A World Bank Group study has warned of significant risks of fraud and corruption in the International Development Association's (IDA) lending programme under which it provides loans and grants to 78 countries, including India.

The report, prepared by the World Bank's Independent Evaluation Group (IEG), said a "material weakness" exists in controls over fraud and corruption related to IDA.

The risk of fraud and corruption by stakeholders, including local beneficiaries and contractors, could result in diversion of IDA funds, the report further pointed out.

"Evidence emerged during the review that suggested that there are significant risks of fraud and corruption impinging on IDA's lending operations,not fully matched by appropriate controls," the report said.

The key purpose of the IDA's internal control system is to assure its stakeholders that IDA complies with its articles and policies, and that the funds it provides for development purposes are used as intended and show measurable results.

The evaluation, the first of its kind to be carried out by any international development finance institution, was carried out over several stages through a detailed management self-assessment, a review by the Bank's internal auditing department, and a comprehensive independent evaluation by IEG.

The IEG study found that overall IDA's internal controls framework operated effectively and with high standards, but with some important qualifications.

IEG also found that while the management assessment was transparent, well documented and comprehensive, there are ''significant'' weaknesses that are concentrated in six areas: some fiduciary processes; management oversight of project processes; keeping the bank's operational policies and bank procedures (OP/BPs) in line with current policy; maintaining ready access to operational documentation; improving operational risk management; and greater IT security in some areas.

IEG has identified one ''material'' weakness in the complex of controls to manage the risk of fraud and corruption in operations supported by IDA.

''This finding is based on the identification of the risk that fraud and corruption may occur rather than on an assessment of actual occurrences. The weaknesses identified by IEG could potentially increase the risk of misuse of funds for IDA and its development partners unless actions are taken, it said, adding, ''The finding presents the challenge of addressing the risks more explicitly and to match them with appropriate risk management controls, recognising that weak governance is a fundamental dimension of the development challenge for IDA and all of its development partners.''

For minimising fraud and corruption risks, the IEG recommended that IDA operations should be addressed on a broad front.

Some actions for this and the other identified control issues could include:

* Deploying specific measures and controls to address fraud and corruption risks into overall risk management and key processes for country assistance strategies, lending design and project supervision.

* Accelerated implementation of governance and anticorruption programmes and devote additional attention and resources to building an organisational culture and incentive structure that addresses the risks of fraud and corruption, explicitly and cost-effectively.

* Intensifying IDA support to strengthen its controls over fiduciary and governance systems and improving local governance and fiduciary system in client countries.

* Close monitoring of the implementation of the remedies for the six significant deficiencies, all of which are contained in one or other of management's remedial action plans already being implemented.

* Close monitoring of the implementation of remedies for control deficiencies, including: Updating the measures currently in progress of the OP/BPs; setting up a mechanism to ensure the future currency of OP/BPs; Improved documentation retention and accessibility and a user-friendly documentation management system; setting up mechanisms to correct and monitor the several IT systems deficiencies identified; taking measures to address the about 100 identified other as yet unresolved smaller deficiencies.