Introduction
In general financial system and Banking business, in particular, are passing through a period of substantial structural transformation. Banks in particular face daunting challenges because of technological development and rapidly changing business scheme. Currently, the activities of the Banking Sector and its growth since nationalization or more specifically, after the economic reforms initiated by the Government of India during the previous century have changed the topography of the Indian economy. As a consequential process, the Indian Banking sector is at an exciting point in its evolution.
The term ‘Banking Fraud’ or ‘bank fraud’ because it is employed interchangeably, has received only a few attempts at its definition, largely thanks to the rationale way that Banking Frauds has been defined as, legislators or experts of the field as a distinct and imminent problem. In the Black’s Law Dictionary, the meaning of ‘bank fraud’ is adopted from an American Legislation as, “The criminal offence of knowingly executing or attempting to execute, a scheme or artifice to defraud a financial organization or to get property owned by or under the control of a financial organization, using false or fraudulent pretences, representations or promises.” Authors on banking including even those who are writing books specifically on the issue of Banking Frauds have not attempted to define Banking Fraud, rather have tried to give the broaden the outline of Banking Frauds by enumerating different instances of frauds in the banking sector. The Indian legislature tried to describe 'bank fraud' by introducing the 1995 Criminal Law (Second Amendment) Bill in the Lok Sabha to establish 'bank frauds' as a separate offence under the Indian legal code, 1860, as follows, “Whoever dishonestly or fraudulently removes or conceals or transfers or causes to be transferred any property in his custody or control which is subject to any form of a security interest created in favour of any bank without the express or implied consent or concurrence of such banks or he furnishes any statement which is fake in any material particular to any bank concerning any property which is in his custody or control and which is either subject to any form of interest in favour of any bank or which is given by him to any bank to be made subject to any security interest in favour of the bank shall be punished.”
This proposed legislative definition of ‘bank fraud’ dealt with solely with the frauds concerning security interest, which is a serious fraud causing huge losses to banks. However, this proposed definition lacked the comprehensiveness or maybe the scope for inclusion of varied dimensions of Banking Frauds which is desired of an evolving definition.
Banking Frauds
The word 'Banking Scam' involves two components, namely banking and scam. Beginning with simple money-changing as per it’s the earliest traced history, the term ‘banking’ has today found synonym with five main functions of accepting deposits, lending, investment, repayment and facilitating of withdrawal of money. In common words, 'fraud' can be an act of dishonesty to gain benefit by causing others to lose out. Legally speaking, ‘fraud’ refers to a falsehood of fact by an individual or his agent who himself doesn’t believe the statement to be true, made to deceive
another party, and making him enter into a contract based on a lie. Thus, ‘fraud’ may be a very wide term which incorporates any behaviour by which one person intends to realize a dishonest advantage over another. It signifies not only an act of commission but also an act or omission which is intended to cause wrongful gain to one person and wrongful loss to another.
Accordingly, ‘Banking Fraud’ may be a broad term won’t signify all kinds of frauds committed in the banking industry. It may be committed with accounts, negotiable instruments, loans, securities or the other banking service. It may be pulled done by customer, employee and outsider or by the bank itself, or by two or more of parties. A common term to explain all such frauds is ‘Banking
Fraud’. Banking frauds could also be committed by way of concealment, embezzlement, breach of trust, theft, cheating, forgery, falsification of accounts, conspiracy etc.
The recent Reserve Bank of India (RBI) report said:
Indian banking industry detected Rs 71,500 crore worth of frauds in the fiscal year 2018-2019. Overall, 3,766 fraud incidents were detected in FY19, a 15 per cent increase from a year ago, while the losses incurred increased by 80 per cent from the previous year, while FY18 saw the foremost infamous banking fraud in India's history, where Nirav Modi snatched nearly Rs 13,000 crores from Punjab commercial bank in February 2018."In terms of area activities, advance fraud was the predominant share of the overall amount involved in fraud in 2018-19, while the proportion of off
balance-sheet fraud declined from a year earlier," according to RBI's annual report released on Thursday. Another point of concern for regulators and policymakers came from the very fact that it took banks a mean of nearly 2 years to detect frauds. High frauds identified above Rs. 52,000 crores worth of fraud is graded as major frauds. To curb this menace, the financial institution said that it's in talks with various agencies including the Ministry of Corporate Affairs to make an interlinked database for fraud monitoring. Further, the regulators said that analytic engines of banks and user interface of fraud registry would be improved to create a more robust monitoring system. The RBI, within the report, said that they also subjected 57 banks through IT examination to see their cybersecurity preparedness and compliances.
As per the RBI, bank frauds are often classified into three broad categories: deposit related frauds, advances related frauds and services related frauds.
Deposit Related Frauds, which wont to be significant in terms of numbers but not in size, have come down significantly in recent years, due to a replacement system of payment, and introduction of cheque truncation system (CTS) by commercial banks, use of electronic transfer of fund, etc. advances related fraud still be a serious challenge in terms of the amount involved, nearly 67 per
cent of the total amount involved in frauds over last 4 years, posing a direct threat to the financial stability of banks. With the ever-increasing use of technology within the banking industry, cyber frauds have proliferated and are getting even more sophisticated in terms of the use of novel methods. As well, as frauds related to documentary credit have surfaced causing concern thanks to their implications on trade and related activities.
As far because the credit risk cares, 16 out of 60 banks, 26.5 per cent market share, weren't ready to cover their expected losses from their current framework. RBI states that NPA’s from retail banking is just 2 per cent; whereas NPA’s from corporate banking is 36 per cent. Given the scale of corporate banking transactions, banks must adopt a strong post-sanction and facilities disbursement monitoring system and lookout for early signs of stress in borrower accounts.
Reason for higher Advance Related Frauds in public sector banks and rising NPA’s: Higher advance related frauds of above Rs.1 crore loans, 87 per cent of the total amount involved in loan worth Rs. 1 crore in value, in public sector banks as compared to private sector banks, 11 per cent of the total amount involved, could be due to the proportion of the loan advanced by both PSB’s (~70 per cent) and private sector banks (~ 30 per cent) especially in large and long gestation projects like infrastructure, power or mining sectors. Also, a higher number of fraud cases reported by PSB’s 65 per cent of the total, as compared to PVB’s, 19 per cent of the total, may be attributed to stringent oversight of CVC in PSB’s. It may also be due to a possible underreporting of loans on the part of the PVB’s, evidenced by RBI’s measures to curb such practices in recent times.
Current Policy of the Government
The prime role of Central Bank is to act as a banker to the Government and also banker to the banks. It is traditional for a financial institution to take care of the deposit accounts of the govt also as banks. Having to operate the currency and the credit system of the country to its advantage, the Reserve Bank of India has also taken up the responsibility of various parts of the financial market. This is the reason for the extended jurisdiction of the Bank beyond the banking sector and that has been reflected in the extension of its Current account facility to non-bank entities.
Objective and Evolution of the Current account Facility with the Reserve Bank of India
Objectives of Current accounts: The current accounts maintained by the Bank are of four types – a) Principle Account – The Current account maintained by a scheduled bank with the Bank at the centre at which the bank furnishes its fortnightly returns;
b) Secondary Account – The Current account that a bank is allowed to open at a centre where it maintains the ‘Principle Account’;
c) Subsidiary Account – The Current account maintained with the Bank at any centre except where the bank has ‘Principle Account’;
d) Current Account – The account in which the money may be withdrawn without notice.
Evolution of the Current account Facility: Initially the Bank maintained deposit accounts of only banks and Governments. Then over time, other non-bank entities have been admitted into the Current account system for some other purposes as well. These include:
a) All non-bank entities who are not members of the Clearing House
b) Primary and Satellite dealers and dedicated Gilt funds facilitating the development of the Government securities market considered critical for the growth of the financial sector as a whole
c) Institutions like National Securities Clearing Corporation Ltd. (NSCCL) promoted by National Stock Exchange for handling an increasing volume of financial transactions, particularly after the liberalisation of financial market and introduction of a screen-based trading system for capital market transactions.
Thus, as on a date, a wide variety of financial and non-financial entities are maintaining Current account with the Bank.
The facility of Current Account with the Bank was initially extended to Scheduled commercial banks to facilitate the fulfilment of their statutory obligation, settlement of their clearing house positions and transactions with the Bank or Government, Scheduled banks and Government of India were the first entities that were given this facility. However, over time diverse entities like State Governments, insurance companies, financial institutions, mutual funds, Primary Dealers, etc., were added to this facility. The main advantage in having Current account with the Bank is the fast and risk-free transfer of funds at almost zero cost. The part of the Bank has also seen change leading to the Bank taking measures for the development of the money market, Government Securities market, etc.
Conclusion
All in all, Banking Frauds constitute a considerable percentage of white-collar offences being probed by the police. Unlike ordinary thefts and robberies, there are lakhs and crores of rupees in the amount misappropriated in those offences. Bank fraud is a federal crime in many countries, described as a scheme to acquire property or money from any federally insured financial institution and also the government's various policies to control banks in the public sector.
Doing this assignment, I have come to understand that the problem of banking frauds has increased due to various reasons like introduction of e-banking, neglect of bank procedure due to various competition, the new techniques of cheating among the employees of banks and customers etc. the crime of fraud and forgery is not limited to metropolitan cities now but also the cases of fraud and
forgery are increasing crime in banks of big and small cities. Therefore, there must be proper check and balance on the working of banks to avoid fraud and forgery. The aims and objectives are important to be achieved by putting efforts to make changes in nature, culture, ideology, psychology, mortality and mentality of unscrupulous fraudulent customers and borrowers and corrupt bank officials.
Anugraha Sundas
Jogesh Chandra Chaudhuri Law College, Calcutta University
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