Journal of Commerce & Management Thought

Vol. V-1, 2014, pp.14-26

DOI : 10.5958/j.0976-478X.5.1.002

Bank Frauds in India : Emerging

Challenges
Dr. V. S. Kaveri
Abstract
While the banking system in India witnesses a steady growth in total
business and profits, the amount involved in bank frauds is on the rise.
This is a matter of concern for bank management and Reserve Bank of
India. These bank frauds seem to be innovative in terms of modus of
operandi and are pretty huge by size. This unhealthy development in
the banking system produces not only loss to banks but also affects
their credibility adversely. Hence, it calls for a study of nature and
extent of bank frauds, their modus of operandi, institutional
arrangements for conducting investigation and preventive strategies.
For such study, it is necessary to collect the relevant data relating to
bank frauds, examine policy guidelines of Reserve Bank of India and
progress made in preventing frauds. The present paper is based on
comprehensive analysis of bank frauds in India and examines
emerging challenges before the banking system.
Keywords: Bank fraud, modus of operandi, KYC norms, Anti- Money
Laundering Act, Chief Vigilance Commissioner
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It is disheartening to observe that amount involved in bank frauds in

India is on the rise whose impact on the banking system is significant. This
disrupts the working financial markets, banking system and payment system.
Now a day, modus of operandi in bank frauds seems to be innovative, calling
for new detection and prevention of bank fraud approaches. This paper
attempts to analyze profile of frauds portfolio, modus of operandi and
conduct of instigation and offers suggests new approaches for prevention of
frauds.
The report of the Study Group on Large Bank Frauds, Reserve Bank of
India defines a bank fraud as a deliberate attempt /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 computerized
environment in banks, resulting into a gain to any person for a temporary
period or otherwise, with or without any monetary gain or loss to the bank
(1). Most of the frauds are detected by receiving anonymous complaints,
while taking charge by a new branch manager, through reconciliation of
entries in the nominal accounts/dormant accounts, by enforcement securities
for recovery, during the branch inspection and audit etc. To suggest
preventive strategies, it is necessary to analyze fraud related statistics.
Profile of Frauds Portfolio
The recent report of the Association of Certified Fraud Examiners
(ACFE), 2012 states that amount of frauds reported by the banking sector in
India has gone up steeply from Rs 2013 crore during 2008-09 to Rs. 8646
crore during 2012-13. Certain data relating to bank frauds are now available
relating to (i) size of frauds and (ii) category of frauds (2). Regarding size of
frauds, as per Table 1, as on March end, 2013 the cumulative number of
frauds in the banking system and the amount involved in bank frauds stood
at 1,78,547 and Rs.31,401 crores respectively. Most of the frauds are
committed in commercial banks both in terms of number and amount
involved therein.

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Table 1 : Frauds in the Banking Sector

(As on March end, 2013)

Table 2 : Large value Frauds in Commercial Banks

A granular approach suggests that nearly 80% of fraud cases with an

amount of less than Rs. 1 lakh while on aggregate basis; the amount involved
in such cases was only around 20% of the total amount involved. Similarly,
large value frauds involving amount of Rs. 50 crores and above, moved up
by ten times from 3 cases in 2009-10 , with an amount of Rs. 404.13 crores)
to 46 cases in 2012-13 with an amount of Rs. 5334.75 crores (Table 3).

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Table 3 : Amount wise Bank Frauds

Further, as seen from Table 4, analysis of bank group wise data as on

March end, 2013 suggests that, while the private sector and foreign banks
group accounted for a majority of frauds by number (82.5%), the public
sector banks witnessed nearly 83.0% of the amount involved in frauds
.(Table 4)

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Table 4 : Bank Groupwise Fraud cases

(As on March end, 2013)

The amount involved in bank frauds in relation to total volume of

banking business seems to be insignificant. To elaborate, the number of
deposit accounts in the banks over the last ten years, between 2002 and 2012,
has gone up from 43.99 crores to 90.32 crores, while the number of loan
accounts in the same period has also more than doubled from 5.64 crores to
13.08 crores. On an average, the number of transactions per day is roughly
estimated at 10 crores. But, the number of frauds per million banking
transactions was about 0.4 which is not a very figure. But the amount
involved in bank frauds as on March end, 2013 was as high as Rs.30, 000
crores which is a matter of concern.
(ii) Category of frauds: Broadly, the frauds can be divided into three
categories: (a) technology related (b) deposits -KYC related and (c) advances
related. But data are available only for technology related and advances
related frauds (Table 5):

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Table 5 : Cumulative Total of Technology and Advances Related Frauds

(As on March end, 2013)

As seen from the above, around 65 % total numbers of fraud cases

reported by all banks are technology related, covering frauds committed
through / at internet banking channel and other alternate payment channels
like debit/credit/prepaid cards. Further, the predominance of new private
sector banks and foreign banks in the number of technology related frauds is
convincing as they lead the technology enabled service delivery in the Indian
banking sector. Though the amount involved in technology related frauds
may be small from banks perspectives, these are significant from the view
point of individuals who are the victims of such frauds. Therefore, in the
banks own interest, it is necessary to ensure that they are constantly on guard
and up to the challenge of providing a secure environment for customers to
conduct banking transactions. Similarly, advances related frauds need a
special attention since
the advances portfolio accounted for a major
proportion (64%) of the total amount involved in frauds. Most of advances
related frauds in terms of the amount involved are in public sector banks.
Therefore, it calls for the study of modus of operandi for prevention.
Modus of Operandi
Since the advances - portfolio accounts for the largest share in the total
amount involved in frauds in the banking industry, it is attempted to discuss
modus of operandi in detail. The major items of modus of operandi advances
areas include: submission of false stock/financial statements to avail of

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finance, removal of goods hypothecated/pledged and siphoning of sale

proceeds, availing of loan against fake National Savings Certificates, seeking
bank finance against accommodation bills, sanctioning ad-hoc credit facility
to non-client, issue of LCs/guarantees without recording in the branch books,
loan sanction beyond powers delegated more frequently, loan sanction by the
controlling office without involving branch etc. Bank loan is expected to be
utilized for the agreed purposes. Often, we come across instances when a
borrower deliberately attempts to cheat the bank right at the stage preoperational stage by inflating the cost of land to cover the promoter's
contribution, making unavoidable and unauthorized additions to building,
purchase of a machinery from a sister concern at high value , high
preoperative expenses to cover margin money etc. Similarly, attempts are
also made during the operational stage by deliberately showing less revenue
in the books of accounts, classifying good quality finished goods as rejected
ones, appointing kith and kin as sole selling agents, allowing the unit's
machinery being used by outsiders for job work and not showing the
revenue in the books of accounts, letting the unit's premise to a sister concern
at a nominal rent, lending to sister concern at nominal return, appointing
relatives on high pay-scale, utilizing services of employees for personal ends,
appointing of their kith and kin as consultants on high fees and borrowing
from friends and relatives at usurious rates of interest selling fixed asset as
scrap. All these are deliberate attempts by a borrower leading to a bank fraud.
Similarly in deposit related areas, the common modus of operandi to
commit frauds are in the nature of opening of new fictitious deposit accounts
by persons not properly identified by the bank followed by depositing of
fake/stolen/forged instruments in such accounts and then withdrawing
proceeds and manipulation in inward/outward clearing and by passing
unauthorized entries in the books accounts. The other modus of operandi may
be if the form of issuing drafts without consideration, giving free access to
unidentified so called middlemen/ agents of the original depositor and
withdrawing the amount, debiting suspense/sundries account for gaining
monetary benefit, laxity in the safe custody of critical stationary etc.
Lastly, computer related frauds are mostly innovative in nature which

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21

arises largely due to laxity in security related aspects, lack of checks and
balances on service providers, absence of IT audit, heavy dependence on few
computer literates in the bank, lack of internal control and supervision in IT
area etc.
Prevention of Bank Frauds Initiatives from RBI/Govt of India
From time to time, RBI has been issuing guidelines on KYC norms to
prevent fraudsters to open deposit accounts in banks with lax KYC drills or
accounts which remain inoperative for long. Prevention of Anti Money
Laundering Act, 2002 has helped in preservation and reporting of certain
information such as cash transaction of more than Rs 10 lakhs, fake notes,
suspicious transactions such as those relating to terrorist activities. It is
mandatory for banks to report such information to RBI. As part
of
prevention of frauds, RBI circulates a list of terrorist organizations among
banks. Similarly, a list of willful defaulters is circulated by CIBIL among
banks. On the advice of RBI, banks have to freeze assets of suspicious
parties. Similarly, stricter norms have been introduced by RBI to appoint
Correspondent Bank abroad by banks to avoid so called Shell Bank which
is in existence only on paper. Similarly, it is mandatory for a customer
depositing an amount of more than Rs. 50,000 in a bank to state PAN in the
pay-in-slip. As per the Forensic Laws, scrutiny of legal documents is
compulsory for high value advances to detect early warning signals of fraud.
Security aspects relating to electronic transfer of funds are given the top most
importance by banks which have taken several initiatives.
Regarding investigation of bank frauds, banks have to follow guidelines
from Govt of India and RBI. Accordingly, each bank should have a Chief
Vigilance Officer (CVO) to investigate frauds committed by the staff up to
Rs 25 lakhs after informing police and RBI. Frauds beyond Rs 25 lakhs
should be referred to CBI. Chief Vigilance Commissioner (CVC) guides in
the matters concerning investigation of large value bank frauds. Banks have
to report frauds involving an amount of more than Rs. 1 crore to RBI which
creates a data-base and issues a circular discussing modus of operandi
involved in such frauds. Lastly, RBI has made stock audit, credit audit and
law audit compulsory for high value advances to get early signals of

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irregularity in lending operations and symptoms of frauds. Despite these

initiatives, efforts need to be strengthened to prevent frauds for which certain
suggestions are offered..
Suggestions
Prevention of Frauds
Regarding advances related frauds, if these are reported early, it is
possible to initiate preventive and corrective action timely. Unfortunately,
this does not happen. It takes almost 12-15 months in declaration of the same
case as fraud by banks. Which not only enables the borrower the banking
system to large extent, but also allows him considerable time to erase the
money trail and queer the pitch for the investigating agencies? In most of the
cases it is noticed that advances related frauds arise due to deficiencies in
credit appraisal, follow up and supervision. Majority of frauds are brought
to the notice of bankers during the recovery which is initiated only when the
account becomes NPA. These indicate laxity in post disbursement
supervision and follow up of advances portfolio by banks. It is often found
that banks do not share important information in the consortium meetings.
Consequently, we come across cases of frauds by raising loans from different
banks against the same security etc. Cases of collusion between borrower and
audit firms & Valuers by making fabricated statements, over-valuing the asset
value etc leading to frauds, are also witnessed.
With the growing number of technology related frauds, it is high time
for banks to constantly monitor the typology of the fraudulent activities and
regular review and update security features to prevent easy manipulations by
hackers, skimmers, phishes etc. With cyber attacks becoming more frequent,
banks should introduce minimum checks and balances like introduction of
two factor authentication in case of card not present transactions, converting
all strips based cards to chip based cards for better security, issuing debit
cards and credit cards only for domestic usage unless sought specifically by
the customer, putting threshold limit on international usage of debit cards
and credit cards, constant review of the pattern of card transactions in
coordination with the customers, sending SMS alerts in respect of card

Bank Frauds in India...

23

transactions etc. to minimize the impact of such attacks on banks as well as

on customers(3). Todays major concern relates to Electronic modes Though
it is the responsibility of the user to ensure that unique ID and password are
properly secured and do not get misused due to his/her laxity, the banks, on
their part, should also confirm that that these payment channels are safe and
secure. In this regard, the RBI has advised banks to introduce preventive
measures such as putting cap on the value/ number of beneficiaries,
introducing system of issuing alert on inclusion of additional beneficiaries,
velocity checks on number of transactions effected per day/per beneficiary,
considering introduction of digital signature for large value payments ,
capturing internet protocol check as additional validation check for any
transaction etc. Similarly, we do come across frauds by way of replication of
data contained in genuine debit cards and credit cards onto duplicate cards.
Therefore, it is necessary for banks to improve peripheral and system
security on ATM locations and, at the same time, educate their customers
about using their payment cards with due caution. Similarly, cases of
circulation of fraudulent e-mails and SMS messages conveying of prize
money have become matter of common occurrence in recent times. For this
purpose, fraudsters generally use deposit accounts in banks with lax KYC
drills or accounts which remain inoperative for long. Banks, therefore, not
only need to caution their customers to guard against such temptations
against such easy money but should also ensure that deposit accounts
maintained with them are fully complaint. The banks should also have a
system of generating alerts to monitor transactions in accounts which are
non-operative for long or where transactions are not in conformity with
general trend and customer risk profile. With the spread of mobile banking,
banks would also need to closely engage with the telecom service providers
to reduce the technology related risk.
Investigation of Frauds and Fixing Staff Accountability
After noticing a fraud, the process of investigation starts to fix staff
accountability. In general, it is experienced in public sector banks, many
needs to be done to improve the quality of investigation. There is sufficient
delay in completing the process of investigation since a large number of

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Journal of Commerce and Management Thought V - 1

officials are included in the probe. In advance related fraud investigations, it

is observed that junior officials are made accountable for lack of
postsanction supervision and ignore lapses on the part of higher officials are
involved in loan sanction. Similarly in consortium advances, the onus of due
diligence remains with the leader of consortium and not on the other
members of the same which is not correct. Staff accountability should be
fixed on the concerned officials of all the banks of the consortium. Many a
times, the internal investigation is kept on hold when the probe is handed
over to external investigation agencies which are not advisable from the point
of view of early completion of investigation.
Role of the Supervisor in Bank Frauds
Good corporate governance serves as a very important factor in control
of fraudulent activities. RBI has indicated that fraud risk management , fraud
monitoring and fraud investigation function must be owned by the banks
CEO & Audit Committee of the Board.(ACB) and , the Special Committee
of the Board in respect of large value frauds. These should evolve robust
fraud risk management systems and in implementing effective fraud risk
mitigating measures. Similarly, the Board and ACB should ensure periodical
review of the procedures and process to ensure that the banks interests are
not impacted adversely due to loopholes in their policy guidelines. It is
imperative that the Top Management puts in place targeted fraud awareness
training for employees focusing prevention and detection of fraud. Regarding
the internal audit machinery, it is suggested to arrange specialized training to
internal auditors to detect frauds during the audit. Information sharing is a
vital fraud prevention and alert mechanism. On its part, Reserve Bank
promptly shares information with all banks diluting the modus of operandi of
fraud cases reported by any bank together with details of the entities involved
in the perpetration of such frauds in the form of confidential advices. This
also serves to encourage periodic review of existing guidelines, identify
loopholes on the basis of caution of advices, if any, and corrective steps.
Reserve Bank has also issued instructions requiring banks to report
negligence or involvement of entities like chartered accountants, Valuers and
advocates resulting in perpetration of frauds, to their professional oversight

Bank Frauds in India...

25

bodies for appropriate deterrent action. Today, most banks have put in place
a system of checking the credit history of the borrower through credit
information companies. Considering that fraudulent borrowers could still
seek credit from the banking system even after defrauding one bank, it may
be worthwhile to consider setting up a fraud registry on the line Credit
Information Bureaus
Banking Operations
Bank policies relating to job rotation in the branch should be strictly
followed. Similarly, branch manager or officer working in a critical banking
operation should be asked to go on leave at least once a year. At the branch
level, recording and checking should not be done by the same person.
Standard of living of star performers in the banks should be kept under watch.
Newly opened accounts with unusual banking operation should be under
check. Timely rectification of entries in Suspense Accounts and
reconciliation of entries in Clearing Adjusted Account should be ensured.
Operations in dormant accounts, if any, should be under watch. Branch staff
to be trained in fraud prone areas and prevention of fraud. Adequate
safeguards should be ensured in respects of TTs, DDs and Pay Orders. Timely
submission of critical returns and statements by the branches is very much
important. Above all, banks have to strengthen concurrent audit system in
banks to detect frauds at the earliest (4).
Conclusion
Though the number of bank funds is coming down, the amount involved
in them is on the rise. The small value technology related and other
transactional frauds, as a proportion to the number of daily banking
transactions, are very miniscule and are manageable. But large value frauds
are mostly advances related and, these are very much observed in public
sector banks. Hence, there is a need to strengthen post sanction formalities
through collective efforts. In particular, involvement of the top management
in banks in review of large advances is called for. In consortium meetings,
banks have to exchange information about conduct of borrowable accounts
and symptoms of irregularity, if any, should be brought to the notice of the
other banks. For effective management of frauds, investigation machinery

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should be made efficient to conclude at the earliest and fix staff

accountability suitably. It is also necessary to strengthen relationship among
investigation agencies. Thus, the banking system should collectively ensure
that the fraudsters do not have access to banking facilities. More importantly,
it is necessary to discourage unscrupulous activities by strengthening the
fraud detection through prompt identification, investigation and exchange
information. Lastly, it is high time to develop confidence in the minds of
customers by keeping frauds under check through safety and high quality
governance in banking operations.
References
1.
Report of the Study Group on Large Bank Frauds, Reserve Bank of India, 1998.
2.
Frauds in the Banking Sector: causes, concerns and cure, Inaugural speech delivered
by Dr K.C. Chakraborty, Deputy Governor, RBI, on July 26, 2013 during the National
Conference on Financial Frauds, organized by ASSOCHAM at New Delhi.
3.
RBI Circular on Security and risk measurements for electronic payment transactions,
February 28, 2013.
4.
Report of the Committee to enquire various aspects of frauds and malpractices in Banks,
appointed by RBI, 1991.

The Author
Dr. V. S. Kaveri is Visiting Professor, the National Institute of Bank Management
(NIBM), Pune, Maharashtra.
E-mail: kaveri@nibmindia.org Received on : 20th Oct. 2013

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