BANK FRAUDS IN INDIA

systems, banks' fundamental and historical

BANKING responsibilities and aims are to take

FRAUDS IN deposits, make loans to borrowers, and

INDIA enable patents. Banks in India offered

fundamental intermediate services in the
form of collecting money in the form of
deposits and directing them to productive
 INTRODUCTION

B
aspects of the industry in their early years. 
anking is the mechanism through
However, as the industry matured and
which banks connect the sources
shifted from a manufacturing to a consumer
of finances to the applications for
development phase, credit quality from the
those funds. Banking is defined as
fundamental manufacturing and
"acceptance of deposits of money from the
infrastructural sectors decreased, and banks
people to invest, infinite repayability on
began to credit the people to meet their
request and otherwise, and withdrawing by
consumption needs. With greater access to
check, drafts, or other methods" (Banking
loans, more people were able to buy more
Regulation Act, 1949). The notion of
things and services, benefiting from the 'buy
banking as we understand it now began in
now, pay later' philosophy. This helped in
India around the late 1800s. Moneylenders
giving in a new structure to the banks in
in India were the first to receive deposits and
India but it also lead to easier bank frauds.
issue receipts for them, according to the
People start taking advantage of this and
central banking committee of 1931 (RBI
start committing bank frauds.
2008). Nevertheless, financial activity was
uncovered throughout the Vedic period, In this paper, we are going to understand the
which lasted from 2000 to 1400 BC.  banking fraud first. After this, we will look
at the different types of banking fraud. Next,
Even the earliest signs of commercial
we will understand the legal framework of
banking may be discovered in the 400 BC
banking fraud, and in the end, the paper will
Kautilya Arthashastra, which uses
be concluded.
terminology like bankers, debtors, and loan
rates. As elements of the nation's payment

1
 BANK FRAUDS IN INDIA

 WHAT IS BANKING 7. Fraudulent financial reporting is

FRAUD? number seven.

Fraud is a careful act to get an illegal benefit 8. Approval or receipt of wages or

or profit, whether for a person or benefits that were not obtained 

organization, by employing deceit or false Bank fraud is defined as any hostile

ideas, deceit or concealment of facts, or any behavior aimed at deceiving a bank or
other immoral tactics that others accept. financial institution to steal a percentage of
Using any of the above-mentioned listed money. Central banks, deposit insurance
methods to deprive any individual, firms, mortgage loan agencies, and any other
organization, or entity of a gain to which entity that receives treasury bonds or money
they are owed is also fraud. 2022 (Editor) deposits are all considered financial
Fraudulent acts might involve a variety of organizations. Generally, any purposeful or
things. willing activity intended to defraud a

1. Conflicts of interest and ethical financial organization is considered bank

lapses fraud. It might also entail using false

2. Embezzlement is the second type of information to get funds, resources, stocks,

fraud. properties, or credit from a commercial

3. Unauthorized access file bank. 2022, Berry)

modification or alteration
4. Exploitation or misappropriation of  TYPES OF BANKING
educational resources (e.g., finances, FRAUDS
materials, technology, facilities, Banking Frauds can be divided broadly into

service, inventories, or other three categories which are as follows:

resources) 1. Insider fraud

5. Authorization or acceptance of 2. Fraud perpetrated by outsiders 
payments for products not delivered 3. both
or assistance not rendered 1. INSIDER FRAUD
6. Document fabrication or
Loan fraud, cash shortfalls, fraud in the
modification
creditor's accounts, fraud in investment
accounts, fraud in forex regions, bought bill

2
 BANK FRAUDS IN INDIA

forgery, fixed deposit fraud, computerized which might range from your
surroundings fraud, frauds in inter-branch administration-monitored investment
and interbank accounts, and so on are all funds number to your financial
examples of insider fraud.  details. Payday advances make it
simple for con artists to obtain cash
1.1. Purchased Bill Frauds: These are
in your name even though you have
frequently expensive and can have
a large number of checks
the following structures: rebates on
outstanding. Alternatively, if they go
taken or forgeries railroad and
increasingly bad, they could be able
engine invoices, as well as many
to start up a legitimate automobile,
other foundational expenses,
home, or company loan with just
fashioned/counterfeit expenses with
enough taken nuances. 
increased value, derived on sister
1.3. Fraud in the Borrower's Account:
concern are restricted,
For all customer loans, data from the
counterfeit/manufactured invoices
client’s detailed office as well as
for worthless goods are restricted.
other character and fraud prevention
The fraud restricts the use of forged
confirmation systems are compared
or stolen railroad invoices. To
to the debtor's profile. Advance on
minimize, a fictitious bill is drawn
clean/narrative bills that have been
on the sister's concerns. Bills are
obtained. 
expanded by the supplier's
1.4. Forex Fraud Deception: Forex
plan. Before the bill is presented to
fraud misrepresentation is any
the institution for payment of the
exchanging scheme designed to
amount, a portion is obtained. The
deceive merchants into believing that
shipment of useless goods is limited
by exchanging an outside trade
by the type of the delivered paper. 
display, they may expect to gain a
1.2. Loan Fraud: In the loaning
large profit. 
registration process, many creditor
1.5. Deposit Account Fraud: Usually,
agencies just request a little amount
the main sorts of frauds are
of information. This makes it simple
committed: value inflation of
for identity thieves to obtain quick
submitted cheques, altering the
credit using your stolen information,

3
 BANK FRAUDS IN INDIA

character of the cheques (crossing to entails tampering with the

bearers), illegally maintaining fundamentals of records of financial
inactive accounts, non-deposit, and transfers for nefarious intents and
misuse by intermediaries.  purposes. 
2. OUTSIDER FRAUD 2.4. Stolen Cheque fraud is the fourth
most common type of credit fraud.
Bill discounting fraud, forgeries and
Fake customer cheques, brokerage
changed cheques, fraudulent activity, lost
cheques (draft picks), and explorer
check thefts, card fraud, booster checks, and
cheques are examples of
other types of fraud are examples of outsider
cheque hacks. They are by far the
fraud.
most notable forgeries that have
2.1. Booster Checks: A sponsor cheque caused the disaster. Taken abounding
is a phony or bad cheque used to free passbooks also motivate
make payments to a Visa bank to counterfeiters, who subsequently
increase the amount of credit sign as if they're financial experts. 
available on all genuine Mastercards. 2.5. Accounting Fraud: To conceal
2.2. Bill Discounting Fraud: A fraudster genuine money concerns, a few
utilizes a business to gain credibility organizations have indeed been
with a banking institution by posing known to use phony accounting to
as a legitimate, beneficial client. The falsify agreements and payments,
organization often and again utilizes inflate the value of the organization's
the bank to limit its consumers' bills. benefits, or convey a benefit while
Bills are paid promptly, and the organization is facing hardship.
consumers are similarly extorted.  These altered records are then
2.3. Forgery and Altered Cheques: A utilized to find support for the
watch with a fashioned symbol of the organization's safety or security
cabinets or payer is frequently not difficulties or to make challenging
properly paid from the client's planning applications on in a last
records since the bank isn't strictly attempt to raise funds to allow for
following the investor's instructions the eventual collapse of an
as he offered them. Check ransom

4
 BANK FRAUDS IN INDIA

unprofitable or stumbling stimulates that individual to produce or

corporation.
 LEGAL FRAMEWORK
In India's judicial process, criminal
legislation and criminal law have several
flaws. The common law demand on the
dispensation of justice due to "evidence
beyond a reasonable doubt" is quite high,
particularly in financial offenses. The
country is experiencing a significant 'trust
problem.' No one, even organizations, and
institutions, can be trusted. Banks and
financial organizations can scarcely expand
in such an environment. The
manufacturing/supply systems are severely
harmed in such an environment. The IPC,
1860, did not include the term "fraud
simpliciter" in the description of any crime.   2
some categories and crimes were extracted
from the sphere of fraud by the Common
law system. Under this Act, a person is
considered to do anything fraudulently if he
does that with the purpose to deceive but not
otherwise10. Except for the fact that purpose
is the most important aspect in behaving
falsely, such a description doesn't get us far.
Any act that is done falsely is not a crime.
When deception turns to steal, this becomes
a crime. Anyone who, by misleading another
individual, dishonestly or deceitfully
assent to the retention of any estate, or who
purposefully stimulates that individual to do
or omit something that he'll never do or omit
if he were not tricked, and which conduct or
omission induces or is likely to cause injury
or damage to that individual in body,
psyche, prestige, or assets, is said to "cheat."
Dishonesty by impersonation1,
contravention of confidence by a cashier or
servant2, abuse of duty by a public servant,
bank manager, trader component, negotiator,
lawyer, or agent3, forgery4, drawing a false
document5, a forged document of a secure
system, will, etc.6, forgery for the intent of
cheating7, by using a fake document as
genuine8 are the other fraud-related offenses.
1
Section 416 of the Indian Penal Code, 1860
Section 408 of the Indian Penal Code, 1860
3
Section 409 of the Indian Penal Code states,
“Whoever, being in any manner entrusted with the
property, or with any domination over the property in
his capacity of a public servant or in the way of his
business as a banker, merchant, factor, broker,
attorney or agent commits criminal breach of trust in
respect of that property, shall be punished with
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”
4
Section 463 of the Indian Penal Code, 1860
stipulates as follows, “whosoever makes any false
document or false electronic record or a part of a
document or electronic record with intent to cause
damage or injury, to the public or to any person, or to
support any claim or title, or cause any person to part
with the property, or to enter into any express or
implied contract, with the or intent to commit fraud
or that fraud may be committed, commits forgery”.
5
Section 464 of the Indian Penal Code, 1860.
6
Section 467 of the Indian Penal Code, 1860.
7
Section 468 of the Indian Penal Code, 1860.
8
Section 474 of the Indian Penal Code, 1860.

5
 BANK FRAUDS IN INDIA
1. UMBRELLA ACTS:
It regulates a wide range of activities. The
following are included in this Act:
1.1. Reserve Bank of India Act, 1934
(Responsibilities of the Reserve
Bank)9: The RBI was established on
January 1, 1935, underneath the RBI
Act of 1934. It was a private
stockholders' organization until
January 1949, when this became a
government organization and began
central banking underneath the
Reserve Bank (Transfer to Public
Ownership) of India Act, 1948.
Whereas it is advisable to establish
an RBI to govern the conduct of
paper currency and the maintaining
of deposits to secure macroeconomic
stability in India and to start
operating the nation's monetary
stability to its benefit, the Preamble
to the RBI Act states.  The RBI's
goal is to foster market growth by
maintaining a stable payment
platform and soundness of the
financial system so that money
transfers may be carried out securely
and effectively. 
9
Reserve Bank of India Act, 1934 (Responsibilities
of the Reserve Bank), act no. 2 of 1934
6
1.2. Banking Regulation Act of 1949
(Financial Sector)10: A "Banking
Corporation" is defined as any
company that does banking activity
in India under Section 5(c) of the
Banking Regulation Act, 1949.
Banking, according to Section 5(b)
of the BRA of 1949, is defined as
receiving deposits of money from the
people for a loan or investing,
redeemable on request or other, and
mechanism for providing by check,
drafts, or demand or other. Business,
as stated in Section 3 of the
Companies Act, 1956, incorporates a
foreign corporation inside the terms
of Section 591 of that Act, according
to Section 5(d) of the Banking
Regulation Act, 1949. Certain
sections of the BRA, 1949, apply to
the SBI, any matching new
institution, a regional rural financial
institution, and any parent financial
institution, according to section 51 of
the BRA, 1949. 
2. ACTS CONTROLLING PARTICULAR
FUNCTIONS:
These two roles are inextricably linked.
These include the following: 
10
Banking Regulation Act of 1949 (Financial Sector),
act number 10 of 1949
 BANK FRAUDS IN INDIA

2.1. Government Securities Act currency. The GOI is also in charge

(Proposed)/Public Debt Act, 1944 of creating and minting currencies in
(Governs Government Debt different denominations. The four
Market)11: An Act to unify and alter Indian Government Mints are
the legislation about Government headquartered in Mumbai,
Bonds and the administration of the Kolkata, Hyderabad, and Noida,
public debt of India by the RBI (the respectively. 
Government). And thus it is 2.4. Foreign Exchange Regulation Act
necessary to unify and revise the of 1973/Foreign Exchange
legislation governing govt bonds and Management Act of 1999
the RBI's handling of the country's (Regulates Trade and the Forex
government debt (the Government).  Market)14: The Foreign Exchange
2.2. Securities Contract (Regulation) Regulation Act of 1973 is a
Act, 195612: An Act to avoid legislation that consolidates and
unfavorable trading activities by amends the laws governing definite
controlling the industry of trading of payouts, interactions in forex and
securities and regulating certain bonds, money transfers implicitly
related concerns.  impacting forex, and monetary
2.3. Indian Coinage Acts, 1906 exports and imports to conserve the
(Governs Currency and Coins)13: country's foreign exchange resources
An Act to Combine and Modify the and improve their proper utilization
Laws Concerning Coins and notes in the best interest of the country’s
and the Mint. The Indian government economic growth. The Foreign
has sole authority over currency Exchange Management Act of 1999
production. By the Coinage Act, was enacted to unify and alter the
1906, as modified from time - to - legislation about the foreign
time, the GOI is responsible for the exchange to enable international
commerce and transactions, as well
11
Government Securities Act (Proposed)/Public Debt
Act, 1944 (Governs Government Debt Market) as to promote the growth and
(ACT NO. XVIII OF 1944)
12
Securities Contract (Regulation) Act, 1956, (act
number 42 of 1956)
13
Indian Coinage Acts, 1906 (Governs Currency and 14
Foreign Exchange Regulation Act of 1973, (act
Coins), (act number 3 of 1906) number 46 of 1973)

7
 BANK FRAUDS IN INDIA

preservation of the currency market provide for the acquisition and

in India.  distribution of the endeavors of
3. ACTS CONTROLLING BANKING certain financial firms, taking into
ACTIVITIES: account their magnitude, assets,
reportage, and organization, to
These Laws are concerned with the
manage the altitudes of the economic
regulation of banking activities. The
system and to encounter successively
following Acts are among them: 
and better the necessities of the
3.1. Companies Act, 1956 (Governs nation's growth by national goals and
Banks as Companies)15: An Act to procedures, and for matters
unify and alter the legislation about connected hereunder. The Bankers'
corporations and some other Books Evidence Act, 1891 Act is an
organizations. This is the Act to alter the Rules of Evidence
fundamental legislation that controls concerning the Banking industry'
the formation, continuance, and Accounts. And while it is deemed
dissolution of corporations, as well necessary to change the Law of
as the interactions among Evidence about Bankers' Records,
stockholders, the corporation, the the following is enacted:
public at large, and the state. This is (1) The Bankers' Books Evidence
an incredibly essential bit of Act of 1891 may well be referred
legislation when combined with to as such. (2) It covers the whole
other liquidity and solvency with country of India [except the state
business organizations.  of Jammu & Kashmir]. The Bank
3.2. Banking Organizations Secrecy Act (BSA) was approved
(Acquisition and Transfer of by Congress in 1970 as the first
Undertakings) Act, 1970-1980 legislation to launder money in
(Pertains to Bank the U.S.A. Businesses must
Nationalization)16: A Legislation to preserve records and file reports
that are found to be highly
15
Companies Act, 1956 (Governs Banks as
Companies), (act number 1 of 1956) valuable in legal, financial, and
16
Banking Organizations (Acquisition and Transfer
of Undertakings) Act, 1970-1980 (Pertains to Bank regulatory concerns under the
Nationalization),

8
 BANK FRAUDS IN INDIA

BSA. Law enforcement commercial activities, and it was

authorities, both domestically written to meet the needs of the
and abroad, rely significantly on business environment at the time. 
the records produced by firms 4. ACTS GOVERNING INDIVIDUAL
under the BSA standards to INSTITUTIONS:
detect, identify, and prohibit Individual institutions are governed by
financial fraud, whether it is these sorts of Acts. The following are the
committed in the course of a Acts: 
crime syndicate, terror, or tax 4.1. State Bank of India Act, 195418: An
avoidance, or other illegal Act to establish an SBI, to transmit
behavior. The Irs is a participant the Royal Bank of India's
in the National Laundering undertakings to it, and provide for
Money Structure of the United any matters related or ancillary
States. The IRS strives to find a thereof. 
balance between enforcing 4.2. The Industrial Development Bank
laundering money rules and (Transfer of Undertaking and
educating the public.  Repeal) Act, 200319: An Legislation
3.3. Negotiable Instruments Act of to provide for transmission and
188117: In 1881, Congress approved conferment of the Heavy Industry
the Negotiable Instruments Act. Due Financial institution of India's
to the passage of time, change in endeavor to, and in, the Business to
economic practices, and technical be founded and enrolled as a
advancements, several portions of Company act, 1956 to bring on the
the Legislation are becoming finance industry, and for purposes
obsolete. Nevertheless, the Act's relating with or ancillary hereunder,
essential ideas remain intact, and it as well as to overturn the IDBI Bank
has survived the passage of time. Limited Act, 1964. 
The Act covers the entire country of
India. There is little question that the 18
State Bank of India Act, 1954, act number 23 of
Act's purpose is to govern 1954
19
The Industrial Development Bank (Transfer of
17
Negotiable Instruments Act of 1881, (act number Undertaking and Repeal) Act, 2003, (act number 53
26 of 1881) of 2003)

9
 BANK FRAUDS IN INDIA

4.3. The Industrial Finance to endorse housing loan

Corporation (Transfer of organizations both at local and
Undertaking and Repeal) Act, national scales and provide financial
199320: An Legislation to provide for support to such organizations and for
transmission and conferment of the matters connected thereto." 
Manufacturing Financial Institution 4.6. Deposit Insurance and Credit
of India's endeavor in a Corporation Guarantee Corporation Act: This
to be founded and enrolled as a act establishes a company for bank
Company under the Companies Act, deposits (and credit facility
1956, and for purposes relating with guaranteeing) as well as other items
or ancillary hereunder, as well as to related to or ancillary to it.
overturn the Industrial Finance
Corporation Act, 1948.   CONCLUSION
4.4. National Bank for Agriculture and When a growing economy's financial
Rural Development Act: An Act to structure is established, the country's
create the NABARD to give credit economic dependency is addressed. With its
for the advancement of agricultural enormous potential growth, India has
production, industries, chalet and remained relatively steady during a series of
town industries, arts and crafts as global recessions and has climbed
well as other rural crafts, as well as reasonably unscathed. In any event, a rapid
other allied commercial sectors in foundation is unanticipated. The post-
rural areas to promote integrated advancement period has brought new colors
rural development. of growth to the Indian financial sector, but
4.5. National Housing Bank Act: The it has also brought new challenges, one of
National Housing Bank which is the rise in blackmail and non-
(NHBbasic )'s operations are benefit assets. This regrettable trend of
described in the Preface of the increasing fraudulent workouts has an
National Housing Bank Act, 1987 as impact on the financial sector. Creates
"to function as a high organizational disasters for the institutions, as well as
negatively encroaching on their
20
The Industrial Finance Corporation (Transfer of
Undertaking and Repeal) Act, 1993, (act number 23 credibility. Banks can use information
of 1993)

10
 BANK FRAUDS IN INDIA

examination technology to reduce cheating Banks: Fraud and Crime, 2nd ed.,
at the recipient phase and, as a result, reduce LLP, London, (2000)
their misery misery-generating. As of  Ghosh, S. and Bagheri, M., The
recently, the number of cases of financial Ketan Parekh Fraud And
fraud disclosed in India has been steadily Supervisory Lapses of The Reserve
increasing. The deferral of legal strategy for Bank of India (RBI): A Case Study,
declaring and various escape mechanisms in Journal of Financial Crime, 2006,
the framework have been identified as some Volume:13, Issue:1, pp 107-124
of the major causes of fraud. Nonexistence  Mehta, J. and Sharma, D. B.,
of adequate gadgets and advancements set Research Scholars from NLSIU,
up to detect early notification symptoms of a Bangalore compiling and
fake; nonexistence of concern for bank commenting on the issue.
workers and clients; and nonexistence of  Narula Sonia & Singla Monika “
cooperation among various banks Empirical Study on Non-Performing
throughout India and internationally. The Assets of Banks” International
growth of cutting edge, along with a rise in Journal of Advanced Research in
the number of fraud and non-performing Computer Science and Management
assets, has had a significant impact on Studies, Vol.2, Issue 1, January
India's financial sector's prospects. The most 2014, ISSN: 2321-7782
well-founded activity by experts, with the  Selvarajan B, Vadivalagan G. “ A
development of innovative ways for Study on Management of Non-
cheating prevention and reduction, is seen as Performing Assets in Priority Sector
the most important step forward in reference to Indian Bank and Public
safeguarding Indian banks' credibility and Sector Banks (PSBs), Global Journal
giving the country's banking sector a of Management and Business
facelift. Research, Vol. 13, Issue 1, 2013,
ISSN: 2249-4588
 REFERENCES  Gupta, P. K and Gupta, S. (2015)
 Norton, J., Walker, G. (Eds),"Serious “Corporate Frauds in India-
fraud – a banker's perspective", Perceptions and Emerging Issues”,

11
 BANK FRAUDS IN INDIA

Journal of Financial Crime, Vol. 22

(1), pp. 79-103

12