Impact of Banking Frauds on Asset Quality and Profitability: An Empirical Study of Indian Scheduled Banks

Abstract

Banking sector plays a vital role in the growth of an economy and as it extends credit facilities, unfortunately, the probability of misappropriation of funds, diversion of funds is always associated. Credit fraud has been increasingly common in India in recent years and post- liberalization the periodicity, nature and the associated loss due to frauds has also been increased and consequently raises the concern of financial regulators. Apart from eroding customer confidence, frauds pose a number of challenges for the financial system, including reputational risk, operational risk, and business risk. The aim of this study is to review and analyze current trend of frauds in the Indian banking sector, as well as its impact on the continuous rise in the non-performing assets. Moreover, the study aims to bring insight on the impact of GNPAs on the profitability of the banking sector in India. Secondary data of 33 banks covering all public sector and private sector Indian scheduled banks is collected and examined for a period of 17 years i.e., from the year 2005 to 2021, by using linear regression analysis in conjunction with descriptive analysis using SPSS. The study shows that the number of frauds affecting the Indian banking sector have been significantly increasing in recent years, leading to an increase in non-performing assets (GNPAs) and Gross Non-Performing Assets depicts a negative impact on the banking sector's profitability. By keeping in view the recently unearthed scam of ABG Shipyard Limited, worth crore of rupees and to restore the Indian banks' credibility, concerned authorities to take tough action and find new ways to prevent and reduce frauds.