Banking frauds destroying the core of Indian economy :the legal viewpoint

Updated: May 17


Akanksha Singh 

The banking system in India was introduced in the year 1770 when the first bank, namely Bank

of Hindustan was established. The basic idea of operating a banking structure back then was to make these private banks issue the first paper notes that were introduced by the British East India Company. with time the banking structure in India too evolved and gained the required trust essential for people to deposit their money not in actual age old safes but instead switch to a “better” and “safer “ option of keeping the hard earned and acquired money in the banks and also earn interest for that . All of this extra credit, returns, and interests being earned just by mere deposition of the cash in hand were enough to excite the target costumers and hence a new monetary revolution began.


When huge amount of deposition stated occurring in these banks the process of getting loan

too became convenient and over showed the role of money lenders, mafias and even terrorist

organizations. A clean picture was reflected which was governed by law and order and most

importantly trust of each individual who eventually became the costumer to such banking

services.



Current bank frauds


If we closely examine the data and the annual report of the year 2019-2020 published by the

RBI we shall witness that banking frauds have not only increased in numbers but also in size.

Bank frauds saw a 2.5 % increase from 71,500 crore rupees in the previous year report to 1.85

lakh crore.

The RBI explicitly stated that these bank frauds have been predominantly occurring in the loan portfolio i.e. the advances category. It also pointed out that there was a concentration of large value frauds that included the top 50 credit related fraud which consisted 76% of the total fraud that occurred in the year 2019-2020.


Few Public sector banks that witnessed a 234% of rise with each passing year accounted for

80% of such frauds that were reported in total. On the other hand the banks that reported

more that 500% rise become accountable for almost 18% of the total fraud cases reported.


The PNB scam and the YES bank scam that the nation recently witnessed uncovered to us that many senior officials were involved in these scam .the PNB scam is estimated to be over rupees 13,000 crore and is considered to be the biggest scam in India’s banking history.


As far as the recent YES bank scam is concerned , the CBI in its very first information report

mentioned that in this particular scam, YES bank invested rupees 3,700 crore in short term

debentures of the already debt – laden DHFL. In returns it was seen that the Wadhawans paid

kickbacks of rupees 600 crore to Rana Kapoor and his family members in the form of loan to

DoIT Urban Ventures. Another loan full of suspicions worth 750 crore was granted by the YES

Bank to a particular company that was under control of Dheeraj and Kapil Wadhawan.


Laws and policy relating to bank frauds and its prevention and control.

The Indian Penal Code , 1860 hasn’t recognized Banking frauds as a separate offence , which is likely because such type of frauds weren’t anticipated by the law makes back then in the year 1860. Fraud as a crime itself has nowhere been demarcated in the IPC but still we find this term quite prevalent in our day to day life. However we can see that the sections dealing with the act of Cheating from section 415 to 420, Concealment from section 421 to 424, Forgery from section 463 to section 477A, Counterfeiting from section 489A to 489E, Misappropriation from section 403 to 404 and Breach of Trust from section 405 to 409 has more or less covered the aspect of Fraud in particular. The Indian Contract Act, 1872 however has given a definite meaning to fraud under Article 17


Lack in the measures to prevent banking fraud is the primary reason for the unprecedented

growth seen in such frauds. The delay done from the side of the bank disclosing the fraud too is a reason that can’t be ignored.


In order to fix this the Banks should ensure that the reporting system is swift and suitably

streamlined so that such frauds can be discovered as well as testified as fast as possible. The ​banks must also fix staff liability if there is delay witnessed in reporting any of such fraud to the RBI. Delay in broadcasting these frauds and alerting other banks about the modus operandi and the issue of caution advice against the defaulting borrower could assist similar kind of fraud being perpetrated somewhere else.


Banks must arrange for sufficient focus on the “Fraud Prevention and Management Function.

“This will help enable effective investigation of such fraud cases. The fraud risk management

and the fraud monitoring and fraud investigation functions must be owned by the respective

CEO’s of the bank. There can also be an internal policy especially designed to target such

banking frauds.


Conclusion

We have seen billionaires going riches to rags and not being the “king of good times “anymore. But where is justice in this? Why is it so that the common man who in good faith is depositing his life savings in these banks and being robbed by the system. Where is the justice for them?

Bank fraud has become a critical issue for the nation but we are still busy buying sympathy of

the ones at fault by releasing documentaries and web series based on the life’s of such

scammers where it’s hard to deny that a more softer picture of the accused is put up so that

the character of the offender comes out as the one who is suffering. Why is it hard for us to

magnify the actual suffering that the common people have repeatedly been going through? It is hard to ignore that Vijay Malay and Nirav Modi remain in the headlines for seeking shelter

abroad after such rip-offs and the untimely death and suicide reports of depositors get lost in

the ultimate luxury.


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