Fraud in the Banking Sector causes,

concerns and cures

Presented by
Venkatesh, M.K
Sr. MBA (ABM)
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Introduction

Banks are an essential part of the Indian economy.

While the primary responsibility for preventing frauds lies with
banks themselves.
Banks are dealing with public's money and hence it is imperative
that employees should exercise due care and diligence in handling
the transactions in banks.
The RBI has been advising banks from time to time about the
major fraud prone areas and the safeguards necessary for
prevention of frauds.

Definition of fraud

Fraud can loosely be defined as any behaviour by which one

person intends to gain a dishonest advantage over another
fraud, under section 17 of the Indian contract act, 1872,
RBI not defined the term fraud in its guidelines on frauds
which reads as under.
A deliberate 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 computer
system in banks, resulting into wrongful gain to any person for
A temporary period or otherwise, with or without any monetary
loss to the bank.

Table 1: Number of frauds cases reported by RBI

regulated entities

(No. of cases in absolute terms and amount involved in Rs. crore)

Sl. No. Category

No. of cases Amount involved

169190

29910.12

NBFCs

935

154.78

UCBs

6345

1057.03

FIs

77

279.08

Total

176547

31401.01

COMMERCIAL BANKS

4
Source:
BIS central bankers speeches 26 July 2013.

Types of frauds

Account opening fraud: this involves a deposit and cashing of

fraudulent cheques.
Cheque kiting: is a method where by a depositor utilizes the
time required for cheques to dear to obtain an unauthorized
loan without any interest charge.
Cheque fraud: most common cases of this kind of fraud are
through stolen cheques and forged signatures.
Counterfeit securities: documents, securities, bonds and
certificate could be forged, duplicated, adjusted or altered and
presented for loan collection.

Computer fraud: hacking, tampering with a diskette to gain

access to unauthorized areas and give credit to an account for
which the funds were not originally intended.
Loan fraud: when funds are lent to a non-borrowing customer
or a borrowing customer that has exceeded his credit limit.
Money laundering fraud: this is a means to conceal the
existence, source or use of illegal obtained money by converting
the cash into untraceable transactions in banks.
Money transfer fraud: alteration of a genuine Funds transfer
request.
e.g Mail, telephone, electronic process, telex.
Latest technology of using GSM phones.

Telex Fraud: The messages that are passed through telex in

form of codes could be altered to divert the funds to another
account
Letters of Credit: Most common in international trading,
these are instruments used across borders ads can be forged,
altered, adjusted and take longer to identify.
Advanced Fees Fraud: Popularly known as 419, advanced
fees fraud may involve agent with an offer of a business
proposition which would lead to access often for a long term.

Table 2: Year-wise and amount of fraud cases in

the banking sector
(No. of cases in absolute terms and amount involved in Rs. crore)
Sl. No. Year

No. of cases

Total
amount

2009-10

24791

2037.81

2010- 11

19827

3832.08

2011- 12

14735

4491.54

2012- 13

13293

8646.00

Total frauds reported as of march 2013

169190

29910.12

Source: BIS central bankers speeches

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Table 3: Bank Group wise fraud cases

(No. Of cases in absolute terms and amount involved in Rs. Crore)
Sl.
No.

Bank group

No. of
cases

% To total
cases

Amount
Involved

% To total
Amount

Nationalised banks
including SBI group

29653

17.53

24828.01

83.01

2a

Old Pvt. Sector banks

2271

1.34

1707.71

5.71

2b

New Pvt. Sector Banks

91060

53.82

2140.48

7.16

Sub total (private banks)

93331

55.16

3848.19

12.87

Foreign banks

46206

27.31

1233.92

4.12

Total

169190

100

29910.12

100

Source: BIS central bankers speeches

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Category of frauds
1.
2.
3.
.

Technology related
KYC related (mainly in deposit accounts)
Advances related
Technology related: The Technology related fraud around 65% of
the total fraud cases reported by banks.
(covering frauds committed through /at internet banking channel,
ATMs and other alternate payment channels like credit/debit/prepaid
cards)
Banks are adopt newer service delivery platforms like mobile,
internet and social media, for enhanced efficiency and costcutting.
Banks customers have become tech savvy and started using
online banking services and products.

.
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The above evident that incidence of cyber frauds is extremely

high, the actual amount involved is generally very low.
RBI has advised banks in February 2013 to introduce two
factor authentication in case of card not present transactions,
converting all strip based cards to chip based cards for better
security.
The electronic modes of payment like NEFT and RTGS are
introduce.
RBI has advised banks to introduce preventive measures such
as putting a cap on the value/ number of beneficiaries, velocity
checks on number of transactions effected per day/ per
beneficiary, and introduction of digital signature for large value
payments.

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Table 4:Bank Group wise Technology Related Frauds

Source: BIS central bankers speeches

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KYC related fraud

KYC (Know Your Customer) is a framework for banks which

enables them to know / understand the customers and their
financial dealings to be able to serve them better.
RBI has advised banks to make the KYC procedures
mandatory while opening and operating the accounts.
Issued the KYC guidelines under section 35 (A) of the banking
regulation act, 1949.
For this purpose, the fraudsters generally use deposit accounts
in banks with lax KYC drills.
Therefore, customers to guard against such temptations for
easy money but should also ensure that deposit accounts
maintained with them are fully KYC compliant.
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They provide an essential part of sound risk management

system (basis for identifying, limiting and controlling risk
exposures in assets & liabilities.
4 key elements of KYC policies
customer acceptance policy
customer identification procedures
monitoring of transactions
risk management

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Frauds in banks advances portfolio

Frauds related to the advances portfolio accounts for the largest

Share of the total amount involved in frauds in the banking
sector. (Involving amount of Rs. 50 crore and above)
Another point that public sector banks account for a substantial
chunk of the total amount involved in such cases.
Declaration of frauds by various banks in cases of consortium/
multiple financing we have on occasions observed more than 12
15 months lag in declaration.
The large value advance related frauds, which pose a significant
challenge to all stakeholders, are mainly concentrated in the
public sector banks.
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Majority of the credit related frauds are on account of deficient

appraisal system, poor post disbursement supervision and
inadequate.
Reserve bank has also advised banks to audit periodically so
that cases of multiple financing may be detected in the initial
stages itself.

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Table 4: Bank Group wise Advance Related Frauds

Rs. 1 Crore & above in value

Source: BIS central bankers speeches

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Case 1

Date of Detection: 05/03/2012

Name of the Branch: Dhuri Branch, State Bank of Patiala.
Amount involved in Rs: 8.75 crores
Brief facts of the case: The branch had financed agriculture business.
Cash Credit limits to 3527 sugar cane growers under tie up
arrangement with M/s Bagwanpura Sugar Mills, who stood as a
guarantor.
As per the tie up arrangement the antecedents of the borrowers were
to be verified by the company.
only 1186 borrowers were resident of the villages and they were
found to be agricultural labourers & not cane growers.
Source: Banking Division, Ministry of Finance, New Delhi.
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Case 2

Date of Detection: 03/02/2011

Name of the Branch: Gharyala, Punjab National Bank
Amount involved in Rs: 1.14 crores
Brief facts of the case: The manager along with shri gurmeet
singh, and clerk in collusion with a group of persons in the area
misappropriated Bank's funds.
housing loans, on fabricated / fictitious revenue record,
disbursed fictitious loans under small business / transport / dairy
without creating any security as a conduit to siphon-off the funds
Source: Banking Division, Ministry of Finance, New Delhi
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Table 7:Year wise details of fraud cases closed

Source: BIS central bankers speeches

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Reporting of frauds to RBI

Frauds involving amounts of less than Rs 1.00 lakh:
less

than Rs 1.00 lakh are not to be reported individually to the

RBI.

Statistical data in respect of such frauds should, be

submitted to RBI in a quarterly statement.

Frauds involving amounts of Rs 1.00 lakh and above but

less than Rs 25.00 lakh:

Frauds involving amounts of Rs1.00 lakh and above but less than
Rs 25.00 lakh should be reported to the regional office of urban
banks department of RBI .
In the format given in FMR-1, and within three weeks from the
date of detection.
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Frauds involving amounts of Rs 25.00 lakh and above :

frauds involving amounts of Rs 25.00 lakh and above should
be reported to central frauds monitoring cell, department of
banking supervision, RBI.
A copy of FMR-1 should also be submitted to the regional
office of urban banks department of RBI.
In addition banks may report the fraud by means of D.O. Letter
addressed to the principal chief general manager of the
department of banking supervision, RBI, central office.
The letter may contain brief particulars of the fraud.
Letter should also be endorsed to the regional office of urban
banks department of RBI under the bank's branch.

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Expectations of the supervisor

RBI has clearly indicated that fraud risk management, fraud

monitoring and fraud investigation function must be owned
by the banks CEO, audit committee of the board.
In respect large value frauds, the special committee of the
board are CMDs, CEOs, audit committee and the special
committee evolving robust fraud risk management systems.
They are responsible for effective investigation of fraud
cases and accurate reporting to appropriate regulatory and
law enforcement authorities.
Top management puts in place targeted fraud awareness
training for its employees focusing on prevention and
detection of fraud.

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Audit systems prevalent in banks have not proved effective in

detecting fraud cases.
Providing individuals a means to report suspicious activity is a
critical part of an anti-fraud program.
A system of protected disclosure scheme has been evolved
which is regulated by CVC in case of public sector banks.
RBI in case of private and foreign banks.

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Table 6:Bank group wise fraud cases reported

as on march 31, 2013

Source: BIS central bankers speeches

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CIBIL

It is a company of checking the credit history.

Fraudulent borrowers could still seek credit from the

banking system even after defrauding one bank.
Worthwhile to consider setting up a fraud registry on the
lines of credit information bureau.

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Conclusion

The impact of frauds on entities like banks, and the economic

cost of frauds can be huge in terms of likely disruption in the
working of the markets, financial institutions, and the payment
system. Besides, frauds can have a potentially debilitating
effect on confidence in the banking system and may damage
the integrity and stability of the economy. It can bring down
banks, undermine the central banks supervisory role and even
create social unrest, discontent and political upheavals. The
vulnerability of banks to fraud has been heightened by
technological advancements in recent times.

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Reference

Inaugural address by Dr K C Chakrabarty, deputy governor of

the reserve bank of India, during the national conference on
financial fraud organised by ASSOCHAM, new Delhi, 26 July
2013.
BIS central bankers speeches.
ACFE (Association of Certified Fraud Examiners Association
of Certified Fraud Examiners)
Banking Division, Ministry of Finance, New Delhi
Int. Journal of Business Science and Applied Management /
Business-and-Management.org

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Thank you!
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