RBI, defines fraud as “A deliberate act of omission or commission by any person, carried out

in the course of a banking transaction or in the books of accounts maintained manually or

under computer system in banks, resulting into wrongful gain to any person for a temporary
period or otherwise, with or without any monetary loss to the bank”.
The country has seen a huge number of frauds starting from The Vanishing Companies of
1998 to the Punjab National Bank Scam. To focus on the biggest scam that happened in the
banking industry that led to huge changes and amendments was the Harshad Mehta Scam of
1992.
An overview:
The fraud of 1992, involving famed stockbroker Harshad Shantilal Mehta, resulted in broad
stock market reforms and exposed systemic flaws in the banking industry. The fraud was the
largest money market scam ever perpetrated in India, with an estimated value of Rs. 5000
crores. The Indian stock market crashed as a result of a systematic stock scam involving bank
receipts and stamp paper. The fraud highlighted the Indian financial system's fundamental
flaws and resulted in a coordinated response.
The whole exchange system suffered as a result of this, since the security system crumbled
and investors lost hundreds of thousands of rupees in the exchange system. He acquired
securities from the State Bank of India against counterfeit cheques signed by corrupt officials
and failed to deliver the securities. The fraud had a wide range of effects, including financial
losses for thousands of families and an instant stock market fall.
Loopholes Misused:
Stamp Paper Scam
Banks in India were not permitted to engage in the equity markets until the early 1990s. They
were, however, expected to make a profit and keep a specific percentage of their assets in
government fixed-income bonds. To meet the banks' capital requirements, Mehta drained
funds from the banking system and invested it in the stock market. He offered the banks
greater interest rates in exchange for transferring the funds to his personal account to acquire
assets for them from other banks. To acquire securities and forward bonds from other banks,
a bank had to go via a broker at the time. He utilized the money in his account to buy stocks,
drastically increase demand for specific stocks (such as Sterlite Industries, and Videocon),
sell them, provide a portion of the proceeds to the bank, and pocket the rest for himself.
Bank receipt scam:
The bank receipts or BR was another important tool. Securities were not really transferred
back and forth in a straight forward trade. Instead, the borrower, or seller of securities, issued
a BR to the buyer of securities. The BR acts as a receipt from the selling bank, as well as a
guarantee that the buyer will get the securities for which they paid at the conclusion of the
period. He required banks that could issue phony BRs, or BRs that were not backed by any
government securities, when he figured this technique. After the BRs were issued, they were
transferred on to other banks, which then provided money to him, ostensibly because they
thought they were lending against government assets when they weren't.
Ready forward deal scam:
The ready forward trade is a method of liaising between two banks through a single broker. A
bank seeks a broker when it wants to sell securities and this broker attempts to sell them at
another bank, and vice versa for purchases. Harshad Mehta had checks written in his name
rather than the bank's. When the bank demanded payment for the securities, he went to
another bank and repeated the procedure. To obtain unsecured loans, he utilized counterfeit
BRs and exploited numerous tiny banks to issue BRs on demand. As they were tiny banks, he
could keep the receipts for as long as he wished. Cheques in favour of both banks were
credited to the brokers' accounts, one of which was Harsha Mehta's. As the scam was
discovered, several institutions were left with worthless BRs — the financial system had been
defrauded of a staggering 4,000 crore.

Name of the bank: Amount (in crores)

1. National Housing Bank 1199.39
2. State Bank of Saurashtra 175.04
3. SBI Capital Markets Ltd. (SBI Caps) 121.23
4. Standard Chartered Bank 300.00
TOTAL 1795.66
(Table 1.0 - This table illustrates the extent of money certain banks lost.)

Changes in regulation:
The multi-million-dollar scheme defrauded unwary banks of hundreds of crores, and the
flamboyant Harshad Mehta enticed naïve investors into investments that led to huge losses by
artificially inflating stock prices. Sebi had a lot of ground to cover when the fraud was
exposed. The ruse prompted policymakers to reconsider their positions.
 The SEBI that we know today as a formidable regulator did not have nearly as much
authority when it was founded in 1992, and it did not have as broad powers as
investigation under section 11C or punishment under section 15 of the SEBI Act, and
with later modifications, more power was granted to it.
 A Special Court was established to expedite trials involving securities, removing the
load off the courts. These special courts were established to deal only with matters
involving any type of fraudulent behaviour involving securities.
 The settlement cycle lasted 14 days in 1992, when brokers had to pay full money and
accept delivery of stocks, or deliver stocks if they were sold. It's already been two
days, and SEBI is predicting a one-day cycle in the near future.
 In 1992, there was no requirement that a consumer maintain a minimum balance in
order to purchase stocks. However, a consumer may no longer purchase or sell stocks
without having a minimum amount of money in their account. The new rule aims to
mitigate systemic risk posed by aggressive brokers who were previously putting the
company at danger.
 Trade settlement was done on paper in 1992, and there was a lot of counter-party risk.
All trades are now settled through clearing companies (CC), and all transactions are
done electronically.
Current scenario:
The RBI mandates that banks actively investigate fraud cases with the CBI or police
authorities, as well as in court. Except when the Chief Vigilance Officer (CVO) and
Chairman & Managing Director (CMD) deem the case serious and the cases cannot be
categorized in monetary terms, all fraud cases under Rs. one crore should be reported to the
local police in the case of PSBs. Frauds are reported to the CBI in these situations. Cases
worth more than Rs. one crore must be sent to a separate CBI division, depending on the
category. Frauds of Rs. one lakh or more perpetrated by an outsider in collusion with a bank
official shall be reported to the local police in the case of private-sector banks.
While India's banking industry has seen consistent development in total revenue and
earnings, the amount of money lost to bank fraud has also increased. This unfavourable trend
in the banking sector not only results in losses for banks, but also has a negative impact on
their reputation. To make recommendations, (a) encouraging senior management to put rules
in place that promote moral behaviour and reflect an ethical culture. Appointing a senior
member of the anti-fraud committee to help the bank draw out fraud prevention and controls;
(b) Conduct in-depth fraud risk assessments to enable management focus on the issues that
need to be addressed. (c) Create an anti-fraud policy and adequate training that defines fraud
and misbehavior clearly and (d) comprehensive consumer education and communications
programmes not only to assist customers realize how to avoid fraud but also to help them
comprehend their own obligations. Financial institutions can only build really successful
fraud prevention measures by collaborating with their consumers.

Source of table: Wikipedia.