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Reading Time: 3 minutes

Banks and financial institutions constitute the backbone of any economy. The rise and fall of any economy are largely dependent on the health of its financial sector. Therefore, banks and other financial institutions are always under scrutiny. Historically, any frauds or scams originating in banks have a far-reaching impact. Not only do they have a bearing on the stakeholder’s finances, but a ripple effect is often observed otherwise also. Sometimes, the impact is so gigantic that it leads to an economic slowdown in the country. As with any developing country, India has also had its share of banking frauds and scams. However, the Government understands the adverse impact of such frauds and their repercussions. Therefore, the Apex bank or the Reserve Bank of India (RBI), in association with the Ministry of Finance, frequently reviews the norms and rules for financial institutions to ensure that there is no scope for frauds or scams being committed.

Recently, a question was raised in the Rajya Sabha on bank frauds. The Union Minister of State for Finance replied in writing saying that basis the information received by Reserve Bank of India (RBI), in the year 2019-20, 79 fraud cases above INR 500 crores were reported by public sector banks/ Indian banks (except foreign banks)/ specific financial institutions. Similarly, 73 cases were reported in 2020-21 and 13 cases in 2021-22 (till 30 June 2021). The Minister further gave a reference to the RBI Master Circular issued in 2015 and noted that the Circular observed various means which are used while committing frauds, some of which are fraudulent discount of instruments, fraudulent disposal of pledged /hypothecated stocks, fund diversion, criminal neglect, mala fide managerial failure on the part of borrowers, forged instruments, manipulated account books, fictitious accounts, unauthorized credit facilities, fraudulent foreign exchange transactions, exploitation of “multiple banking arrangement”, and deficiency on the part of third parties with role in credit sanction/disbursement. The Minister also apprised of various measures which have been taken by the Government to curb these types of frauds. Key measures include:

  • Issuance of “Framework for timely detection, reporting, investigation, etc., relating to large value bank frauds” to Public Sector banks which would help in complete and comprehensive verification of legacy Non-performing Assets (NPA) which includes:
  1. All accounts which have been classified as NPAs and exceed INR 50 crores should be examined by banks from the angle of possible frauds. The investigation report should be placed before the bank’s committee for review of NPAs.
  2. An examination for willful default should be conducted once the fraud is reported to the RBI.
  3. If the account turns NPA, a report should be sought from the Central Economic Intelligence Bureau.
  • The Government has enacted Fugitive Economic Offenders Act, 2018, which deters the offenders from evading Indian laws by remaining outside the jurisdiction of Indian Courts. In such cases, the law provides that the property of the fugitive economic offender must be attached, confiscated and the offender should be disentitled from defending any civil claim.
  • The Public Sector Banks have been advised to obtain certified copy of passports of directors or promoters and other authorised signatories of Companies which are availing loans exceeding INR 50 crores. Further, they may also decide to publish photographs of willful defaulters in line with RBI’s instructions and their policy as approved by the board; moreover, they should also ensure strict rotational transfer of officials/ employees. The heads of Public Sector Banks have also been empowered to issue requests for lookout circulars. Lookout circulars are generally used by Governments globally to search for a travelling person who is wanted by any law enforcement agency.
  • The Government has also appointed National Financial Reporting Authority as an independent regulator for enforcing auditing standards and maintaining the quality of audits.

Even after these measures were taken, various scams have been unearthed. This is because most of these steps are a post-facto exercise i.e., they will come into picture once the fraud has happened. Ideally, there should be some measures which can prevent the fraud from happening. Therefore, the country needs more preventive rather than reactive measures. Once the fraud is unearthed, the offender can be punished, however, the money of innocent people is still lost. Moreover, the trust and faith of common people in the banking system has started to waver on account of multiple scams which have taken place in the last couple of years. As a country, we need even more substantial and robust banking system which can cater to world’s second largest populous country and still be reliable.

Komal Vithalani

Komal Vithalani

Content Writer

Komal Vithalani, a Chartered Accountant and Commerce graduate, is a dedicated professional committed to delivering value with years of expertise in navigating the complexities of indirect tax laws. Her practical excellence includes managing perplexed litigations, dispensing tactical tax advice, conducting thorough compliance checks, supervising audits, and crafting articulate and insightful content. At Cygnet, Komal seamlessly blends her profound understanding of tax regulations with cutting-edge tax technology. Leveraging her competence, she adeptly transforms complex tax tech jargon into concise, impactful, and engaging content. This not only aids readers in comprehending tax-related topics with enlightening clarity but also ensures the delivery of narratives that resonate broadly.

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