frauds involving large amounts are analysed to identify the contributory factors and taken up with the banks concerned for remedial measures. The aspects relating to recovery, staff accountability and improvement in internal controls are also pursued with the banks which are advised in the process to report the fraud cases to Police/CBI, if not already done. Detailed instructions have been issued by Reserve Bank of India towards streamlining fraud prevention and control/monitoring system.

With a view to expediting the investigation of fraud cases, RBI reports cases involving Rs. 1 crore and above as also those revealing inter-state ramifications irrespective of the amounts to CBI. The banks are advised to examine staff accountability aspect in all cases. Obtaining photographs of accountholders while opening accounts is one of the measures introduced to control frauds.

In-depth examination of large value frauds reported by commercial banks was conducted by a Study Group under the Chairmanship of CMD of a public sector bank. The group indicated common types of frauds by giving the modus operandi thereof and recommended several measures for early detection and prevention of frauds including recommendations for improvement in internal control, house-keeping, vigilance, management, etc. Apart from implementing the recommendations the banks were advised to adopt certain measures to avoid delay in reporting. It has also been decided that if large value frauds were due to non-observance of prescribed internal control system, certain restrictions are to be placed on opening of new branches by these banks. The banks have been advised to scrupulously follow the time limit laid down by Chief Vigilance Commissioner (CVC) and the position of adherence to CVC guidelines reviewed by their board on a quarterly basis. If these guidelines are not strictly followed, the concerned banks should furnish a report to the CVC.

An Advisory Board on bank frauds was set up by the Governor, RBI with effect from March 1, 1997 under the Chairmanship of Shri S.S. Tarapore, former Member of BFS and Deputy Governor of RBI and five members drawn from areas such as law, administration, police, professional accounting and commercial banking. The Board has since been converted as Central Advisory Board on Bank Frauds and functions as part of the Central Bureau of Investigation (CBI) of Government of India. The Board advises on the cases referred by the CBI either directly or through the Ministry of Finance for investigation/ registration of cases against bank officers of the rank of General Manager and above. The Department of Banking Supervision is providing the secretarial assistance and RBI meets the cost of the functioning of the Board.