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(Created page with "<ref>Written by Somya Goel, LLB Hons. student, Bennett University</ref>'''INTRODUCTION-''' Money plays a very crucial role in the lives of people in today’s life. It has ev...")
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Latest revision as of 21:52, 2 August 2020


Money plays a very crucial role in the lives of people in today’s life. It has evolved from coins to paper currency notes to credit cards, and with that evolution, the increase in economic fraud is evident. The system of simple barter changed to speculative international training. In order to handle these complex monetary systems, need for a third party arose, to assist the smooth handling of the transactions, mediate between the buyer and the seller, hold the custody of money and the goods, remit funds and also to collect proceeds. This role of mediate is well taken by the Bank and the mediators are the Bankers. With time, the number of such mediators have grown and hence, the need to control and regulate their activities has also invited the government’s control.

‘Fraud’ is defined as a criminal deception, use of false representations to gain unjust advantage, dishonest artifice or trick.[2]

‘Fraud’ is also well-defined under Section 17 of the Indian Contract Act, 1872.

There has been no proper definition of bank frauds attempted by anyone till date. At present, the sections under IPC covering cheating, concealment, counterfeiting, misappropriation, breach of trust, criminal conspiracy, etc. are used in all bank fraud cases. There are no proper sections dealing with bank frauds and deciding the criteria for commission of such frauds or their punishments. It is important to mention that these financial frauds in India are not yet defined under the criminal offences though they cause enough harm and loss to the financial institutions and banks. The situation is now becoming explosive and the number of these frauds have tremendously increased with the increased knowledge about the technology. RBI had set up an Expert committee on legal aspects of bank frauds in 2001 with Dr. NL Mitra as chairman after big frauds like Harshad Mehta scam, vanishing companies’ scam, plantation company scams, non-banking companies’ scams, mutual funds scams, and Ketan Parekh scam.


The increase in bank frauds has been evident and has increased seven-fold in just five years.

The malpractices at Public Sector Bank (PSBs) accounted for 90% of the fraud value and 55% of the number of frauds. PSB frauds have continued to worsen in the current financial year, i.e., 2019-20, as suggested by the most recent data. The finance minister also reported to a recent question in Rajya Sabha, that the PSB frauds had reached Rs. 95,760 crores between April and September 2019, whereas, it was Rs. 64,509 crores during the 2018-19. The chronology of losses to banks is such that, the State Bank of India recorded the highest losses amounting to Rs. 25,417 Crores, followed by Punjab National Bank amounting to Rs. 10,822 Crores and Bank of Baroda amounting to Rs. 8,273 Crores. the National Crime Records Bureau (NCRB) released a report in 2017, suggesting that the rate of economic crimes (as reported under the Indian Penal Code, or IPC) rose to 111.3 crimes per million people in 2017 from 110 in 2014. Economic crimes here include crimes ranging from ATM-related fraud to forgery to counterfeit notes. Jaipur has been reported as the epicentre of economic crimes and the lease number of economic crimes are reported in Chennai.[3]

The increase in number of frauds is also a result of its reporting. Since the cases have been widely registered and a Central Fraud Registry has been established by the RBI, it has helped in tracking the cases. RBI has also mandated that all non-performing assets with value exceeding Rs. 50 Crores should be examined for any possible fraud. These crimes are not limited to the universal banks[4] , but are also extended to small banks.

More generally, it can be said that these frauds can worsen in the time of slowdown and as a theory suggests, as a firm struggles for growth and reel under the situation of greater debts, they may be tempted to involve in fraudulent activities more.

One recent fraud in Banking sector was reported by PNB, for Rs. 3,688.58 Crores in DHFL account.[5] The number of these frauds have been consistently rising. In financial year 2019, RBI reported bank frauds worth Rs. 71,500 crores out of which 90% of these losses were to the Government owned banks.[6] However, the lack of judicial system in such cases is that, there is no codified law for such frauds in legal world but a structure has been created for filing police/CBI complaints.[7]



1- Lack of oversight by the management if case of deviation from the current process. This constitutes 73% of the total reasons contributing to such frauds.

2- Consistent business pressure to meet the set targets, constituting 50% of the contribution in such frauds.

3- In case of a difficult business situations, constituting 47% of the contribution.

4- Lack of tools to identify the high-risk patterns and the transactions, constituting 37% of the contribution.

5- Collusion or disturbance between the employees and the external parties, constituting 33% of the contribution.

6- Change in business strategy, without any changes in its execution plan, constituting 27% of the contribution.

7- Lack of fraud risk framework within the organization, constituting 23% of the contribution.

8- However, 7% of the reasons have still not been disclosed.


Retail banking (77%), corporate banking (57%), private sector lending (33%), private banking (10%), treasure and administration/procurement (3%).


There has been an evident decline in the profitability of the banks which is an eye opener as it is a great threat to the economy.

The bank failures due to these frauds or any other reason have a large social consequence in the economy of the country due to its linkages with other parts, called “network externalities”. One of the recent reports have also suggested that there has been a delay of 359 infrastructure projects which resulted in a cost overrun of Rs. 200000 crores.

However, the economy has finally begun showing some seriousness and caution after the outbreak of India’s biggest bank fraud of more than Rs. 11,600 crores involving PNB and Nirav Modi. It is now observed that if the strings have been pulled tightly and every potential borrower is scrutinized as a default case, it would lead the economy towards a more difficult time, that might choke the legitimate credit growth of the Indian Economy.