© 2019 JETIR January 2019, Volume 6, Issue 1 www.jetir.

org (ISSN-2349-5162)

Banking Frauds in India; A case analysis

Dr. D.Mahila Vasanthi Thangam
Associate Professor
Department of commerce
Karunya Institute of Technology and Sciences, Coimbatore

Bhavin P P
Research scholar
PG Research department of commerce
Sree Narayana Guru College, Coimbatore

Abstract
The rise of frauds in the financial sector is a downshifting factor which slows the circulation of the
financial system and makes the economy worse. For the last few years, Indian media’s sensational news
items were related to financial frauds. The scams in the corporate world and frauds in banking sectors
astounded the stakeholder and the general public. In this paper, the researchers analyzed various bank frauds
registered with CBI and convicted by CBI court (2015 to 2017). The researchers depicts the various types of
frauds in the Indian scenario and also revealed its legal action taken by the investigation agency. The paper
also discusses the involvement of bank officials in these frauds and also tried to explore the frauds in
different sectors viz:Public, Private, and Cooperative sectors

Key words: Financial system, Banking frauds,

Introduction
The stability of an economy is largely influenced by the financial system pertaining to that country.
One of the main components of a financial system is the financial institution in the system. Any scam that
hit the financial system will shake the foundation of an economy.
The report on Occupational Fraud and Abuse, (Asia Pacific edition 2018 )by Association of Certified Fraud
Examiners, shows that banking is the second most industry hit by fraudulences (11% cases) second only to
manufacturing (17%).The Government and public administration (10%) come in the third place. These
result will definitely induce to examine the Indian scenario, especially in the banking arena because the
majority of banks in India are under the Public Sector.

John Maynard Keynes (1913) stated that “In a country so dangerous for banking as India, it should
be conducted on the safest possible principles”1 so the importance of banking fraud identification and expel
is clearly visible in his statement. The history of banking fraud is as old as the history of the bank, traceable
evidenceis available from Indian banking history literature. Few banking literatures point out the different
type of frauds existed inthe 18th century that includes loan disbursement fraud, accounting,and clerical
frauds, and corruption. The failure of the Presidency Bank of Bombay (1890) is an example of bank failure
due to mismanagement and credit fraud. The current scenario is worse than ever as banks loss 410 billion in
financial year 2017-18which is 72 % higher than a previous financial year and more than 5000 instances of
bank fraud shook the Indian financial system. Due to the advent of technology, the dimension of banking
fraud is larger than ever 18% of young Indians confront the banking fraud challenges.
Theoretical Frameworks
The Institute of Internal Auditors“… any illegal act characterized by deceit, concealment, or
violation of trust. These acts are not dependent upon the threat of violence or physical force. Frauds are
perpetrated by parties and organizations to obtain money, property, or services; to avoid payment or loss of
services, or to secure personal or business advantage.”2

1
Keynes, J. M. (1913). Chapter Seven. In Indian Currency and Finance (pp. 200-201). Toronto: Macmillan Publishers.
2
The Institute of Internal Auditors. Definition of Fraud-Internal auditing’s role in fraud prevention and detection –. Retrieved
from https://www.iia.org.ua/?page_id=225

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From the legal point of view, fraud is defined as a deception deliberately practiced to secure unfair
or unlawful gains. Fraud is characterized as cheating purposefully practiced for unlawful gain. It is an
important challenge faced by governments. If it is not effectively prevented or identified that might
dissolve the organization or even the economy. The major challenge faced by any regulatory
organization is the response from the victim organizations is poor due to various factors.

Bank fraud is a type of financial fraud and it differs from a bank robbery. It is defined as the act
of availing illegal methods to obtain assets held by a financial institutio n. Or the act of using a
financial institution to obtain the assets of a person, organization or public.

Types of Bank Frauds

 Clerical and accounting frauds: Clerical frauds are committed by bank officials and normally
caused due to omission and misstatement of facts or numbers. Accounting frauds are all frauds
related to the misstatement of the financial statement of an organization for gaining benefits
likeloan, extended credit limit and also to inflate the net worth of the company.

 Cheque frauds: Cheque frauds are all unlawful use of a cheque issued by a financial institution
or use of any other document resembles so. Cheque kitting and bad cheque writing ar e different
kinds of cheque frauds.

 Loans and advances frauds: A fraudulent loan is one in which a borrower is a person, an
entity or a non-existent entity influenced by a dishonest bank official; the "borrower" then
declares bankruptcyor the loan becomes a device for organized theft. Fraud loan may take place
through fraud loan applications, an application that hides the creditworthiness of the borrower.

 Forged Document fraud: The forged documents frauds are frauds in which a person or an
entity uses forged documents for availing any form of services from financial institutions.

 Bill discounting fraud: Bill discounting fraud is a fraud in which the fraud bank customer
present himself as a genuine customer with the support of an entity and maintain a regu lar
customer role. The customer disappear when the outstanding balance between the company and
bank is sufficiently high.

 Technology frauds: Technology frauds defined as all unlawful gain availed by using any
means of information and communication technology.
 Phishing and Internet fraud: It is a form of internet fraud in which the fraudster avail unlawful gain
by spam e-mails, forged websites, or using genuine customer information collected in any other
fraudulent way.

 Wire fraud: Any fraudulent activates taken place with the use of wire or any electronic means
is a wire fraud.

 Payment card frauds:Fraudulent activities taken place by using any form of payment cards
like a debit card, credit card.

 Identity theft: The unauthorized use of personal information about an individual for obtaining
identity cards, accounts etc. and using this information or credentials for availing benefits from
a financial institution.

 Money laundering: Money laundering is a scam where the true origin or the source of the fund
is hidden for availing an unlawful benefit.

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The Master Direction by RBI

The Reserve Bank of India for combating the challenges of banking frauds took different actions
which include different policy and procedures. One among themis the master circular issued by
RBI(2016) for classification and reporting of fraudsin scheduled commercial banks.

Classification of frauds
The RBI’s master circular classified banking frauds on the basis of Indian Penal Code of 1986.These
proactive steps are useful for maintaining uniformity in reporting.
 Misappropriation and criminal breach of trust.
 Fraudulent encashment through forged instruments, manipulation of books of account or through
fictitious accounts and conversion of property.
 Unauthorized credit facilities extended for reward or for illegal gratification.
 Cash shortages.
 Cheating and forgery.
 Fraudulent transactions involving foreign exchange
 Any other type of fraud not coming under the specific heads as above.

Review of Literature
Swain, D. S., &Pani, D. L. (2016) conducted a trend analysis on frauds in the banking industry in Indiaand
revealed that inefficiency and inexperience of staff causedmany banks seem to have compromised in KYC
norms and innovation in the banking arena.

Bhasin, M. L. (2016) conducted a questionnaire-based survey in the 2012-13 period and revealed that the
banks are not ready to accomplish zero tolerance arrangement towards frauds. The bank authorities are less
conformed to national bank rules in instances of administration of passbooks, checks, inter-bank and
internal account management and deposit account. The investigation likewise uncovered that junior officials
in the bank are less aware and prepared in the matter of frauds andalso central bank guidelines in
comparison with middle and senior managers

Singh, T., & Nayak, S. (2015) conducted interview-based research on Frauds in Banking and they revealed
various reasons of unethical practices existing in the financial industry. The financial industries are massive
in size, complex in design and also they have a global reach. The industry practices differ from countries to
countries so there islack of a common ethical culture and most of industries’ transactions are depersonalized
in nature which also boosts the unethical behavior. The study suggests that the industry should communicate
the ethical code to its roots and moreover, there should be policy of blacklisting those who engage in
malpractices.

Khanna, A., & Arora, B. (2009) investigated the reasons for bank frauds and the implementation of
preventive security controls in the Indian banking industry and they emphasized the difference among
employees on the matter of following central bank norms and they also point out the importance of
experienced and trained officials in combating fraudulent activities.

Anthala, H. R. (2014) has analyzeda few cases and revealed that public bank employees and outsiders are
playing a vital role in banking frauds. There exist a proper legal channel to combat it but the implementation
is poor. Most of the time Public Interest Litigation (PIL) is useful for revealing many scams.

Kundu &Rao, (2014) have pointed out that most of the bank scams or frauds are not disclosed because of
the fear of mitigation of bank reputation. They also revealed reasons for increase in bank frauds viz;
ignorance, situational pressure, and attitude of employees, procedural delay in detection and reporting.

Gupta, P. K., & Gupta, S. (2015). Found that the regulatory system exists in India is poor in tackling
corporate frauds and the coordination among various regulatory institutions are also poor. The

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researcher recommends the publishing of fraud prevention policy and the establishment of a corporate
offense wing.

Objectives
This article demonstrates the different types of bank frauds in India and alsoanalyze the depth of frauds in
public, private and cooperative banks. This paper tries to identify the involvement of bank officials in the
banking industry and alsoanalyzed the legal consequences of these frauds within the frameworks of Indian
Penal Codes.

Research Methodology
The methodology applied in this paper is a case study in nature. The researcher analyzed various bank fraud
cases registered and convicted by the Central Bureau of Investigation of India. The data are exclusively
collected from CBI press release archives for three years from 2015 January to 2017 December.

Data Analysis and Results

Table 1
Analysis on the basis of types of Banks
Sl.No Type of Banks No of cases Percent
1 Public sector bank 54 91.5
2 Private sector bank 1 1.7
3 Cooperative bank 3 5.1
4 Regional Rural Banks 1 1.7
Total 59 100

Table 1 explains the different types of banks analyzed for this study. The results point out that majority of
bank fraud cases (Registered or Convicted) happened in public sector banks are 91.5%, at the same time, out
of 59 cases analyzed, 5.1 % cases are relating to cooperative banks.While private sector banks and RRBs
occupied the third position with 1.7% each. This analysis signifies that the public sector banks are showing
some serious failures in executing thecentral bank’s measures to curb fraudulent activities in banks. In
comparison with the private sector counterpart, the public sector banks lack efficiency in functioning and
controlling banking operations.
Table 2
Section wise analysis
No of times
Sl.No Various Under Sections of different Act’s Percent
charged
1 IPC 120B. Punishment of criminal conspiracy 38 23.313
2 IPC 380. Theft in dwelling house, etc 1 0.613
3 IPC 406. Punishment for criminal breach of trust. 2 1.227
IPC 409. Criminal breach of trust by public servant,
4 8 4.908
or by banker, merchant or agent.
5 IPC 419. Punishment for cheating by personation. 2 1.227
IPC 420. Cheating and dishonestly inducing delivery
6 38 23.313
of property
7 IPC 465. Punishment for forgery 3 1.840
8 IPC 467. Forgery of valuable security, will, etc 10 6.135
9 IPC 468. Forgery for purpose of cheating 14 8.589
IPC 471. Using as genuine a forged document or
10 13 7.975
electronic record.
11 IPC 477A. Falsification of accounts. 3 1.840
12 IPC 477. Fraudulent cancellation, destruction, etc 4 2.454
13 IPC 511. Punishment for attempting to commit 1 0.613

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offences punishable with imprisonment for life or

other imprisonment
U/s 7 Public servant taking gratification other than
14 legal remuneration in respect of an official act.— 1 0.613
The Prevention of Corruption Act, 1988
U/s 13 Criminal misconduct by a public servant.
15 25 15.337
The Prevention of Corruption Act, 1988
Total 163 100

Table 2 shows the results of Section-wise analysis. Majority Sections are based on the Indian Penal
Code of 1980 and a few are based on the prevention of corruption Act 1988. As per the table, the most
used the Section is IPC 120 B (23%)and IPC 420(23%) which deal with Punishment of criminal
conspiracy, Cheating and dishonestly inducing delivery of property respectively. So the investigations
reveal that in the majority of banking fraud cases, an act of criminal conspiracy is occurring .This shows that
banking frauds done in India are well planned well-designed frauds.The Section 420 B of IPC dealt with
cheating and dishonest delivery of a valuable, most of the cases are a type of cheating and cause a loss to a
party. Most of the offenses are liable to get a punishment ranging from three to sevenyears of imprisonment
. The second most used section is Section 13 of the Prevention of corruption Act 1988 (15%).As this section
deals with the criminal misconduct by a public servant, it shows therampant involvement of bank officials in
these scams.
Table 3
Types of frauds analysis
Forged
Types of
instrument Any
frauds
s, other
Unauthori
manipulati type of
zed credit
on of fraud
facilities
books of not
Misappropriatio extended Negligence Cheating Total
account or coming
n and criminal for reward and cash and No of
through under
breach of trust. or for shortages. forgery. cases
fictitious the
illegal
accounts specific
gratificati
and heads
Types of on.
conversio as
banks
n of above.
property
Public
sector 14 14 18 1 3 4 54
bank
Private
sector 1 0 0 0 0 0 1
bank
Cooperat
1 0 0 1 0 1 3
ive bank
Regional
Rural 1 0 0 0 0 0 1
Banks
Total 17 14 18 2 3 5 59
Percent 28.814 23.729 30.508 3.390 5.085 8.475 100

Table 3 shows the analysis of different types of frauds. The type of frauds are categorized based on the
RBI’s Master Circular on bank fraud reporting (2016) and the circular follows IPC 1860 for categorising .

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The analysis clearly shows that the majority of the frauds are in the nature of unauthorised credit facilities
extended for reward or for illegal gratification. (30).These frauds are frauds related to loan disbursement. So
it is clear that loan disbursement frauds are the most committed frauds. Criminal breach of trust by bank
officials is placed second with 28 %. While Forged documents frauds is placed in the third position with (23
%)
Table 4
Analysis of involvement of bank officials
Category
bank
official
Junior Middle Senior Top Private
Types of Managem Managem Managem Managem Individu
banks ent ent ent ent als
Public
sector
bank 7 26 11 6 13
Private
sector
bank 1 1 0 0 0
Cooperati
ve bank 0 2 0 2 0
Regional
Rural
Banks 1 1 0 0 0
Total 9 30 11 8 13
Percent 12.676 42.254 15.493 11.268 18.310

Table 4 shows the analysis of the involvement of bank officials in different bank fraud cases. The
analysis clearly shows that majority bank officials are from middle management (42%) which include
bank managers, senior managers, accountantetc while outsiders/private individuals role in banking
fraud are also high (18%). The role of top management which includes Deputy Manager,CFO,CEO etc
is comparatively less (11%).

Findings
It is found that public sector banks are more affected by fraudulent practices in the financial industry
than the private sector banks which are less exposed to these types of frauds. Most of the fraudulent
practices are committed in the nature of loanisbasement, breach of trust by bank officials, and the use
of forged documents. Cheating and criminal conspiracy is behind all major banking frauds in India.
IPC Section 120B and IPC 420 are the commonly used legal action towards these fraudsters. Middle
management executives’ involvement is comparatively high in all these cases.

Suggestions
The role of the regulatory institution is very important while dealing with these frauds. There should
be coordination among various financial regulators internationally. The financial industry should take
zero tolerance towards the officials who commit any form of mismanagement, or unlawful activities.
All banks should execute the central bank's fraud controlling measures immediately without any delay
and loopholes. Public sector banks need more care in handling these frauds there should be a speedy
mechanism for reporting and follow-ups. The public bank should initiate awareness programs among
the bank employees and also take initiate for public awareness programs about bank fraudand legal
consequences. Banking industry should introduce continuous training mechanism for its employee’s
asthis will support them to tackle the latest fraudulent practices. Lawmakers should take initiative to
make legal framework more comprehensive that would inculcate the next level fraudulent practices.

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Conclusion
The dimensions of frauds in the financial industry are changing year by year, there should be a strong
international frame to challenge these fraudsters. As the industry is not confined to one country, the
depth and width is so wide and therefore, the legal structure should be of an international form. The
main aim of this study is to analyze the nature of frauds in the banking industry, and the role of frauds
in public sector banks. It is found that the public sector companies are more vulnerable and study
recommends that authorities should take a more vigilant approach on these matters. The study is not
comprehensive in nature as there are many limitations to understand the phenomena of fraud in the
financial industry.

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