Frauds in the Indian Banking Sector Implication of the Techno-Legal Defects

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Frauds in the Indian Banking Sector



Consequently, banks have a large database to solve many problems, for an instance, keeping up individual points of interest of clients to substantial enterprises and they are separate everyday exchanges. The power of saved money and the monetary condition of a country takes the generation, merchandise usage, and economic ventures in a country. It is specifically demonstrative of prosperity and expectations for the everyday comforts of people. Along these lines, if the money-saving framework is dysfunctional with abnormal, non-profitable amounts on accounting bank reports, budgetary trouble of borrower customers and unwanted criteria in transaction systems are the major causes of pressure for the Indian economy.

The marvellous opening of branches, development, and broadening in business, automation and systems administration, have on the whole expanded the complex operational dangers monitored by banks. Sadly, it is additionally obvious that the industry needs to confront numerous sorts of fakes and tricks. The Reserve Bank of India (RBI) is the focal strategy making and national-level administrative body that monitors the whole money-saving industry. Recently, 2015, declared that “deposits of the Indian banking industry in 2014 is Rs. 81 trillion”.

Banks are utilizing the internet and cell phones to complete exchanges and speak with customers. In addition, as given by the KPMG-CII report (2013), “Indian managing an account area can possibly coil up the fifth lead on the planet by 2020, and then third lead by 2025.” The terrible truth is that a lion’s share of associations that succumb to misrepresentation doesn’t set aside the opportunity to completely comprehend the genuine dangers engaged with frauds and along these lines don’t attempt endeavours to distinguish and forestall frauds before it really happens.

 Creating protection measures against frauds, distinguishing the strategies through which frauds can be conferred, building up compelling control measures, and setting up extortion determination rules not just enables associations to keep the loss of income and resources, yet additionally enhances the nature of their business forms and their general notoriety in the business condition.

This unfortunate advancement creates misfortunes for the banks and seriously influences their validity.” A description of fraud was, suggested in the perspective of electronic banking in the article of RBI Working Group, The meaning of fraud was suggested as: “A deliberate act or omission by any individual carried out during a banking transaction ensuing in a wrongful growth to any person for a fleeting period or otherwise, with or without any monetary loss to the bank”. Fraudulent documentation requires changing or altering a document to mislead another person. It also involves approving incorrect information given in documents intentionally. In banks, accounts that are inoperative due to various reasons are susceptible to fraudulent certification.

Examples Of Bank-Related Fraud

  • An individual unlawfully acquires individual data/records of someone else and takes an advance for the benefit of that individual.
  •  Any individual gives false data about their money-related status, for example, pay and different resources, and takes an advance for a sum that surpasses their qualified points of confinement with the intention of non-reimbursement.
  • A man takes a credit utilizing an invented name and there is an absence of a solid system relating to spot confirmations of address, due to tirelessness of chiefs/ promoters preendorse studies and distinguishing proof of defective/fragmented applications and negative/criminal records in customer history.
  •  Counterfeit documentation is used to concede overabundance overdraft office and pull back cash.
  •  A person may produce many documents like bills filed, Guarantee sheet for export and its orders/numbers given by the component specialist.
  • Big-ticket bank frauds- In seven out of the last ten years (2008-2018) nationalized banks have represented more than two-thirds of the aggregate sum engaged with these fakes.

Top 5 bank frauds over the last few years According to the Confederation of Industry, the distribution of reported frauds by banks follows the high Pareto Principle, known as a principle (80% of the consequences come from 20% of the causes). The large valued frauds of Rs 50 crore and above constitutes nearly 1% of the frauds but amounted to three-fourths of fraud losses.

On An Average Every Year, Banks Report Fraud Loss Of Rs 35,000 Crore.

  • Punjab National bank-Rs 13,000 Crore
  • PMC bank-Rs 4,355 Crore
  • ICICI Videocon-Rs 1,730 Crore
  • Cosmos Bank-Rs 90 Crore 
  • Bhushan power Rs2,348 Crore

Types Of Frauds

To bring uniformity in reporting, RBI has classified frauds based on the provisions of the Indian Penal code

  • Misappropriation and criminal breach of trust
  • Fraudulent encashment through forged instrument, manipulation of books of accounts or fictitious account.
  • Unauthorized credit facilities extended
  •  Negligence and cash shortages
  • Cheating and forgery
  • Irregularities in foreign exchange transactions.
  • Any other type of fraud not covered under the above heads.

Bank Frauds in India

 the major bank frauds were involved in the following sectors; the common modus operandi is pledging of spurious goods, pledging of goods belonging to a third party, inflating the value of goods, hypothecating goods to more than one bank, fraudulent removal of goods with knowledge of bank staff. 

  • Gem and jewelers-letter of credit/standby letter of credit
  •  Manufacturing industry-shipping bills 
  • Agro sector-diversion of funds via fake inventories, embezzlement of stocks, post dated cheque, etc.
  •  Media-diversion of funds and misrepresentation of facts
  •  Aviation sector-diversion of funds
  •  Service/project-window dressing 
  • Discounting of cheques – fraudulent transaction through fake and false documents
  •  Trading sector-cash credit/letter of credit/standby letter of credit.
  •  Information technology-diversion of funds

Causes Of Banking Frauds

An analysis made on basis of the cases brings out the following factors responsible for the commission of frauds in public sector banks

  • Active involvement of staff independently or with help of external.
  •  Failure of bank staff to follow laid down instructions and guidelines.
  •  Forgeries or manipulation of banking instrument and documents.
  •  Collusion between business, senior bank executives, civil servants to defraud the banks.

Central vigilance commission pointed out many loopholes/lapses in the system as the causes like

  • Lack of competence and skill on part of banks to appraise technical aspect of project for finance.
  •  Lack of proper and due diligence by the banks.
  • Diversion of funds by the promoters of companies with use of shell companies.
  •  Fabrication of information
  •  Frauds committed by companies.

The causes may be due to lack of adequate supervision of top management faulty incentive mechanism for employees, weak regulatory system, lack of appropriate tools and technologies to detect early warning signals of frauds, lack of coordination among different banks across India, collusion between employees and external parties, lack of adequate training, the excessive burden on the bank staff. According to RBI, during the past five years, more than 23,000 cases of fraud involving Rs 1 lakh crore have been reported. According to SEBI Executive Director, Anand Baiwar, there is a close link between corporate frauds and corporate governance.

Suggestion And Conclusion

  • There should be strong internal rating agencies that evaluate each project before sanctioning the loan. 
  • Indian government should also consider the role of third parties like auditors, chartered accountants, and rating agencies and determine punitive measures for future deterrence. The internal and external audit must be completed on time at the branch level and share report with government auditor and examined by RBI.
  • Periodic disclosures to RBI, SEBI, and other regulators
  • SWIFT CBS linking must be made mandatory for all letters of understandings and for each letter confirmation from lending foreign branch bank.
  • Well trained bank staff for the role
  • Strengthening KYC norms to prevent fraudulent financial reporting
  • Establishment of a fraud monitoring agency within the bank including trained officials.
  • Financial literacy among employees in areas of early fraud detection and prevention. 
  • Proper coordination between banks and agencies like CBDT (Central Board Of Direct Tax)

There has been growing awareness among banks to enhance their fraud risk management in response to regulatory directives and increasing incidents of fraud. There is a lack of forensic analytical tools to identify potential in different processes. Banks need to have a more systematic and structured fraud risk management framework. Banks need to harness their expertise and experience across managing fraud and the compliance landscape and combine with innovative technology and data analytics to address the problems.


Keywords: Frauds in the Indian Banking Sector, Frauds in the Indian Banking Sector and recent trends, Cyber Frauds in the Indian Banking Sector

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