Banking Frauds


    The banking sector has grown rapidly in India, making it one of the world’s fastest-expanding economies. Any economy’s financial sector is its backbone. Since 1991, when financial sector reforms including financial inclusion, economic liberalization, digitalization, and demonetization were implemented, the Indian banking sector has enjoyed significant expansion.

    Although the Reserve Bank of India regulates the banking sector, it is still plagued by financial distress. The risk of fraud is increasing day by day as more people use e-banking, digitalization, mobile banking, and the internet. The current research aims to delve deeper into concerns such as banking fraud and misconduct.

    There are some concerns, such as the rise in non-performing assets (NPAs) in public sector banks in recent years. Though operations such as inter-branch transactions, loans, deposits, and other internet transactions are extremely secure, legal requirements and procedural controls must be sufficient to deal with effective detection and prevention by banks and regulators such as the RBI.


    The finance, banking, and business sectors are structural and constitutive elements of India’s rapidly growing economy. The health of a country’s financial, banking, and business sectors reveals the country’s economic strengths. A country’s finance, banking, and business systems must be established and transparent before it can achieve its progressive aims. On the other hand, if these institutions are dishonest and fraudulent, cronyism and nepotism will trump financial ethics’ essential principles.

    There are numerous determinants that reveal whether a country’s economy is in good shape or not in order to measure the health of various sectors. It goes without saying that a country’s three economic systems have a significant impact on its total economy. Finance and banking are inextricably linked, and they are the lifeblood of a country’s economy. Without a free and fair financial and banking system, trade and commerce are not flexible. In general, for corporate expansion, good trade and commerce flexibility is required.

    All three are interconnected. Finance and banking are the backbones of modern businesses in the twenty-first century. A bank is a financial entity that handles deposits, advances, lending, mortgages, and a variety of other services. They deal with people’s personal finances as well as commercial ventures. Ethical and professional values are related with each of these functions, and their violation leads to the emergence of loopholes for frauds and scams.

    Generally, Fraud is a deliberate deception intended to acquire an illegal advantage for the perpetrator or to deprive a victim of a right. Fraud can take many forms, including tax fraud, credit card fraud, wire fraud, securities fraud, and bankruptcy fraud. A single person, a group of people, or an entire corporation can engage in fraudulent behavior.

    Fraud is defined as the intentional withholding of vital information or the making of false representations to another party with the purpose of obtaining something that would not have been obtained without the deception.

    According to Section 17 of the Indian Contract Act, a fraud is defined as any act committed by a contracting party or with his consent or by his agents with the intent to deceive another party or his agent or to convince him to enter into a contract. Fraud happens when a firm or entity intentionally alters and hides important information in order to appear healthier. Companies use a variety of methods to commit such frauds, including misinformation in prospectuses, accounting record manipulation, debt concealment, and so on.


    Banks are reviewing accounts that were previously placed on alert. In the case of significant accounts, they will disclose any instances of fraud and make a 100 percent provision for them. These are being rigorously examined to ensure that banks’ balance sheets are suitably provisioned. The RBI further stated that the scams reported for 2019-20 occurred in loans approved between 2010 and 2014.

    During 2019-20, the average time between the date of the fraud and its identification by banks and financial institutions was 24 months. The average latency in massive frauds of Rs. 100 crore and above was 63 months.

    Consider the recent large-scale frauds that have afflicted India’s financial system.

    The CBI found in 2011 that officials of various banks, including the Bank of Maharashtra, Oriental Bank of Commerce, and IDBI, created nearly 10,000 bogus accounts and transferred Rs 1,500 crore in loans. In 2014, the bribe-for-loan controversy involving ex-chairman and MD of Syndicate Bank SK Jain for his role in awarding Rs 8,000 crore was exposed. Union Bank of India designated Vijay Mallya a wilful defaulter in 2014, and other banks such as SBI and PNB soon followed suit.

    Employees of Jain Infra projects robbed the Central Bank of India to the tune of over Rs 2,000 crore in 2015, which raised suspicions. The Syndicate Bank heist, which involved over 380 accounts opened by four people who defrauded the bank of Rs 10 billion using fraudulent cheques, Letters of Undertakings (LoUs), and LIC insurance, was one of the worst financial frauds of 2016. The new bank fraud involving diamond dealer Nirav Modi, worth Rs 11,450 crore.

    It has been revealed that the company obtained at least 150 LoUs with the help of former PNB personnel, allowing Nirav Modi Group to swindle the bank and several other lenders.


    Any person found guilty of fraud faces a term of imprisonment of not less than six (06) months but not more than ten (10) years, as well as a fine of not less than the amount involved in the fraud but not more than three (03) times the amount involved in the fraud. When the fraud involves public interest, the term of imprisonment must be at least three (03) years.


    PSBs have been scrutinizing loan accounts and expect to report more fraud cases in accounts that were previously placed under their Early Warning Signals (EWS) system.

    The Reserve Bank of India (RBI) created the EWS framework after noticing a delay in banking fraud detection and reporting. The EWS framework’s goal is to avoid and detect these offenses, provide timely reporting to regulators, and launch staff accountability actions, all while ensuring that the banks’ operations and risk-taking ability remain unaffected.


    SWIFT is a secure financial messaging carrier that can help to prevent fraud. To put it another way, it transmits messages from one bank to the next. Its fundamental duty is to offer a secure transmission route so that the message from Bank A reaches Bank B exclusively. Bank B, in turn, is aware that the communication was delivered, read, and amended along route by Bank A alone. Needless to say, banks should have double-checked before delivering messages. The missing connectivity between SWIFT and the bank’s backend software was one of the main faults in the PNB case. This allowed fraudsters to move funds using letters of understanding or a loan request to another bank via the SWIFT network.


    Despite the Reserve Bank of India (RBI) tightening supervision and vigilance, the total number of cases of fraud reported by banks and financial institutions increased by 28% in volume and 159 percent in value in 2019-20. According to the RBI’s Annual Report 2020, the number of frauds increased from 6,799 in March 2019 to 8,707 in March 2020, involving Rs.1,85,644 crore.

    # With 4,413 cases involving Rs.1,48,400 crore, PSBs topped the fraud table.

    # 3,066 scams of Rs.34,211 crore were recorded by private banks.


    It is widely believed that the banking sector, as the economy’s barometer, reflects macroeconomic indicators. Transactions through ATMs and internet/mobile banking have increased noticeably, and banks have made significant investments to expand their banking network and consumer reach.

    The Indian banking industry is today valued at Rs. 81 trillion (US$1.31 trillion), and banks are now using cutting-edge technology such as the internet and mobile devices to conduct transactions and communicate with the general public. According to a KPMG-CII assessment of the banking sector, “the Indian banking sector is predicted to become the fifth-largest in the world by 2020 and the third-largest by 2025.

    This unfavorable trend in the banking sector not only results in bank losses but also has a negative impact on their trustworthiness. Banks must use technology to detect fraud and improve information sharing.

    Law enforcement officials should endeavor to avoid instilling fear in the public, which could stifle credit flow to productive industries. Apart from increasing capacities in the financial system, the accountability of third-party service providers such as auditors and lawyers should also be rectified. Before allowing credit to flow, the working capital limit should be assessed.

    Awareness of loopholes, the implications of skipping procedural requirements, and benchmarks for evaluating the veracity of various crucial papers should be provided. The inquiry should be carried out to determine the trail of funds diversion and whether any money has been sent abroad. Banks should devote the necessary attention to internal control systems and fraud prevention measures in order to ensure that instructions issued by them are followed. Credit rating organizations should scrutinise the borrower’s situation more closely in order to prevent bad debts.

    The bank should establish centralized loan processing hubs to help streamline the selection of borrowers with expanded due diligence, proposal evaluation, and other functions, thus delinking the sanction process from branch heads. To perform effectively, Indian banks require considerable changes in operational and governance standards, as well as continuous work on loopholes, so that the banking sector can contribute more to the growth of the Indian economy.

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    (MARCH – APRIL 2022)


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