Mumbai, Sept. 16 -- Not too long ago, Indian banks were scrambling to shore up deposits to fuel credit growth. Now, they are more willing to advance loans despite the inherent risk of default than competing for depositors. The reason: digital fraud and fund diversion. Bankers say rising cases of dormant accounts being misused as mule accounts are keeping lenders on their toes. Mule accounts act as conduits for sending and receiving funds that do not belong to the account holder. They usually remain dormant but can see a sudden spurt in low-value, high-volume transactions. Over 700 bank branches across India have around 850,000 mule accounts, according to the Central Bureau of Investigation (CBI). The agency is probing such accounts being used for cyber fraud. Last year, banks faced one of the worst deposit crises in two decades as low returns pushed people to other investment avenues like mutual funds. Credit growth was consistently outpacing deposit growth, leading to worries of asset-liability mismatch. The two rates finally converged earlier this year, primarily on account of a dip in credit growth. Indian bank deposits grew 10.2% year-on-year at the end of August, while non-food credit rose 9.9%, according to data from the Reserve Bank of India (RBI). While the deposit crunch seen last year has abated, the associated risk is now much higher because of mule accounts, a banker said, speaking on the condition of anonymity. A private banker said, "There is a lot of government focus around how this can be brought under control because many banks have fallen prey to wrong accounts. At some level, there is naturally pressure at the branch level to open accounts, and it is very difficult to control compliance because of the sales pressure." The know-your-customer (KYC) process acts as a vital safeguard against money laundering by mapping each account to a bona fide customer. It requires banks and other lenders to seek proof of address and identity from customers before opening bank accounts or even while availing loans. However, the intent is hard to establish. "Today, opening a loan account seems safer than opening a deposit account," CS Setty, chairman at government-owned State Bank of India (SBI), India's largest lender by assets, said at an event last month. "You have the issue of mule accounts, the issue of wrong transactions happening, and this is central to our customer protection." Unlike earlier, Setty said, large amounts of operational risks are coming from liability accounts, which need to be taken care of. However, the banker quoted earlier said that public sector banks are better placed to thwart such accounts since they have many more branches and their employees are mostly seasoned bankers, whereas private lenders have a relatively younger workforce that is prone to high attrition. "It is much harder to get well-trained people who can balance sales and compliance." Public sector banks accounted for about 62% of 151,862 bank branches in India as on 30 June, showed RBI data. While public sector banks added 1,774 branches in the 12 months to June, private lenders added 2,603. Lenders face several challenges with their Permanent Account Number (PAN), said a banker at a large public sector lender who did not want to be identified. "The Pan 2.0 Project of the government is working to eliminate these risks and when it comes into force, banks will be able to run KYC checks more seamlessly." Mint reported in November that Pan 2.0 is expected to cater to businesses' demands, focus on efficient grievance redressal, and provide better cybersecurity. Existing Pan card holders will not have to change or apply for new cards....