New Delhi, Jun 28 (PTI) Stating that banks and financial institutions are easy prey for fraudsters, RBI's Deputy Governor R Gandhi has asked banks to remain constantly on vigil as those committing frauds always try to remain "one step ahead of the bankers, regulators and the police".

Gandhi also said financial sector frauds often result in a systemic response of banks and the bankers' reactions typically include withdrawal from lending, becoming risk averse, excessive collateralisation and even "efforts to recoup the losses through higher interest rates and charges".

"Can frauds be wished away? Obviously, we can't wish them away. We can only be consciously on our vigil to ward off frauds and initiate exemplary action on the perpetrators of fraud which will serve as deterrents to intending fraudsters," Gandhi said in a lecture here on Financial Frauds.

"Banks and financial institutions are easy prey to fraudsters. As long as banks and financial institutions handle huge sums of money as financial intermediaries, they will always be the target of ingenious fraudsters trying to relieve them of the money," Gandhi said.

The RBI Deputy Governor said the endeavour has to be to prevent the fraud, detect it at the earliest if it happens and minimise its negative fallout.

"This entails a constant state of vigil against frauds and emerging fraud risks in the economy.

"The business landscape is generally dynamic, and with ingenious fraudsters, we are dealing with people who always change their strategies to be one step ahead of bankers and regulators and the police.

"As such, when it comes to fraud risk management, a bank has to be like a referee in a football game, always moving with the players and be alive to changes in the game and take action," Gandhi said in his speech at an Assocham event on Friday.

Gandhi said frauds can have immediate impact on the banks' financials and can also cause a systemic risk in extreme cases, because of which regulators are generally keen an extra oversight on banks about frauds.

"More often than not, the frauds lead to tighter regulations. These aim at bringing in both corrective and preventive measures," he said, while adding that banks must follow three KY Principles -- Know its Customer, Know its Employee and Know its Partner -- to check frauds.

Gandhi also asked banks to do pattern recognition and conduct discreet probes while they also need to invest in data analytics and intelligence gathering to make fraud detection as near to real time as possible.