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All you need to know about bank frauds in India

April 6, 2022

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This article has been written by Oishika Banerji of Amity Law School, Kolkata. This article discusses bank frauds in India thereby throwing light to a frequently recognized offence under Indian laws.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

A competent banking system is required for any country’s economic growth and development. With a plethora of economic variables at play, both at the national and global levels, the banking sector’s role has evolved significantly over time. This allowed the financial sector to explore new prospects and expand its reach beyond a country’s territorial extent. The banking industry underwent huge revolutionary transformations in tandem with the enormous shift of trade and commerce. These reforms include the entry of new private sector banks, the introduction of information technology (such as the use of NEFT and Smart Cards), and modifications to capital adequacy standards, among others. These changes have improved the banking sector’s efficiency and productivity tremendously. While India’s banking sector continues to develop in terms of overall revenue and profits, the amount of money lost to bank fraud is increasing. The Reserve Bank of India and bank management are both concerned about this. These bank robberies appear to be novel in terms of their method of operation and are rather large in scale. This unfavourable trend in the financial system results in not just losses for banks, but also a deterioration of their trust. This article provides its readers with an idea about bank frauds in India thereby throwing light on the legal mechanisms governing the same.

What is a bank fraud

Bank fraud is a purposeful act of omission or conduct by any person in the course of a banking transaction or in the bank’s books of accounts, which results in unlawful temporary gain to any individual or otherwise, with or without any monetary loss to the bank. The losses incurred by banks as a consequence of fraud are equal to the combined losses incurred as a consequence of offences such as robbery, dacoity, burglary, and theft. Unauthorized credit facilitates are extended for illegal gratification such as cash credit allowed against pledge of goods, hypothecation of goods against bills, or against book debts.

“‘Fraud’ denotes a false statement made knowingly or without trust in its truth, or recklessly careless, whether true or untrue,” according to Lord Herschell. In the case of Derry v. Peek (1889), he had opined that a false statement made by someone who does not believe it to be genuine is referred to as a fraudulent misrepresentation.

Pledging of fictitious items, inflating the value of goods, hypothecating commodities to several banks, fraudulent removal of goods with the knowledge and connivance of or ignorance of bank employees, and pledging of goods belonging to a third party are all common methods of operation of bank frauds. Goods hypothecated to a bank are found to contain obsolete stocks packed in between good stocks and cases of shortage in weight are not uncommon.

Components of a bank fraud

Any fraud conducted by a bank employee or in conjunction with a borrower has two key components, namely,

First, there is the subjective intention, and
There is the objective opportunity.

In a bank, conditions must be constructed such that a person who wants to commit fraud does not have the chance to do so. An examination of instances surrounding banking frauds reveals the following four primary aspects that are responsible for the commission of bank frauds:

Active participation of the personnel, both managerial and clerical, either independently or in collusion with outsiders.
Failure of bank employees to adhere to properly set out instructions and procedures.
External elements defrauding banks by forging or manipulating checks, drafts, and other financial instruments.
There has been increasing cooperation of business people, senior bank executives, public servants, and powerful politicians to cheat banks by bending the rules, flouting laws, and tossing banking standards to the wind.

Classification of frauds

The RBI’s Master Directions on Frauds – Classification and Reporting by commercial banks and select FIs (Updated as on July 03, 2017) provides different categories of offences that constitute fraud, putting specific reliance on the Indian Penal Code, 1860. The classifications are provided hereunder:

Misappropriation and criminal breach of trust.
Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts, and conversion of property.
Unauthorised credit facilities extended for reward or for illegal gratification.
Negligence and cash shortages.
Cheating and forgery.
Irregularities in foreign exchange transactions.
Any other type of fraud not coming under the specific heads as above.

Risks possessed by fraudulent activities on banks

Banks are exposed to a variety of dangers. A successful bank is one that can consistently avoid these risks while still generating considerable profits. Risk mitigation is only possible if hazards are properly identified, as well as the reasons for their occurrence and the potential damages they may produce.
Credit risks, market risks, operational risks, moral hazards, liquidity risks, business risks, and systematic risks are the key categories of risks that any bank faces. The Reserve Bank of India (RBI) cautioned that the banking industry is under significant stress in its bi-annual Financial Stability Report (FSR) issued on June 30, 2018, citing increasing bad loans and a surge in bank fraud, among other difficulties.
All of this, according to the RBI, can cause India’s economy to suffer. Public Sector Banks’ (PSB) average bad loans accounted for 75% of their net assets in March 2018. These problematic loans are reducing bank profitability and capital situations, putting India’s largest banks’ viability in jeopardy.

Bank frauds in India

In the case of Pradeep Kumar And Another v. Postmaster General And Others (2016), the Supreme Court of India had opined that individual employees are capable of being dishonest and committing fraud or wrongdoings on their own or in cooperation with others. Such activities of bank/post office workers, when done in the course of employment, bind the bank/post office at the instance of the person who is damnified by the bank/post office officers’ fraud and illegal conduct. Thus, post offices, banks are vicariously liable for fraud, wrongs by employees during their employment.

Cheque frauds, deposit account frauds, purchase bill frauds, hypothecation frauds, loan frauds, frauds in foreign currency transactions, and inter-branch account scams are all examples of bank frauds. The failure of supervisory employees to follow established systems and processes is a major source of fraud. Unscrupulous constituents conduct frauds by taking advantage of authorities’ weakness in enforcing the Reserve Bank of India’s (RBI) time-tested safeguards. In its central office, the RBI has established an investigation unit. It is manned by an ace investigator with extensive expertise. The bank team delves into the core causes of bank fraud and offers comprehensive prevention recommendations. The RBI conducts in-depth analyses and research into the commission of bank frauds and makes recommendations for fraud prevention measures.

To maintain depositors’ interests and public trust, a good banking system should have three key features which are provided hereunder:

A society that is devoid of deception,
A tried-and-tested best practice code, and
An in-house method for resolving pressing grievances.

In India, all of these criteria are either absent or severely weakened.

Fraud by insiders

On 19th February 2022, the Central Bureau of Investigation (CBI) had charged ABG Shipyard Ltd and its then Chairman and Managing Director Rishi Kamlesh Agarwal, as well as others, with defrauding a consortium of banks led by State Bank of India of over Rs 22,842 crore. In addition to Agarwal, the agency has named the former Executive Director Santhanam Muthaswamy, Directors Ashwini Kumar, Sushil Kumar Agarwal, and Ravi Vimal Nevetia, as well as another company ABG International Pvt Ltd, for alleged criminal conspiracy, cheating, criminal breach of trust, and abuse of official position in violation of the Indian Penal Code, 1860 and the Prevention of Corruption Act. This recent bank fraud case is a classic example of fraud by insiders. Bank frauds are commonly carried out by its internal members for it becomes easy and smooth for the latter to rob the former while being equipped with adequate information about the same.

Rogue traders

A rogue trader is a high-ranking insider who is ostensibly authorised to invest large sums of money on behalf of the bank. This trader secretly makes increasingly aggressive and risky investments with the bank’s funds, and when one investment fails, the rogue trader engages in further market speculation in the hope of making a quick profit to cover or hide the loss. Unfortunately, when one investment loss follows another, the expenses to the bank can quickly mount into the hundreds and millions of rupees resulting in a grave loss for the bank.

Fraudulent loans

Taking out a loan is one of the methods to get money out of a bank, and it’s a behaviour that bankers would be happy to encourage if they knew the money would be repaid in full with interest. A fraudulent loan, on the other hand, is one in which the borrower is a business entity managed by a dishonest bank officer or an accomplice, and the money is lost when the borrower files bankruptcy or disappears. The borrower might even be a non-existent organisation, with the loan serving as a front to cover a large-scale bank robbery. Based on the recommendations of an Internal Working Group constituted by the Bank, a framework for dealing with loan frauds was put in place vide circular dated May 7, 2015.

Wire fraud

Wire transfer networks, such as the international interbank fund transfer system, are appealing targets since a transfer is difficult or impossible to reverse after it has been done. Rapid or overnight wire transfers of large sums of money are commonplace because these networks are used by banks to settle accounts with one another. While banks have put checks and balances in place, there is a risk that insiders will try to use fraudulent or forged documents claiming to request a bank depositor’s money be wired to another bank and often an offshore account in some faraway foreign country.

Forged or fraudulent documents

Banks like to count their money precisely, thus every cent must be accounted for, hence forged documents are frequently used to mask other frauds. A document declaring that an amount has been obtained as a loan, withdrawn by an individual depositor, transferred, or invested might therefore be useful to a criminal who wants to hide the minute detail that the bank’s money has been stolen.

Theft of identity

Depositors’ personal information has been known to be disclosed by dishonest bank employees for use in identity theft and fraud. The information is then used to get identity cards and credit cards in the victim’s name and personal details.

Demand Draft (DD) fraud

The Bunko Banker is generally one or more dishonest bank workers that commit DD fraud. They take a few DD leaves or DD booklets from the stock and use them as normal DDs. They understand the coding and punching of a demand draft since they are insiders. These demand drafts will be produced without debiting an account and will be payable in a faraway town/city. It will be cashed at the payment branch after that. It’s just another DD for the paying branch. This type of fraud will only be uncovered when the head office does branch-by-branch reconciliation, which typically takes at least 6 months. By that time, the funds are no longer recoverable.

Fraud by others

From the name itself, it stands clear that fraud by others signifies those outside the financial institution but are interested in earning profit illegally by exercising fraudulent activities in targeted banks.

Forgery and altered cheques

Cheques are often tampered with to modify the name in the cheque in order to deposit cheques intended for someone else or the amount on the face. Rather than tampering with a genuine check, some fraudsters also try to counterfeit a depositor’s signature on a blank cheque or even print their own cheques drawn on other people’s accounts, non-existent accounts, or even supposed accounts held by non-existent depositors. Before the cheque may be rejected as invalid or for lack of cash, it will be deposited in another bank and the amount is extracted.

Stolen cheques

Some fraudsters get access to facilities that handle significant numbers of cheques, such as a mailroom or post office, or the offices of a tax authority (which receives a high number of cheques), or a company payroll, or a social or veterans’ benefits office (which receives a huge number of cheques) (issuing many cheques). Forgers cherish stolen blank cheque books because they may sign as if they are the depositor.

Accounting fraud

Often firms have been known to utilise false bookkeeping to overestimate sales and revenue, inflate the value of the company’s assets, or declare a profit while the company is operating at a loss in order to conceal major financial issues. These altered documents are then used to solicit investment in the company’s bond or security offerings or to submit fake loan applications in the last effort to raise funds to stave off the eventual collapse of an unproductive or mismanaged business.

Bill discounting fraud

Essentially a confidence trick, a fraudster utilises a corporation to garner confidence from a bank by posing as a legitimate, lucrative customer. To provide the impression of being a desirable customer, the corporation employs the bank to collect money from one or more of its consumers on a regular basis. These payments are always paid because the consumers in issue are complicit in the scam and actively pay all of the bank’s invoices.

Cheque kiting

Cheque kiting takes advantage of a system in which money is made accessible immediately after a cheque is placed into a bank account, even if the money is not taken from the account on which the cheque is drawn until the cheque clears. A cheque is cashed, and the money is placed into another account or withdrawn by writing further cheques before the bank receives any money by clearing the cheque. The initial deposited check is frequently discovered to be a counterfeit check. On a daily basis, some offenders have switched checks between multiple banks, using each to offset the deficiency from a prior check.

Credit card fraud

Credit card fraud is a common method of stealing from banks, businesses, and customers. A credit card is made up of three polyvinyl chloride plastic sheets. The core stock refers to the card’s centre layer. These cards are of a certain size and include a lot of information embossed on them. However, credit card theft may take many forms. It is expected that when e-Commerce, m-Commerce, and internet capabilities become more widely available, fraudulent financial freaking by means of credit cards would rise dramatically. White plastics are the name provided to counterfeit credit cards.

Fraudulent loan applications

Individuals using false information to disguise a credit history full of financial issues and unpaid debts, as well as organisations employing accounting fraud to overestimate revenues in order to make a hazardous loan appear to be a solid investment for the bank, are all examples of fraudulent loan applications. Some companies have overextended themselves by borrowing money to fund expensive mergers and acquisitions and overstating assets, sales, or income to look solvent despite being severely financially strained. The consequent debt burden has bankrupted huge corporations, such as Parmalat, an Italian dairy behemoth, and exposed banks to significant losses from bad loans.

Phishing and Internet fraud

Phishing works by sending forged emails imitating an online bank, auction, or payment site. The email takes the user to a forged website that looks like the original site and subsequently tells the user to update his or her personal information. The stolen information is subsequently utilised in various crimes, such as identity theft and online auction fraud. Several malicious “Trojan horse” programs have also been used to eavesdrop on internet users while they are online, stealing keystrokes or personal data and sending it to third-party websites.

Booster cheques

A booster cheque is a forged or bad check used to make a payment to a credit card account in order to “blow out,” or increase the amount of credit available on otherwise legal credit cards. The bank credits the amount of the check to the card account as soon as the payment is made, even if the check has not yet been cleared. Before the fraudulent check is discovered, the offender goes on a shopping spree or takes out cash advances until the card’s newly increased allowable limit is reached. The initial check then bounces, but it’s too late by then.

Impersonation and theft of identity

Identity theft is on the rise. The fraud involves getting information about a victim and then using that information to apply for identification cards, accounts, and credit in that person’s name. A birth certificate may often be obtained with just a name, parents’ names, date, and place of birth. Each document received is then used as identification to get other identity documents. Standard identifying numbers issued by the government, such as social security numbers, PAN numbers, are also beneficial to identity thieves. Unfortunately for the banks, identity thieves have been known to take out loans and then flee with the money, happy to have the incorrect people accused when the bills default.

Money laundering

Money laundering has been around since the days of Al Capone. Money laundering has subsequently come to refer to any scheme that conceals or hides the real source of finances. The surgeries are carried out in a variety of ways. One variation involves buying securities (stocks and bonds) for cash, putting them in a safe deposit box at one bank, and using a claim on those assets as collateral for a loan at another. After then, the borrower would default on the debt. The securities, on the other hand, would retain their full value. The transaction simply helps to conceal the monies’ original source.

Forged currency notes

At the personal level, paper cash is the most common means of money transaction, however, checks and drafts are also widely employed in the business. The term ‘bank note’ is defined under Section 489A of the Indian Penal Code, 1860. If currency note forgery is effective, it has the potential to provide the forger with a fortune while simultaneously destroying the nation’s economy. A currency note is constructed of a special paper with plastic covering bonded on both sides to preserve the ink and anti-counterfeiting technology from harm. These notes also include security threads and watermarks. However, the majority of individuals are unaware of these facts.

Stolen payment cards

A phone call from a credit card issuer asking if the person has gone on a spending spree is often the first indication that a victim’s wallet has been stolen. The simplest form of this theft involves stealing the card itself and charging a number of high-ticket items to it in the first few minutes or hours before it is reported as stolen. A variation of this is to duplicate only the credit card numbers rather than taking the card itself and then utilise the numbers in online scams.

Duplication or skimming of card information

This can take many forms, from a dishonest merchant copying customers’ credit card numbers for later misuse or a thief stealing the information using carbon copies from old mechanical card imprint machines to the use of tampered credit or debit card readers to copy the magnetic stripe from a payment card while a hidden camera captures the numbers on the face of the card. A fraudulent card stripe reader would record the contents of the magnetic stripe, while a covert camera would take a glimpse at the user’s PIN. The data from the fake equipment would then be used to create duplicate cards that could be used to make ATM withdrawals from the victims’ accounts.

Frauds assisted by digital technology

Except for those in rural and distant locations, most bank offices have been digitised to provide efficient and quick service. As computerisation in Indian banks is still relatively new, there haven’t been many computer-related scams in banks that have been in discussion. However, in western nations, a high number of cybercrimes in the financial industry are regularly recorded. It is necessary to investigate the nature of such crimes in order to create effective prevention measures. Normally following types of frauds are committed:

Cyber crooks create spy software in order to crack passwords. They hack into banks’ computer systems and modify data to transfer money from other people’s accounts.
Computer viruses are developed by malicious individuals who get access to a computer system via email. These viruses corrupt data saved on computers and cause the entire system to slow down. It is frequently said that anti-virus software firms develop viruses in order to sell their product in the market.
Hackers are computer professionals who steal passwords and get access to sensitive data kept on computers. They have no qualms about ‘rendering’ government agencies, including military bases, in order to carry out their malicious plan to destroy and mutilate data contained in computer systems. Such crimes are typically undertaken not for financial gain, but to obtain mental joy from the pain of others.
Wiretapping is a crime in which a person taps the wire of a bank’s ATM to take money from another person’s account. The fraudster connects a wireless microphone to the telephone connection linking the ATM to the bank’s computer and wiretapping signals, while a client is using the ATM. These signals are later on utilised for withdrawing money.

Law and policy related to bank frauds

Both the Reserve Bank of India and the Government of India can devise a number of ways to combat the threat of banking fraud. These techniques can only be effective if they support the creation of a more effective financial system. In reality, inside the banking system, fraud is one of the areas that need rapid attention.

Banking fraud is not recognized as a distinct offence under the Indian Penal Code, 1860. Depending on the facts of each instance of banking fraud, different provisions of the Indian Penal Code, 1860 are invoked. This demonstrates that there is now no separate legislation dealing completely and specifically with banking frauds. Banking fraud, in general, is a type of white-collar crime done by unscrupulous individuals who cleverly exploit gaps in the present banking system and procedures. Banking fraud can be simply defined as an action including a combination of civil and criminal components that harms the public interest, public money, and the state exchequer.

The Indian Contract Act, 1872

The term ‘fraud’ is defined under Section 17 of the Indian Contract Act, 1872. Any of the following activities undertaken by a contracting party, their connivance, or their agent with the purpose of deceiving or encouraging another party or their agent to join into the agreement are considered fraud. The situations leading to fraud have been provided hereunder:

The assertion as fact of something that is not true by someone who does not believe it is true.
The deliberate hiding of a fact by someone who knows or believes it.
A commitment made with no intention of following through.
Any other conduct that is designed to deceive.
Any act or omission that is expressly declared fraudulent by the law.

Ingredients of fraud

There should be a suggestion as to a fact.
The fact suggested should not be true.
The suggestion should have been made by a person who does not believe it to be true,and
The suggestion should be made with intent either to deceive or to induce the other party to enter into the contract.

Punishment for fraud

The penalty for perpetrating fraud is non-compoundable, as it includes both a fine and a period of imprisonment. Online fraud has increased as technology has progressed, and as a result, committing fraud has become a serious legal infraction.
Fraud is punishable under Section 447 of the Companies Act of 2013. About 20 sections of the Act are dedicated to exposing frauds committed by an organisation’s/directors, entity’s auditors, key managerial staff, and/or corporate officers.
If a person is found guilty of fraud under Section 447, he may be sentenced to jail for a period ranging from six months to ten years.

Remedies available to the aggrieved party against fraud

In the event of a fraud, the plaintiff has two options:

The plaintiff has the right to retract, or terminate, the contract and seek reimbursement for his/her losses.
Confirm the contract and file a lawsuit against the defendant for damages. (For example, when the asset’s value has dropped).

The defendant’s malevolent or criminal intent can be proven depending on the facts and circumstances of the case. The defendant can then face criminal proceedings, which might result in fines or perhaps a prison sentence for the defendant.

The Indian Penal Code, 1860

Even though ‘fraud’ is not defined explicitly in the Indian Penal Code, 1860, provisions for cheating (Sections 415 to 420), concealment (Sections 421 to 424), forgery (Sections 463 to 477A), counterfeiting (Sections 489A to 489E), misappropriation (Sections 403 to 404), and breach of trust (Sections 405 to 409), sufficiently cover the same.

Legal remedies and punishment for the offence of fraud

Cheating

Section 419 of the Indian Penal Code, 1860 provides an imprisonment of either description for a term which may extend to three years, or with fine, or with both, as the deterrent for the offence of cheating.

Offence of cheating is cognizable and non bailable. The trial is done by a magistrate of first class. FIR or Application can be filed under Section 156(3) and in case of private complaint under Section 200 of the Code of Criminal Procedure, 1973.

Concealment

Section 421 of the Indian Penal Code, 1860 provides that dishonest or fraudulent removal or concealment of property to prevent distribution among creditors will be accompanied by imprisonment of either description for a term which may extend to two years, or with fine, or with both.

The offence is non-cognizable, bailable, triable by any Magistrate and compoundable by the creditor who are affected thereby with the permission of the court.

Forgery

Section 465 of the Indian Penal Code, 1860 provides an imprisonment of either description for a term which may extend to two years, or with fine, or with both, for the offence of forgery.

Counterfeiting

Counterfeiting of bank notes or currency notes under Section 489 A of the Indian Penal Code, 1860, can cost the offender with an imprisonment for life, or with imprisonment of either description for a term which may extend to ten years, and shall also be liable to fine. The RBI Master Circular on the same can be referred here.

Misappropriation

Section 403 of the Code of 1860 lays down provision for dishonest misappropriation of any movable property which shall be punished with imprisonment of either description for a term which may extend to two years, or with fine, or with both.

Breach of trust

Section 406 of the Indian Penal Code, 1860 provides punishment for criminal breach of trust which ranges from an imprisonment of either description for a term which may extend to three years, or with fine, or with both.

The Information Technology Act, 2000

The Information Technology Act of 2000 was adopted by the Indian government to make ways for punishment and penalties for computer-related frauds. In the case of unauthorised acts committed in respect of another person’s computer system, such as access, downloads, or making copies of the information or data stored, the introduction of a computer contaminant or computer virus, damages to the computer or its system, etc., Section 43 of the said Act provides for hefty damages up to rupees ten lakhs payable by the offender to the person affected. Furthermore, the aforementioned Act makes tampering of computer source documents and hacking computer systems punishable by up to three years imprisonment.

Efforts extended by RBI

Frauds, deceptions, robberies, and other types of crimes at banks are a source of concern. While banks bear the main responsibility for fraud prevention, the RBI has been counselling banks on significant fraud-prone sectors and the precautions required to avoid fraud on a regular basis. The Reserve Bank has also been sending information to banks about sophisticated scams that were not previously disclosed so that institutions might put in place the required protections/preventative measures through suitable processes and internal inspections. Banks are also being given information on unethical borrowers and linked parties who have committed bank fraud so they should be cautious when dealing with them. To help with this continuing process, banks must provide detailed information concerning frauds and the actions taken in response to them to the RBI.

Chapter III of the Master Directions on Frauds-Classification and Reporting by commercial banks and select FIs (Updated as of July 03, 2017) introduces the Central Fraud Registry (CFR) based on the Fraud Monitoring Returns, to be filed by banks and select FIs. The same has been made available, along with updates, to which banks have been allowed access through user-ids and passwords. CFR is a searchable database that is accessible over the internet. The practice of giving Caution Advice (CA) on paper has now been phased out. However, CAs will be given as and when needed for frauds, including attempted frauds with systemic implications. Banks should make full use of CAs/CFRs for rapid fraud risk detection, control, reporting, and mitigation. Banks should also put in place suitable systems and procedures to ensure that the information in CA/CFR is used in credit risk governance.
Chapter VI of the aforementioned RBI Circular provides a guideline for reporting frauds to police/CBI. When dealing with incidents of fraud or embezzlement, banks should be driven not just by the desire to recover the funds as quickly as possible, but also by the public interest and the need to ensure that the perpetrators are brought to justice.
Chapter VIII of the Master Direction lays down a set of three guidelines to be adopted for the purpose of filing complaints with law enforcement agencies in cases of bank fraud.

When a bank detects fraud, it is obligated to quickly file a report with the appropriate law enforcement agency. There should ideally be no delay in submitting complaints with law enforcement authorities since delays can result in the loss of relevant ‘reliable’ papers, non-availability of witnesses, borrowers absconding, and the money trail becoming cold, in addition to asset-stripping by the fraudulent borrower.
It has been found that banks lack a central location for submitting CBI/police complaints. As a result, banks have a non-uniform method to report complaints, and the investigating agency must deal with many levels of authority inside the institutions. This is one of the most common causes for complaints getting converted into FIRs taking so long. As a result, banks are required to appoint a nodal point/officer to file all complaints with the CBI on behalf of the bank and to act as a single point of coordination and remedy for complaints with flaws.
The bank’s complaint to law enforcement authorities should be correctly written and should always be verified by a legal professional. Banks have also been located filing complaints with the CBI/police on the basis of borrowers’ deception, theft of money, diversion of funds, and so on, without categorizing the accounts as fraud and/or reporting the accounts to the RBI. As such circumstances are inherently grounds for categorizing an account as fraudulent, banks should classify such accounts as frauds and report them to the RBI.

Well known bank frauds in India

The number of financial scams in the country has increased as the number of digital transactions is on a rise. According to data provided by the Reserve Bank of India (RBI), India had an average of 229 banking frauds each day in the fiscal year 2020-21, with less than 1% of the total amount recovered. In FY21, there were 83,638 incidents of banking fraud in India, with a total value of Rs 1.38 lakh crore. According to statistics released by the RBI in response to a Right to Information (RTI) request submitted by India Today, only Rs 1,031.31 crore has been recovered so far. However, the figures for FY21 reflect a little improvement over FY20, when India had an average of 231 financial frauds each day. In FY20, there were 84,540 scams reported. A total of Rs 1.86 lakh crore was implicated, of which Rs 16,197 crore was recovered.

Bank of Maharashtra scam: Rs 836 crore

The Bank of Maharashtra was allegedly accused of sanctioning numerous credit facilities to SiddhiVinayak Logistics Limited’s drivers without their knowledge between 2012 and 2014. The corporation misappropriated the loan funds and did not use them for the purpose for which they were approved. In connection with the Rs 836-crore bank fraud case, the CBI had arrested a Bank of Maharashtra officer, Padmakar Deshpande, and the director of a Surat-based private logistics business, Siddhi Vinayak Logistics Limited.

Syndicate Bank Scam: Rs 1,000 crore

Nine persons were detained, including a former Syndicate Bank chief executive officer, for allegedly creating 386 accounts in three Syndicate Bank branches in Rajasthan and ‘defrauding’ the bank of Rs 1,000 crore by using fraudulent cheques, letters of credit, and life insurance policies.

ICICI Videocon scam: Rs 1,875 crore

Videocon group MD Venugopal Dhoot, ICICI Bank CEO Chanda Kochhar, and her husband Deepak Kochhar were accused of creating errors in loans sanctioned by the ICICI bank to the group in 2012. The ICICI Bank approved loans of Rs 1,875 crore to the Videocon Group and its subsidiaries. The vast majority of these loans were shown to be in direct breach of banking rules and ICICI Bank standards.

Rotomac Pens scam: Rs 3,695 crore

Bank of India, State Bank of India, Union Bank of India, and IDBI were among the 14 banks implicated in the Rotomac Pens scam. Rotomac’s promoter, Vikram Kothari, was accused of defrauding seven banks of Rs 3,695 crore. He was discovered to have misused loans of Rs 2,919 crore from seven banks, with a total outstanding sum of Rs 3,695 crore, including interest. Vikram Kothari was arrested by the CBI for the alleged offences.

PMC scam: Rs 4,355 crore

The Reserve Bank of India revealed in September 2019 that PMC Bank had reportedly constructed false accounts to disguise around Rs 4,355 crore in loans to Housing Development and Infrastructure Limited, which was near bankruptcy at the time.

ABG Shipyard scam: Rs 22,842 crore

In 2001, ABG Shipyard reportedly borrowed money from a group of banks led by ICICI Bank, IDBI Bank, and later SBI. Over a five-year period, the business was accused of stealing Rs 22,842 crore. According to the CBI, ABG Shipyard’s account was deemed a non-profitable asset (NPA) in 2013.

Bank of Baroda foreign exchange scam: Rs 6,000 crore

Loopholes in the remittance laws were used in the money laundering fraud to transfer unlawful money back from overseas in the Bank of Baroda foreign exchange scam. Scammers sent money to Hong Kong under the guise of advance payments to merchants. Employees of different institutions, notably Oriental Bank of Commerce and Bank of Baroda, were accused of being involved in the Rs 6,000 crore scandal.

Bribe for Loan scam: Rs 8,000 crore

UCO Bank, Bank of Maharashtra, and Canara Bank were among the banks implicated in the bribe for a loan scam of Rs 8,000 crore. The CBI detained Chartered Accountant Pawan Bansal for allegedly making arrangements between the Syndicate Bank and major firms in order to secure hefty loans. The scheme was determined to be well-oiled, with bribes paid to the heads of public sector banks and financial organisations in exchange for loans. Bansal was accused of striking arrangements with these institutions for loans totaling over Rs 8,000 crore.

Kingfisher scam: Rs 10,000 crore

Vijaya Mallya was accused of owing more than a dozen Indian banks over Rs 10,000 crore after his airline, Kingfisher Airlines Ltd, went bankrupt in 2013.

Nirav Modi PNB scam: Rs 14,000 crore

Nirav Modi, a diamond merchant, and his uncle Mehul Choksi were accused of defrauding Punjab National Bank of approximately 14,000 crores, reportedly with the aid of certain bank employees, irresponsible bank management, and inadequate bank auditing.

Preventive measures that can be adopted to curb bank frauds

Almost every aspect of life has changed dramatically in the twenty-first century. Technology has promised humanity enormous progress, with computerization serving as a wellspring of new age wisdom and a slew of innovative, rapid, and efficient financial services. However, this facility introduced hazards to a variety of banking activities, necessitating well-defined and timely preventative actions. Computer automation, which provides a plethora of services, is susceptible to various security/precautionary procedures to protect against its inherent weaknesses, and RBI, in outlining the activities, recommends preventive vigilance steps to be done to avoid such risks. The ways in which fraud can be effectively averted have been provided hereunder:

Recruitment and selection

The correct people with the proper credentials and abilities should be hired by bank authorities to look after its functioning. Qualifications, experience, performance, efficiency, and reputation should all be considered when selecting officials. Staff at all levels should get adequate training.

No undue reliance

There should be no excessive dependence on the bank’s personnel. Explanations should not be taken at face value. Agents, clerical employees, and officers should be shifted from branch to branch on a regular basis to avoid entrenched interests.

Basic honesty

No bank official should think of accepting presents and bribes from the borrowers with the belief that everything is safe and nothing would go wrong. A borrower’s financial situation and dealings should be closely monitored if he or she invites bank officials to drinks and dinners too frequently or sends them gifts.

Private lives of staff

Staff members’ personal life should be scrutinized, no matter how tough that may be. A staff member who is a frequent borrower or lives beyond their means may be the one to let the bank down in the end.

Supervision and audit

The authorized officer should check the books and records on a regular basis. Without warning, the godowns should be examined. A bank branch audit is also required.

Routine

The bank’s system, routines, and processes must all be followed meticulously. The instructions manual and circulars are the results of the head office’s extensive expertise with persons and problems over a lengthy period of time.

Vigilance

The term vigilance refers to a state of alertness or watchfulness. This is a mental condition that affects both rank and file personnel. The management job of vigilance is essential. Preventive vigilance should ensure the following:

The firm is planned and run in accordance with the corporate goal, using correct systems and processes.
Transactions are allowed and assessed correctly.
Assets are protected and obligations are managed, reducing the risk of losses due to anomalies or fraud.
Accountability and recordkeeping ensure that information is thorough, accurate, and timely.
Finally, bank officers cannot afford to be sluggish, complacent, or careless in the performance of their jobs.

Unscrupulous parties

Accepting new clients, particularly debtors, should be done with caution by the bank. Customers who have been observed engaging in questionable practices or who have been accused of fraud should be avoided. It is in the bank’s best interests to adopt the adage “once bitten, twice shy.”

Danger signals

Pay special attention to accounts where the debt total is frequently close to the sanctioned limit or the withdrawal limit. When borrowers’ checks begin to bounce for reasons such as “exceeds arrangement” or “effect not cleared present again,” or when the account’s turnover is low and securities are charged, bank staff must be on the lookout.

Conclusion

Banks are the engines that propel the financial sector’s activities and an economy’s growth. With India’s burgeoning banking industry, bank fraud is on the rise, and fraudsters are getting more clever and cunning. While it is impossible for banks to operate in a fraud-free environment, proactive measures such as risk assessments of operations and policies can assist them to mitigate the risk of fraud-related losses. As a result, the time has come to address the banks’ security concerns on a priority basis. Poor hiring procedures and a lack of adequate employee training are common issues that banks are encountering, along with overworked employees, weak internal control systems, and low compliance levels among bank managers, offices, and clerks. However, technology may help governments, regulatory bodies, and banks battle the increasingly sophisticated form of fraud by means of proactive forensic data analysis and data mining techniques.

References

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