Critical analysis on frauds related to Financial Banking and corporate sectors in India

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Finance, banking, and corporate sectors are structural and constitutive parts of India’s trending economy. The health of the financial, banking, and corporate sectors in a country provides the realities of its economic strengths. If the finance, banking, and corporate systems of a country are developed and transparent, then the country sails smoothly in its progressive goals. On the other side of the coin, if these systems are corrupt and fraudulent then cronyism and nepotism overtake the fundamental principles of financial ethics. In order to assess the health of these sectors, there are many determinants that show whether a country's economy is in appropriate shape or not. It is obvious that these trio systems of a country largely affect its overall economy.

 Finance and banking are very much directly interrelated, and they are the life and blood of an economy. Trade and commerce is not flexible without a free and fair financial and banking industry. Generally Corporate institutions need good flexibility of trade and commerce for their growth . All these three are interrelated. In the 21st century, finance and banking sectors act as the backbone of modern businesses. Basically, a bank is a financial institution which deals with deposits, advances, lending, mortgages and several other related services. They deal with the personal finances of the individuals and also invest in the commercial projects. In either of these functions, ethical and professional values are associated, and their violation leads to the opening of loopholes for frauds and scams. 

The aim of this article is to analyze the current financial difficulties in the banking sector due to the scams and frauds in India. Then based on the scenarios, we suggest some strategic solutions required to avoid these major scams and frauds at a large scale under the current situations. Overall, this article provides an overview of the current problems and suggests solutions based on the available framework.

Generally Fraud is an intentionally deceptive action designed to provide the perpetrator with an unlawful gain or to deny a right to a victim. Types of fraud include tax fraud, credit card fraud, wire fraud, securities fraud, and bankruptcy fraud. Fraudulent activity can be carried out by one individual, multiple individuals or a business firm as a whole. Fraud involves the false representation of facts, whether by intentionally withholding important information or providing false statements to another party for the specific purpose of gaining something that may not have been provide without the deception .

In Contractual term as described in the Indian Contract Act, Sec 17 suggests that a fraud means and includes any of the acts by a party to a contract or with his connivance or by his agents with the intention to deceive another party or his agent or to induce him to enter into a contract. Fraud occurs when a company or an entity deliberately changes and conceals sensitive information which then apparently makes it look healthier. 

Companies adopt various modus-operandi to commit such frauds, which may include miss-information in the prospectus, manipulation of accounting records, debt hiding etc. The aspect of falsification of financial information includes false accounting entries, false trades for inflation of profits, disclosure of price-sensitive information which comes under the ambit of insider trading, and showing false transactions which result in attracting more investors and lenders for funding. There can be several reasons cited for which companies commit such frauds like making more falsified money, creating a false image of the company for the market scenario and misguiding Governmental authorities for tax evasion. In India, the Commission on 'Prevention of Corruption', in its report, observed, "The advancement of technological and scientific development is contributing to the emergence of mass society with a large rank in file and a small controlling elite, encouraging the growth of monopolies, the rise of a managerial class and intricate institutional mechanisms. 

There is a necessity for strict adherence to high standards of ethical behavior for even the honest functioning of the new social, political, and economic processes.  Banking Frauds constitute a considerable percentage of white-collar offences being probed by the police. Unlike ordinary thefts and robberies, the amount misappropriated in these crimes runs into lakhs and crores of rupees. Bank fraud is a federal crime in many countries, defined as planning to obtain property or money from any federally insured financial institution. It is sometimes considered a white-collar crime. The report of the Vivian Bose Commission inquiring into the affairs of the Dalmia Jain group of companies in 1963, highlighted how the big industries indulge in frauds, falsification of accounts and record tampering for personal gains and tax evasion etc. 

The first successful trial of a financial scandal in independent India was the Mundhra Scam, in which Hon'ble Justice M.C. Chagla made certain critical observations about the big business magnate Mundhra who wanted to build an industrial empire entirely out of dubious means. The number of bank frauds in India is substantial. It is increasing with the passage of time. All the major operational areas in banking represent a good opportunity for fraudsters with growing incidence being reported under deposit, loan and inter-branch accounting transactions, including remittances. Bank fraud is a big business in today's world. With more educational qualifications, banking becoming impersonal and increase in the banking sector have given rise to this white-collar crime. 

In the present-day economic system, Financial institutions play a very important role in the economic development of the country. Nowadays, banks have diversified their activities and are getting into new schemes and services that create opportunities for financial inclusion. As the banking sector is flourishing, it is getting plagued by some operational problems such as fraud, etc. The Financial Stability Report of the Reserve Bank of India (RBI) shows that the Indian banking system reported about 6,500 instances of fraud involving over ₹30,000 crore in 2017-18. Central Vigilance Commission (CVC) analyzed the top 100 banking frauds in different sectors and has also suggested some measures that will help avoid such unethical activities in the future. Banking frauds attracted national attention when the Punjab National Bank reported earlier this year that it had been defrauded by companies related to jeweler Nirav Modi and Mehul Choksi. Several other cases of large banking frauds were reported subsequently, which raised questions about the ability of banks to contain them.

Let’s see the huge scams that shackled India’s financial system in recent times

In 2011, investigative agency CBI revealed that executives of certain banks such as the Bank of Maharashtra, Oriental Bank of Commerce and IDBI created almost 10,000 fictitious accounts, and an amount of Rs 1,500 crore worth loans were transferred. Another scam that was unfolded in 2014 was the bribe-for-loan scam involving ex-chairman and MD of Syndicate Bank SK Jain for involvement in sanctioning Rs Rs 8,000 crore. In 2014, Vijay Mallya was also declared a willful defaulter by Union Bank of India, following which other banks such as SBI and PNB followed suit. In 2015, another fraud that raised eyebrows involved employees of Jain Infraprojects, who defrauded Central Bank of India to the tune of over Rs 2,000 crore. One of the biggest banking frauds of 2016 is the one involving Syndicate Bank, where almost 380 accounts were opened by four people, who defrauded the bank of Rs 10 billion using fake cheques, Letter of Undertakings (LoUs) and LIC policies. The fresh bank fraud to the tune of Rs 11,450 crore involving diamond merchant Nirav Modi. It has come to light that the company, in connivance with retired employees of PNB, got at least 150 LoUs, allowing Nirav Modi Group to defraud the bank and many other banks who gave loans to him.

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Any person who is found guilty of fraud shall be punishable with imprisonment for a term which shall not be less than six (06) months but which may extend to ten (10) years and shall also be liable to a fine which shall not be less than the amount involved in the fraud, but which may extend to three (03) times the amount involved in the fraud. Where the fraud in question involves public interest, the term of imprisonment shall not be less than three (03) years.

RBI Circular: 

It was an outcome of the PNB scam. It was believed that the scam is mainly due to people and process failure not so much a technology failure.  Though there was some technology tweaking that the banks had to do, the guidelines were mainly about people and process.

Recent frameworks: 

Public Sector Banks (PSBs) have been reviewing loan accounts and are expected to report more fraud cases in accounts which have earlier been put under their Early Warning Signals (EWS) system.

The Reserve Bank of India (RBI) developed the EWS framework as it noticed a delay in the detection and reporting of banking frauds. The objective of the EWS framework is to prevent and detect these offences, to provide timely reporting to regulators and to initiate staff accountability proceedings thereby ensuring that the operations and risk-taking ability of the banks is not impacted.

SWIFT and Its importance in India

SWIFT is a secure financial message carrier that can avoid fraudulent transactions. In other words, it transports messages from one bank to another bank. Its core role is to provide a secure transmission channel so that the message from Bank A reaches Bank B only. Bank B, in turn, knows that Bank A, and no one other than Bank A, sent, read or altered the message en route. Banks, needless to say, should have checked in place before actually sending messages. One of its biggest failures in the PNB case was the missing link between SWIFT and the bank’s backend software. This allowed fraudsters to use letters of understanding or a loan requests to another bank through the SWIFT network to transfer funds. 

Data Analysis of frauds in India: 

The total cases of frauds (involving Rs. 1 lakh and above) reported by banks and financial institutions shot up by 28% by volume and 159% by value during 2019-20 despite the Reserve Bank of India (RBI) tightening the supervision and vigilance. While there were 6,799 frauds involving Rs. 71,543 crore as of March 2019, the number of frauds jumped to 8,707 involving Rs.1,85,644 crore, says the RBI’s Annual Report 2020.

PSBs topped the fraud table with 4,413 cases involving Rs. 1,48,400 crore.

Private banks reported 3,066 frauds involving Rs. 34,211 crore.

Present outlook :

Banks are going through their accounts which were put on alert earlier. They will report fraud wherever such instances are found in case of large accounts, and make 100% provision against them. These are being reviewed thoroughly to ensure that banks have adequately provisioned balance sheets. The RBI also indicated that the frauds registered during 2019-20 actually occurred in the loans sanctioned during 2010-2014. The average lag between the date of occurrence of frauds and their detection by banks and financial institutions was 24 months during 2019-20. In large frauds, of Rs. 100 crore and above, the average lag was 63 months. After a forensic audit and investigation into these accounts, diversions and other issues were found. RBI defines diversion of funds as utilization of short-term working capital funds for long-term purposes not in conformity with the terms of sanction; deploying borrowed funds for purposes/activities other than those for which the loan was sanctioned, and transferring borrowed funds to subsidiaries/group companies or other corporates by whatever modalities.


It is widely accepted that the banking sector, being the barometer of the economy, is the reflection of the macroeconomic variables. There has been a noticeable upsurge in transactions through ATMs and internet/mobile banking and banks have invested considerably to increase their banking network and their customer reach.  The  Indian banking industry is currently worth  Rs.  81  trillion  (US$1.31  trillion)  and  banks  are  now  utilizing  the  latest technologies like internet and mobile devices to carry out transactions and communicate with the masses.  “The Indian banking sector is expected to become the fifth-largest in the world by 2020 and third-largest by the  year  2025,”  according  to a KPMG-CII  report on the  banking sector.  While the banking industry in  India has witnessed a steady growth in its total business and profits, the amount involved in bank fraud has also been on the rise. 

This unhealthy development in the banking sector produces not only losses to the banks but also affects their credibility adversely. It is important that banks should take help of technology to detect frauds and improve the sharing of information. Law enforcement agencies should work in such a way that they don’t end up creating an environment of fear, affecting the flow of credit to productive sectors. Apart from improving capabilities in the banking system, the accountability of third-party service providers such as auditors and lawyers should also be fixed. Assessment of the working capital limit should be done before the flow of credit. Awareness should be created about loopholes, consequences of bypassing procedural aspects and benchmarks should be provided for evaluating genuineness of various essential documents. The investigation should be done to find out the trail of diversion of funds and whether any money has been remitted abroad.

  The Banks should pay the required attention to the area of internal control system and the fraud prevention measures to ensure compliance of instructions issued by them from time to time. The status of the borrower should be more critically analyzed by credit rating agencies to put a check on bad debts. The bank should set up centralized loan processing hubs which will help in streamlining the selection of borrowers with enhanced due diligence, assessment of proposals, etc, thus delinking the sanction process from the branch heads. Indian banks need significant improvements in operation and governance standards to work in an effective manner, by constantly working on the loopholes so that the banking sector can contribute more to the growth of the Indian economy.

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