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 Reserve Bank of India has significantly strengthened its fraud risk management framework through revised Master Directions on Fraud Risk Management (updated in recent years). The revised directions focus on early detection, time-bound reporting, accountability, and governance oversight. Key measures include:
- Time-bound fraud classification and reporting: Banks must identify and classify frauds within defined timelines and report them promptly to the RBI. Delays in reporting now attract supervisory scrutiny.
- Board-level oversight: Banks are required to establish dedicated Fraud Risk Management Committees to monitor fraud detection, root cause analysis, and systemic corrective action.
- Early Warning Signal (EWS) Framework: Strengthened EWS mechanisms mandate banks to proactively monitor red flags such as fund diversion, abnormal transaction spikes, round-tripping of funds, and sudden deterioration in financial indicators.
- Forensic Audit Requirements: For large-value frauds, mandatory forensic audits are required to identify accountability, trace fund movement, and determine systemic lapses.
The Government has also operationalised the Central Fraud Registry (CFR) under the RBI. This centralized database enables banks and financial institutions to share fraud-related information across the system, preventing repeat offences and strengthening inter-bank vigilance.
In addition, enhanced monitoring of large exposures and stressed assets is being implemented under stricter supervisory mechanisms. Banks are required to conduct periodic reviews of high-value accounts and strengthen credit underwriting standards to prevent diversion and evergreening of loans.
The Fugitive Economic Offenders Act, 2018 continues to act as a strong deterrent against economic offenders fleeing Indian jurisdiction. The law empowers authorities to attach and confiscate properties of offenders and restrict them from defending civil claims unless they submit to Indian courts.
To further strengthen governance and accountability:
- Enhanced KYC and AML compliance norms have been implemented with tighter due diligence for high-risk and high-value accounts.
- Digital KYC, video-based customer identification, and real-time transaction monitoring systems have been expanded.
- Senior management accountability frameworks have been reinforced to ensure responsibility in cases of supervisory lapses.
- Periodic internal and external audits are mandated with stronger reporting standards.
The Government has also empowered the National Financial Reporting Authority (NFRA) to independently oversee auditing and accounting standards, ensuring higher audit quality and reducing the possibility of financial misstatements going undetected.
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.
Author
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.
