CHAPTER: 1

Background:
Indian economy is one of the world’s fastest growing economies with special growth of banking sector in the past few
decades. Banking sector is the backbone of any economy. The Indian banking sector has experienced considerable
growth since the introduction of financial sector reforms and liberalisation of economy in 1991. Though the banking
industry is well regulated by Reserve Bank of India, still the sector suffers from financial distress. This study endeavours
to cover banking frauds and analyse the current financial difficulties in the banking sector due to the scams and frauds.

Bank fraud is considered a federal crime in many countries as it involves fraudulent activities to wrongfully gain property
or money from a federally insured financial institution. There have been umpteen cases of money misappropriated in
bank frauds in the country even to the tune of 100s of crores.

Reserve Bank of India(RBI) defines fraud as “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 banks.”

Section 17 of the Indian Contract Act, in contractual terms, suggests that fraud means and includes any of the acts by a
party to a contract or with his connivance or by his agents with the intention to deceive another party or his agent or to
induce him to enter into a contract. In simpler terms, it is a dishonest act or behaviour by which a person gains an
advantage over another. This can be the concealment of facts, false claims, promises without the intention to carry it
out, or any deceptive act.

In past few years Indian banking sector is confronted with banking frauds. For a better system, banking sector needs to
be Prompt in reporting and action. Banking sector frauds is one of the key concerns for the regulator, government and
banking industry. Banking business involves risk but with rising frauds, banks must have effective control mechanism.
Banks are making huge investments over a period of time on Fraud Risk Management frameworks, systems and controls.

In India, there is rising trend of nonperforming assets among the public sector banks which has adverse effect on their
Profitability. It is believed that there is relationship between banking frauds and non- performing assets. Almost all bank
frauds have been concentrated in public sector banks. From the year 2010-11 to 2020-2021,the total amount of frauds
in scheduled commercial Banks was nearly Rs.525750 crore with cases nearly 482264.

Literature Review:
Ramana, S.V. and Krishna, S.G., 2017, presented a detailed survey On banking fraud. The authors identified and
explained the Methods to determine and prevent fraud in small banking Products. Further to this, they reported that the
Indian banking Sector was undergoing the pressure owing to rise in fraud events In recent years. Retail banking is more
procedure and volume-Driven, and so amplified the fraud incidents in that area; Increasing the need to stimulate a wider
audit of procedures and Prevents to spot the way of frauds.

Khanna, A. and Arora, B., 2009, revealed the execution of different inside control components- they demonstrated that
the absence of learning, overburdened staff, rivalry, low consistency Level are the primary explanations behind bank
frauds. The Knowledge on the view of bank staffs towards the preventive system and their mindfulness towards
different frauds and the significance of preparing counteractive action of bank frauds Were considered.

Bhasin, M.L., 2016, conducted a survey based on a questionnaire in 2012-13 among 345 bank staffs “to know their
opinion towards bank Frauds as well as evaluate the aspects that influence the extent of Their compliance point.” And
also discussed that “there were Poor employment practices as well as lack of effective training; Weak internal control
systems, over-burdened staff and low Compliance levels on the part of bank managers, officers, and Clerks.

Indian banking system has remained plagued with growth in NPAs during recent years, which Resulted in a vicious cycle
affecting its sustainability. Chakrabarty (2013) noted in his speech That, while most numbers of frauds have been
attributed to private and foreign banks, public Sector banks have made the highest contribution towards the amount
involved.

Key findings in RBI (2014) included the stress of asset quality and marginal capitalization Faced by public sector banks,
and various recommendations to address these issues. Rajan (2014) stressed on good governance and more autonomy
to be conferred to public sector banks to increase their competitiveness and to be able to raise money from markets
easily. In response to the common perception that increasingly strict regulations will make business opportunities take a
hit, Raju (2014) stated that, regulations do not seem to be a bar in functioning of banks after the crisis. Subarea (2009)
was of the opinion that without broad-based trust and presumption of honest behaviour, there wouldn’t be a financial
sector of the current scale and size. He called the emergence of a moral hazard problem in the banking system as
privatization of profit and socialization of costs.

Objectives of the study:

1.To study different types of fraud in banking sector.

2. To study various cases of fraud to identify the common process of committing frauds.

3.To understand and analyse the underlying causes behind increasing trends in frauds in Indian banking sector.

4.To study and analyse the trend of number and trend of value of frauds in banking operation.

5.To study the internal management system to reduce fraud in loan and advance.

6.Find out some basic recommendation for better future. Because,

“Truth must have no compromise.”---Swami Vivekananda.

Research Methodology:
A dual approach was undertaken to accomplish the above mentioned Objectives:

a) Secondary sources: This was based on literature review and case study approach.It also relied heavily on trend
analysis of frauds based on past data available with the RBI and Various other entities. Also, it seeks to uncover the
broader trends within public sector banks(PSBs) and private sector banks (PVBs) in India.

b) Primary sources: A 360 degree analyse Was conducted by interviewing banking officials, retired bankers,
practitioners, academicians and auditors.

Limitation of the study:

According to RBI report, in banking sector,fraud can be done in mainly 10 categories. But in terms of area of operations
fraud have been occurring predominantly in the loan portfolio (advanced category) both in terms of number and value.It
can be classified as a limitation of this project which focuses only Advance related fraud.

Another limitation is shot availability of time.If more time will be given,then this report can reach new dimension by
doing more surveys and collecting more primary data. This project report mainly based on secondary data and a limited
interview sessions were done due to confidentiality among different paries involving in banking and auditing sector.

CHAPTER 2
Conceptual Framework
In Layman’s language fraud can be defined as a misrepresentation of Information which causes another person to
endure loss basically a financial loss. If you take an example of a salesman he may lie about his Name, place, birth date
but he won’t be called as a fraud as long as he Remains truthful about his product he sells. He should have provided
Some misleading information about the product he sells that will cause actual monetary damage to another person.

Banking Fraud can be defined as the use of malpractices to gain money, Assets, or any property held by any person or
institution or to gain Money from the depositor by a variety of fraudulent activities. Also,financial fraud is not new to the
Indian banking system because they are regularly reported in recent years. These frauds are happened due to The cost
of business, its frequency and complexity of the framework.

Types of Fraud

There are many different types of bank fraud. Some of the most common types of fraud tend to

Be check fraud, debit and credit card fraud, safe deposit box fraud, and ACH fraud, but there are many

Additional types of bank fraud both within and beyond these basic categories. Here’s a closer look at

Some of the more unusual types of bank fraud faced.

Accoun ting Fraud: Accounting fraud largely affects loans and advances (lending) to business units.

Businesses those who commit accounting fraud (window dressing), look more profitable and strong

Financial health on paper than they really are. Based on these fraudulent misrepresentations in financial

Statements, banks grant loans to these businesses, but ultimately, because the businesses are insolvent,

They can’t repay the loans. Then, the banks get left with a loss.

Loan Fraud: Accounting fraud may lead to loan fraud, but this type of fraud isn’t just limited to

Businesses providing fraudulent statements on their loan applications. When individuals present false

Information for a loan is also loan fraud. Similarly, if a thief steals someone’s identity and applies for a

Loan in their name, that is another type of loan fraud. Moreover, if someone has a line of credit and a
Scam artist draws funds from that line, also falls into this category.

National Automated Clearing House (NACH) fraud: NACH fraud is the theft of funds through the

Automated Clearing House financial transaction network. The ACH network acts as the central clearing

Facility for all Electronic Fund Transfer (EFT) transactions, representing a crucial link in the national Banking system.

Wire Transfer Fraud: It includes all cases of fraud involving wire transfers or the internet. In some Cases, the scammers
steal the username and password of a bank customer, and they wire money to Themselves.

Phishing Fraud: Phishing is when a scam artist uses email, text, phone calls, or other methods to obtain A victim’s
banking details. This type of fraud often overlaps with other types of fraud. For instance, Fraudsters often use phishing
emails to get bank account details from their victims so they can commit NACH or wire transfer fraud.

Rogue Traders: If you run an investment bank, you likely have traders on staff, and in this situation, You need to ensure
that you protect yourself from rogue traders. These are traders who engage in Unauthorized trades and manipulate the
system to make it look as if their trading activities are generating More money for the bank than they really are.

Demand Draft Fraud: Like rogue trading, demand draft fraud happens internally. One of the bankers Simply generates a
demand draft payable at another branch or even at another bank. Then, they leverage What they know about the
system to avoid detection, they cash the demand draft, and they keep the Funds.

Bill Discounting Fraud: Although this type of bank fraud is relatively rare, you should still understand The risk. Generally,
with bill discounting fraud, the fraudster opens a business account at the bank. Then, The “business owner” convinces
the bank to start collecting bills from the business’s clients. The so-Called clients are part of the scam, so they always pay
the bills. After a while, the financial institution Gets lulled into a false sense of security about this customer. Eventually,
the customer asks the bank to Credit the bills in advance. When the bank does that, the fraudster takes all the money
and runs, and the Bank never gets those funds back.

ATM Fraud: ATM fraud includes everything from reprogramming the machine to installing a skimmer To steal card
details. However, it can also include making fraudulent deposits by depositing empty Envelopes — an envelope-free
ATM is usually the easiest way to avoid that.

Money Laundering: Money laundering is when criminals deposit fraudulently obtained sums of cash Into a bank. They
typically try to make the funds look as though they have come from a legitimate Source.

Now after knowing various types of fraud, we are going to take close look on 12 big banking frauds and crisis which
were happened in India in recent time.This brief case studies will help us to understand the common causes of
happening frauds in banking sector in general. They are as follows:
1.Nirav Modi Scam(PNB Scam)
 Punjab National Bank is an Indian multinational banking and financial service company.It is state owned
corporation based in New Delhi, India.The bank has over 80 million customers and 6937 branches and 10681
ATMS across 764 cities .
 Nirav Modi is a wanted person in PNB loan scam and presently he is on a run . CBI seeks the help of interpol to
arrest him. He is into Diamond trading business .He is the founder and creative director of the Nirav Modi chain
of Diamond jewellery.
 Nirav Modi exported rough diamond from foreign country worth crores of rupees. The employees at PNB Brady
House branch fraudulently issued LOU for 365 days without making any provisions for collateral and by passing
Core Banking System (CBS) . It was the clear case of collusion with branch manager to arrange fake LOU. In this
way Modi committed fraud with PNB and his Vender. Firm also raised funds from Indian banks overseas branch
for paying to the suppliers.
 But the scenerio was changed when new brunch manager took charge. Nirav Modi’s firm again requested the
bank to issue another LOU but the new official refused on ground that the company has to keep collateral with
bank but Modi’s firm argued that no such money was kept on margin for the previous LOU. After the PNB new
official started scanning the records and didn’t find any such transactions and then filed a complaint with CB.
 According to the complaint filed by PNB with the CBI on January 28,2018,the fraudulent issuance of letters of
undertakings (LOU) was detected at the mid corporate branch, Brady House in Mumbai.
 After investigation of CBI,it came to light that auditors failed to detect any frauds which took place in PNB
branch because there was no direct linkage of Society for worldwide interbank financial telecommunication
(SWIFT) and core banking system (CBS).swift his communication system through this PNB issued fake LOU To
Hong Kong vendor.LOU gave guarantee that if Modi would fail to pay vendor within 30 days then PNB would
repay.For this PNB get Commission and Colateral securities should be deposited by Modi. In this case colateral
security is missing.
 Entry in swift is contingent liability. it does not come to CBS system. Contingent liabilities come under footnote
of balance sheet.
 To ensure contingent liabilities completeness is a big challenge to the auditor. in this way frauds where taking
place under the nose of the authority by using loophole of system.
 Another cause of happening this fraud is ,the management system was very weak and couldn’t detect any fraud
because the deputy manager of branch himself was involved in the fraud.
 No Rotation of Employees is also a cause– According to reserve bank of India (RBI) guidelines, every employees
working in banks should be rotated from one position in every three years but the same was not done in the
PNB branch.
 CBI has registered a case against Nirav Modi on january 29,2018.PNB registered a case against Nirav Modi on
february 13,2018.The bank initially reported a scam of Rs.280 crores but it was later realised to be Rs.11,400
crores. Modi left India before the fraud came into light . CBI arrested at least 13 people, 7 from bank and 6 from
Modi’s company. Investigator has also seized their property including jewellery and other luxury vehicles of Rs.
500 crore.
 We can conclude this case by saying that,

‘’Shining Diamond trader took away PNB’s shine.’

2. Vijay Mallya Kingfisher Scam

 Vijay Mallya is an Indian businessman and former member of Parliament (Rajya Sabha). Vijay Mallya became
the chairman of United Breweries Holdings Limited (UBHL) in 1983 at the age of 28 after his father’s death.
Vijay Mallya grew its company rapidly.From 1998 to 1999, Vijay Mallya grew the turnover of the company by
64%.
 Kingfisher is an Indian brand owned by United Breweries Holdings Limited (UBHL) or UB Group Bangalore
based Indian Company. UB group has several businesses but its core business is beer, aviation, and
investment.UB group also launched Kingfisher airlines in India. Till December 2011 Kingfisher Airlines had
the second largest market share in India’s domestic air travel. The company closed its operations in India
after its inspections.
 Vijay Mallya wants to expand his liquor and Airline business. His advisors advise him not to do this but
despite his advisor’s advice, he does the same. He sold another company formed by his father to fund its
airline company.

 Vijay Mallya’s kingfisher becomes India’s no.1 domestic airline company and first choice of every passenger.
Due to some restrictions, the Indian Government did not allow kingfishers to fly international flights. To fly
international flights he leveraged United Spirits or United Breweries to buy Deccan Air which is a loss-making
company and merged it with Kingfisher Airlines but it could not make the profits thus in 2010 Malaya’s this
business was in heavy loss.
 To run this business he continuously took loans from banks. He took loans of 9000 crores by 17 banks.
Although SBI has declared them as bankrupt other banks kept lending him loans because he was a member
of Rajya Sabha and some parties supported him.
 The company also did not pay the salary of its employees or ran out of cash. In 2012 the company had to
shut down its operation. Vijay Mallya had a loan of 9000 from different banks and he denied to pay this loan.
 SBI and other banks filed a case against Vijay Mallya but before taking any action against Vijay Mallya he
flew away to the United Kingdom.
 Recently in January,2022,a news came that Vijay Mallya to be evicted from his London home over Swiss
Bank’s unpaid loan,UK court orders.
 Now the question is, ultimately whose money is it? Obviously Taxpayers’ money.so ultimately we are the
losser.Authority should say no to a waste of Taxpayers’money.

3. Rotomac scam
 Kanpur based rotomac global has orchestrate a scam of a Rs.3695 Crores by means of Wilfull loan
default to multiple banks.
 Vikram Kothari was the director of Rotomac global and son of Mansukhlal kothari, who founded Pan
Parag.
 Based on a complaint filed by the Bank of Boroda(BOB),CBI has Registered a case against 3 directors of
Rotomac and others.(Including some bank staff)
 First case was registered in February,2018 by siphoning of bank loan through Rotomac.
 The allegations are that of cheating a consortium of seven public sector banks by siphoning off loans
disbursed to the company.
 Credit sanctioned and disbursed to the company was utilized for purposes other than executing export
orders.
 credit sanctioned for export order receipt from Singapore for supply of wheat was diverted to another
company M/s Bargadia Brothers Pvt Ltd Singapore.Later it was routed to Rotomac.In other cases,
money disbursed for procurement Of goods for the export was not utilized for this purpose and no
export order was executed By this company. misappropriation of funds, breach of trust, violation of
foreign exchange management actact(FEMA) were happened.Most of the transactions of the company
are limited with the buyer,sellers.
 There are similarities in the breakdown of internal control mechanisms and in the supervisory failure at
the banks in both the cases of Nirav Modi Scam and Rotomac scam.
Lower level bank officials being complicit in the fraud are indeed Reprehensive, but there also seems to
have been a supervisory level lapse (or Collaboration).In both cases higher level involvement is implicit
as risk detection and taking Remedial action was clearly delayed or not done at all.
  Differences are , in the PNB case, reporting systems were bypassed (literally off The record), and even
the subsequent 3-tier audit failed to detect this.In contrast, BoB was completely aware of Rotomac’s
default and took Unreasonably long to take action.Notably, Rotomac was listed as BoB’s top defaulter
almost a year ago and it Account has been classified as ‘Non Performing’ since 2015.Here, the fact that
even RBI (which overseeing bank books regularly) hasn’t taken timely corrective action is concerning.

4. RP Infosystem Scam
 Central Bureau of Investigation (CBI) has filed FIR against Kolkata based RP Info System for a bank fraud
of Rs. 512.12 crore.
 The F.I.R. has been registered after D.V. Prasad Rao, Deputy General Manager of Canara Bank’s Camac
Street branch filed a complaint with the CBI that directors of RP Info Systems Limited; Shivaji Panja,
Kaustuv Ray, Vinay Bafna and Debnath Pal, Vice President (Finance); have cheated a consortium of ten
banks to the tune of Rs. 515.15 crore banks against fabricated stock positions and other forged
documents.
 The ten banks of the consortium are: Canara Bank, State Bank of India, State Bank of Bikaner and Jaipur,
Union Bank of India, Allahabad Bank, Oriental Bank of Commerce, Central Bank of India, Punjab National
Bank, State Bank of Patiala, and Federal Bank.
 The complaint said that the accused in criminal conspiracy with unknown bank officials availed bank
loan on the basis of false and fabricated stock/receivables/debtors statements.
 The complaint further alleged that Letters of Credit (LC) opened by different member of banks of the
Consortium on the applications of M/s. R. P. Info Systems Ltd. Started devolving from 2012 onwards due
to non-maintenance of funds.
 “RP Info System and the accused dishonestly and fraudulently did not route the sale proceeds through
the loan account and siphoned off the entire amount,” said the complaint.
 Some of the purported debtors, viz, Gail India, Vincent Electronics (Rourkela), CEAT ltd, had informed
State Bank of India that they had no dealing with RP Info Systems.
 The other member banks of the consortium had authorised Canara Bank to lodge the consolidated
complaint, according to the FIR.
 “ During2013 IDBI Bank relinquished their position as Consortium leader after the deliberation with RBI.
it is learnt that, in the month of December 2013, IDBI Bank lodged a complaint Regarding the fraud
committed on there bank alone to the CBI and the CBI investigated only the exposure of IDBI Bank.”- a
complaint by Canara Bank said.
 According to reports, shivaji panja was already booked for allegedly cheating IDBI Bank to tune of Rs
180.44 crores.
 Now the question is ,after having such background,how did Panja manage to acquire loans from
different banks and make a new fraud amounting to Rs. 515 Crores?

5. Kanishk Gold Fraud

 Another bank fraud of Rs 824.15 Crore was uncovered. A CBI investigation revealed it involved Chennai based
jewellery chain Kanishk Gold pvt limited.
 SBI was first to declare the kanishk gold account fraudulent to the Reserve Bank of India in November 2017,
having extended loan of rupees 215 crore to the jewellery chain.
 This scam comes in wake of the PNB fraud, where the CBI and the enforcement directorate have filed cases
under the prevention of corruption act and the prevention of money laundering act respectively.
 “Kanishk gold procured the loans and then these loans were diverted elsewhere. The loans were not returned
and when the banks realized that this loans had Become nonperforming asset(NPAs), the complaint was
registered.”-SBI officials.
  Kanishk gold is owned by promoters and directors, Bhoopesh Kumar Jain And his wife Neeta.
 According to SBI's complaint, the loan to Kanishk Gold date 2007 onwards.Over a period of time, banks
increased the credit limit and working capital limit to Kanishk Gold.According to the complaint.The company had
a working capital facility sanctioned to Rs 747 crores.
 Kanishk jeweller first defaulted on payment of interest to eight banks In March 2017 and from April 2017 it
stopped giving payments to all 14 banks.
 “The promoter was unavailable For follow up. When the stock audit was initiated on 05.04.17 For the quarter
March 2017,The company did not facilitate stock and receivables audit process. Subsequently on
27.05.17,Consortium members visited the corporate office factory and showrooms and found that there was no
activity.”- The complaint to CBI.
 A physical inspection revealed that there was no activity at the factory and all showrooms of Kanishk Gold were
found locked.
 According to bank’s complaint,”On the same day, Mr. Bhoopesh Kumar Jain gave a letter admitting falsicification
of records since 2009 and removal of stock secured to the lenders.”

6.Reliance Group Fraud

 The State Bank of India has declared the accounts of Anil Ambani’s three reliance firm,Reliance communication,
Reliance telecom, Reliance Infratel as fraud.
 The State Bank of India informed the court that During the audit, they have found misappropriation of fund,
diversion and siphoning of fonds Afterwhich they have classified the account as fraud.
 Anil Ambani who was the third richest person in India in 2008,Informed a U.K court in February 2020 that his net
worth was zero after Chinese bank sought their money back from his telecoms group Reliance communications.
 “Reliance Capital’s downfall” is the effect of accumulated Wrong business decisions, lack of focus and
leadership. Finally no one came forward to rescue the sinking ship.”-said JN Gupta,managing director of the
shareholder advisory company .
 The accusation of fraud puts Reliance communications’ resolution plan at risk . According to company’s official
website,it owes Rs.49,193 crore in dues. In addition to that, Reliance Telecom owes Rs. 24306.27 crore and
Reliance Infratel owes Rs. 12,687.65 crores.
Cumulatively this adds up to 86188 crores while still excluding the Rs. 28837 that’s owned in spectrum dues.
 These allegations come nearly a year after a forensic audit unearthed questionable transactions worth rupees
5500 crore in the three Anil Ambani left Reliance Group entities.At the time, the probe found three suspicious
large entries buried between hundred of thousands of other transactions between March 2017 and March
2018,which indicated fund diversion.

7. Jatin Mehta Scams

 Jatin Mehta entered into the diamond business in 1985, when he founded India’s first diamond public trading
company Su-Raj Diamonds Limited. At that time he conducted his business with transparency and repaid all his
loans when required. In fact, Mehta won several awards while at the helm of Su-Raj Diamonds, such as the
Diamantaire of the Year, certificates of merit and recognition as the largest exporter of cut and polished
diamonds in India.
 In the early 2000s, Mehta started using his company Winsome Diamonds to export to clients in the UAE.
 For the jewellery business, Mehta bought gold on credit from several international bullion banks, such as the
Bank of Nova Scotia, Standard Bank PLC London and Standard Chartered, among others. Bullion banks normally
refers to those banks which are active in the precious metals markets.
 To ensure their safety in payment, bullion banks require that the company asking for the gold loan submit a
standby letter of credit from a domestic bank.
  Jatin Mehta obtained standby letters of credit from several Indian banks such as Bank of Maharashtra, Canara
Bank, Union Bank and others.Thus the trade commenced.
 For years, this line of transactions proceeded smoothly. But in November 2012, Mehta defaulted on his
payments. He claimed that his regular group of 13 buyers from the UAE, had run into unforeseen losses in the
trading of derivatives and commodities. As a result, they had not been able to pay him for the supply of
jewellery. With no incoming revenue, Mehta said he would be unable to pay for the gold that he had taken from
the bullion banks.
 Now Indian bank faced a claim of rupees 7000 crore by bullion banks.
 Investigation began from the part of Indian banks and it came to surface that 13 individual buyers in UAE was
false. All 13 companies were controlled by one man,namely Haytham Ali Salman Abu Obuidah,a Jardanian
national. He associated with Winsome group for the last 8-9 years.
 Further it was also revealed that out of the 13 companies, ten had been created in 2012 itself.
 Investigation later revealed that even some bank officials were in on the fraud. this is the only explanation for
the fact that Mehta had only kept Collateral worth only Rs. 250 crore even though the line of credit was valued
at 7000 crores. how is it possible?
Thus it was proved that it was well planned FRAUD.
 But before any major charges could be filed, Jatin and his entire family left in India and settled in Saint Kitts and
Nevis happily by thefting Taxpayers’ money.

8.Bhushan power & Steel fraud

 Enforcement directorate(ED) had initiated a money laundering investigation on the basis of FIR filed by the
central Bureau of Investigation (CBI)in 2019 against bhushan power and steel limited and others on charges of
criminal conspiracy amongst themselves and with unknown public servants of bank with intention to cheat
banks, financial institutions and government exchequer.
 The ED has a alleged that the accused dishonestly and fraudulently diverted huge amount of bank funds through
shell companies and deliberately defaulted repayment of bank loans.
 “They did not use the bank funds for the purpose for which the same were sanctioned,committed forgery for
the purpose of cheating, used forged document and falsified the accounts causing wrongful loss to the lending
bank, financial institutions, government exchequer and corresponding wrongful gain to themselves.”—Said the
ED .
 Apple Ding to the FIR lodged by the CBI, Bhushan power and still limited had availed various credit facilities from
33 different banks Including financial institutions between 2007 to 2014 and the outstanding defaulted amount
as on January 30 2018 was rupees 47,204 crore. BPSL eveld various loans facility Under the leadership of Punjab
national bankLarge corporate branch Chandigarh for different purposes namely working capital,term loan for
The purchase of plant and machinery etc.PNB declared accounts of bhushan power and steel limited as
nonperforming asset on December 31, 2015.
 PNB repoted a borrowing fraud of 3805 crore in BPSL account to the Reserve Bank of India. Chandigarh branch
3191crores,Dubai branch 345crore, Hongkong branch 268 crore.The fraud detected during a forensic audit.
 “Money laundering investigations has revealed that the funds were utilized for purchase of property by Assurity
real estate LLP were siphoned from Bhushan Power & Steel Limited and routed through shell companies
projecting the same as unsecured loans. It has Established that the so called unsecured loans were without any
documentation end repayment obligations.”—Added the ED.
 In 2021 October, ED had attached bank balance to the tune of rupees 1.74 crore in connection with a money
laundering case involving Bhushan power and still limited, officials said.
 The building worth of our rupees 190 crores located at Ceejay House in Worli, was attached under prevention of
money laundering act (PMLA) As part of the ED’s investigation against Sanjay Singal,former chief managing
director of BPSL.
  ED filed a charge sheet against former Bhushan power and steel limited CMD Sanjay Singal and others in a multi-
crore money laundering case linked to alleged bank, saying he was the “Mastermind” behind the diversion of
loan funds.

9. IF & FS crisis
 Infrastructure leasing and financial service(IL&FS) is an Indian infrastructure development and finance company.
IL & FS was formed in 1987 as an “RBI registered core investment company”by the Financial institutions namely
the central Bank of India, Housing development finance corporation (HDFC)And Unit trust of India (UTI) to
provide finance and loans for major infrastructure projects.
 IL&FS has 256 group companies as of 2018, including subsidiary,joint venture companies and associate entities .
 IL and FS has several projects in different sectors including transportation, area development, e-
governance,Health initiatives, cluster development, finance, powers, ports,Water and waste management,
urban infrastructure, environment, education and tourism.
 Gujarat International Finance Tee city(GIFT),
Connect Ladakh to Kashmir Tunnel,
Building oil Terminal,
India’s largest and safest road tunnel along the Jammu-Srinagar highway---are some big projects,done by IL&FS .
 But today’s debt situation is Rs. 91000 crores.Since September 2018, IL&FS had defaulted in payment of interest.
 IL&FS Needed capital infusion off rupees 3000 crore and had also proposed rupees 4500 crores right issue.
 IL&FS Subsidiaries had been unable to repay short term loans off 1000 crore and also not in a position to repay
its sippy obligation. Actually the company raised short term loans to repay long term loans. Now short term
loans also were unable to be repaid.Debt equity ratio is around 18 times.
 Sucheta Dalal is the first one to report about IL & FS.She said,sack IL&FS board to fix the mess.IL&FS can’t
remain in the control of the crony club.After all,the are fully complicit in having created the mess in the first
place.
 Reasons of this crisis are:
1) Improper management of company’s resources by top level management.
2) High paid upper level management even at the bad time.
3)It is a shadow bank,thus it has less regulatory compliances.
4) Cost escalation due to project delay.
5) Problems in land acquisitions for project and lack of risk management.
 To overcome from this crisis the Government superseded the existing board of debt laden IL&FS with six new
board members,announcing Kotak Mahindra Bank MD & CEO Uday Kotak as chairman of the board,the
Government also nominated technocrats who have had varied experience in their careers.

10. IDBI Bank Loan Fraud

 The Central Bureau of Investigation (CBI) said it has registered a criminal case against 15 former senior officials
of IDBI Bank and 24 others, including Aircel founder C Sivasankaran and 11 companies and their respective
directors, for allegedly defrauding the lender to the tune of Rs 600 crore.
 According to the agency, one of Sivasankaran’s Finland-based companies WinWinD Oy had obtained a loan of Rs
322 crore from IDBI in 2010 that was declared a non-performing asset (NPA).
 The company went in for bankruptcy proceedings in Finland in 2013, failing to repay the loan. In February-March
2014, IDBI sanctioned another loan of Rs 523 crore to British Virgin Islands-based Axcel Sunshine Ltd, a
Sivasankaran group company. The group repaid the previous loan of Rs 322 crore from this money as well as
some loans taken by associate companies of the Sivasankaran group, said agency officials. It failed to repay the
loan of Rs 523 crore, which with interest now amounts to Rs 600 crore.
  “This is complete violation of regulatory guidelines laid down by the Reserve Bank of India (RBI). A company
cannot take a loan to repay its previous loan. This is a clearcut case of fraud,” said an agency official.
 The agency has booked 15 top former senior officials of IDBI alleging active connivance. Among those booked
are MS Raghavan, then CMD of IDBI; Kishore Kharat, then CMD and current CMD and CEO of Indian Bank.
Melwyn Rego, the then DMD (of IDBI) and presently MD and CEO of Syndicate Bank, has also been booked by
the CBI.
 The companies that have come under the CBI scanner for the alleged fraud are British Virgin Islands-based Axcel
Sunshine Ltd, Broadcourt Investments and Lotus Ventures Investment; Indian Telecom Holdings Ltd (Mauritius);
Siva Palm Corp (Singapore) and Chennai-based Siva Industries and Holdings Ltd and Sterling Agro Product and
Processing Pvt Ltd.
 The allegation on them is : Despite knowing about the poor financial status of Siva group of companies,led by
the businessman,top officials of the IDBI Bank colluded with him and extended further credit facilities of Rs. 523
crores in favour of group companies,Axcel Sunshine Limited,based in British Virgin Islands for repaying loans of
other associate companies.
 Sivasankaran had claimed that he was a “Ambassador at large” for the Republic of Seychelles and was protected
from criminal prosecution under Vienna convention.But in December,2021 the Supreme Court declined a plea
for diplomatic immunity raised by Aircel founder C.Sivasankaran,who is facing money laundering charges.

11. ICICI Bank Loan Fraud

 The ICICI Bank-Videocon case is about allegations of a quid-pro-quo deal between the Chanda Kochhar and the
Videocon group. The head of the ICICI bank was Kochhar.
 The case rotates around a loan given by ICICI Bank to the Videocon group as a part of a State Bank of India (SBI)
led consortium in 2012 and the change of ownership in a firm called NuPower Renewables Pvt Ltd, which was
floated as an equivalent joint venture between Chanda Kochhar’s husband Deepak Kochhar and Videocon’s
Venugopal Dhoot.
 The loan fraud first was highlighted by a whistle blower name Arvind Gupta. He had written a letter to the Prime
Minister Office(PMO) somewhere in the year 2018.
 The gist of the allegation made by Mr. Arvind Gupta was that certain loan amounts to the tune of Rs.600 crores
(Approx) were sanctioned by ICICI Bank in favour of Videocon company with Chanda Kocher being head of the
sanctioning committee.As a result of this loan sanction,Gupta alleges that Venugopal Dhoot transferred the
ownership of Nupower Renewables to Deepak Kochar,the husband of Chanda Kochar the for Rs.64 crores.
 Central Bureau of Investigation filed an FIR against Ms Chanda Kochhar, her better half Deepak Kochhar, leader
of the Videocon group Venugopal Dhoot and ICICI Bank officials for sanction of credit facilities infringing upon
rules, that caused a loss of ₹1,730 crores to the ICICI bank.
 Kochhar committed the mistake of not revealing to the bank’s board about her husband other’s business
associations with the Videocon group, which was a customer of the bank.
 She kept on being a part of the advisory groups that sanctioned credit facilities to Videocon when she should
have separated herself on-premise of conflict of interest.
 The CBI inquiry report holds her responsible for violation of the bank’s “code of conduct, its system for dealing
with conflict of interest and fiduciary duties, and the relevant Indian laws, rules, and guidelines.”
 The Enforcement Directorate has enrolled a criminal case of money laundering against past ICICI Bank Chief
Executive Officer Chanda Kochhar, her significant other Deepak Kochhar, Videocon Group advertiser Venugopal
Dhoot and others to test claimed irregularities and corrupt practices in sanctioning of Rs 1,875 Crore advances
or loans by the bank to the corporate groups, said by authorities.
 This case raises questions over the guidelines of corporate administration at one of India’s biggest banks. The
ICICI Bank scene is just one among a few examples of governance lapses in corporate India as of late. It
highlights the need for regulators to keep up a severe vigil on the functions of corporate boards in a period of
corporate misadministration.
12. ABG Shipyard Fraud
 A major Gujarat-based ship-building company and its directors have been booked by CBI for fraudulent loan
default to the tune of Rs 22,842 crore, making it one of the biggest loan fraud cases the agency is probing.
 According to CBI, the Surat based company was engaged in ship building and ship repair.
 The agency has booked ABG Shipyard Ltd (ABGSL) and its former chairman and managing director, Rishi Kamlesh
Agarwal, along with then executive director Santhanam Muthaswamy, directors Ashwini Kumar, Sushil Kumar
Agarwal and Ravi Vimal Nevetia.
 ABG Shipyard is alleged to have diverted loan funds through subsidiaries in Singapore and through other means
between 2012 and 2017. The loan was declared NPA in July 2016, and the company is already facing
proceedings in the National Company Law Tribunal (NCLT).
 The FIR has been registered on the basis of a 2019 complaint from the State Bank of India, one of the lenders.
 “It was alleged that the accused had cheated the consortium of 28 banks, including branches of erstwhile State
Bank of Patiala, Commercial Finance Branch, New Delhi; erstwhile State Bank of Travancore, Commercial Branch,
New Delhi; State Bank of India, Overseas Branch, Mumbai etc. The consortium of 28 banks was led by ICICI
Bank,” CBI said in a statement.
 “It was alleged that the accused had colluded and committed activities by way of diversion of funds for the
purpose other than for which the funds were released by the bank,” the agency stated.
 “Huge amounts were allegedly transferred by the said company to its related parties and subsequently
adjustment entries were made.”
 “It was alleged that bank loans to the said private company was diverted and huge investment was found to be
made in the overseas subsidiary. It was alleged that funds from banks were diverted to purchase assets in the
name of related parties,” it stated.
 According to the complaint, the company was impacted by a global crisis in the shipping industry due to fall in
commodity demand and prices and subsequent fall in cargo demand. However, an audit of its financials revealed
fraudulent practices, CBI has stated.
 The Forensic Audit report dated 18.01.2019 submitted by M/s. Ernst & Young LLP for the period April 2012 to
July 2017 revealed that the accused have colluded together and committed illegal activities including diversion
of funds, misappropriation and criminal breach of trust and for purposes other than for the purpose for which
the funds are released by the Bank.
The Loan account was declared as nonperforming asset in July 2016 and fraud in 2019. The bank had first filed a
complaint on November 8,2019 on which CBI had sought some clarification on March 12,2020.After scrutinising
for over one and a half years,the CBI acted in the complaint filing.

Common Causes of Banking Frauds:

An analysis made on basis of above cases brings out following:

Factors responsible for commission of frauds in public sector banks :

1. Active involvement of staff independently or with help of external.

2. Failure of bank staff to follow laid down instructions and guidelines.

3. Foregeries or manipulation of banking instrument and documents.

4. Collusion between business, senior bank executives, civil servants to defraud the banks.

Central vigilance commission(CVC) pointed out many loopholes/lapses in the system as the causes like :

1. Lack of competence and skill on part of banks to appraise technical aspect of project for finance.

2. Lack of proper and due diligence by the banks.

3. Diversion of funds by the promoters of companies with use of shell companies.

4. Fabrication of information

5. Frauds committed by companies.

The causes may be due to lack of adequate supervision of top management faulty incentive mechanism for
employees,weak regulatory system, lack of appropriate tools and technologies to detect early warning signals of frauds,
lack of coordination among different banks across India, collusion between employees and external parties, lack of
adequate training, excessive burden on the bank staff.

Interview Based
A interview was conducted with various officials of the bank, auditors, and practitioners.They are asked some questions
regarding the fraud cases and take their opinion.From their given opinion , we were able to come up with the following
insights and key findings:

The opinions of different personels are sum up. And more or less they opined the same.Follwing questions are asked
and here is their opinion:

1.What is the main reason for higher advance related frauds in public sector banks and rising NPAs?

Higher Advance related frauds of above Rs. One crore loans in public sector banks as compared to private sector banks
could be due to the proportion of the loan advanced by both PSBs and private sector bank especially in large and long
gestation projects like infrastructure, power or mining sectors.

Also, the higher number of fraud cases reported by PSBs as compared to PVBs may be attributed to stringent oversight
of CVC in PSBs. It may also be due to a possible underreporting of loans on the part of the PVBs.

Most of today’s NPAs are from loans in the mid-2000s, when the economy was booming and business confidence was
buoyant. But as economic growth stagnated post the global financial crisis of 2008, the repayment capacity of these
borrowers declined. This lead to what is called the India’s Twin Balance Sheet problem, where both the banking sector
and the corporates are reeling under financial stress.

Also political factors like crony capitalism too has caused high NPAs in India.

Further, recently there have also been frauds of high magnitude that have contributed to rising NPAs. Although the size
of frauds as compared to the total volume of NPAs is relatively small, these frauds have been increasing, and there have
been no instances of high profile fraudsters such as Vijay Mallya, Nirav Modi and Mehul Choksey being penalised.

2.It is accused that---“The initial project appraisal process in PSBs is as good as that of PVBs. But monitoring post
sanction of loan is weaker in PSBs compared to the PVBs.” What is your opinion ?

It is admitted truth that post sanction of loan is weaker in PSBs compared to the PVBs on account of diverse loan
portfolio, lack of expertise and modern technological resources, lack of inter brunch connection and lack of manpower
and motivated employees, who are not appropriately incentivized to detect early frauds or prevent them.

Lack of awareness of staff towards appropriate procedures in place and red flags they should be aware of. Non-
adherence to standard procedures and systems in place, by the employees is also the reason. Even when any employee
detects some fraudulent activities in existence involving people in power, whistle Blower protection policy does not
guarantee adequate safety.

But now-a-days PSBs in India had prepared a five point action plan to make them more competitive, which Included
suggestions like introduction of performance management systems and incentives In banks. Smaller banks should focus
on the areas of their strength (to optimize capital Utilization) among other reform plans. The banks demanded creation
of bank board bureau and bank investment committee and empowerment of banks on certain decision making
Capabilities, in line with RBI. Additionally, they demanded simplification of credit Insurance process and strengthening of
legal framework for debt recovery, apart from more usage of technology.

3.From 2018-19 to 2020-21, in public sector bank, the share of total amt. of fraud declined from 90% to 59%.On the
other hand, three years, it is observed that the share of total amt. of fraud in private banks increased from 8% to
33.5%.---Why it was happened ? What are the possible reasons of it?

As per RBI’s annual report, the average time lag between the date of occurrence of frauds and the date of detection was
23 months for the frauds reported in 2020-21. However, in respect of large frauds of Rs 100 crore and above, the
average lag was 57 months for the same period.

So whatever figure we see in the in present time relating to numbers or amount involve in fraud, was occurred,
minimum 2 to 3 years ago. At that time these were declared as non-performing asset and now it is proved or detected
by investigation agencies that that NPA is actually a fraud. Like ABG Shipyard case,the loan account was declared as NPA
in July 2016 and bank had first filed a complaint on November 2019.And now in February,2022 CBI proved that it is the
case of Rs.22800 crore fraud.

So rising of the number and value of fraud in private sector bank is the outcomes of previous malpractices and today
only it comes to us. It also may be the cause of good vigilance in banking sectors now-a-days.

4.What are the common Early Warning Signals relating to a Red Flag Account?

Early Warning Systems are specialized tools, built using a set of parameters and processes that identify probable risks at
a nascent stage. A comprehensive and well-structured EWS assists the top-level management to predict possible
defaults from borrowers that may adversely affect the institution.

An Red Flag Account (RFA) is one where a suspicion of fraudulent activity is thrown up by the presence of one or more
Early Warning Signals (EWS).

The threshold for EWS and RFA is an exposure of Rs. 500 million or more at the level of a bank irrespective of the lending
arrangement (whether solo banking, multiple banking or consortium). All accounts beyond Rs. 500 million classified as
RFA or ‘Frauds’ must also be reported on the Central Repository of Information on Large Credits(CRILC) data platform
together with the dates on which the accounts were classified as such.

Followings are some Early Warning Signal (EWS) alerts:

 Bouncing of cheques for financial reasons on more than 2 occasions in a month.

 Raid by Income Tax and Commercial Tax Authorities.
 Regular large cash withdrawals disproportionate to the trade (more than 15% of the sanctioned limit in a
month).
 Frequent demand for adhoc sanctions- more than one per Quarter .
 Continuous over dues in the term loans for more than 2 months.
 Frequent invocation of Bank Guarantees and devolvement of Letter of Credits (more than two in a quarter).
 Non submission of stock and book debts statements( for more than two months).
 Material discrepancies in stock and book debts statements From the previous statements.
 Non cooperative attitude towards stock audit.
 No operations in the account for more than 30 days.
  Large number of transactions with interconnected companies And large outstanding from such companies .
 Resignation of key personnel and frequent changes in the management.

5.How can forensic audits prevent generation of non-performing assets and frauds in banks?

The problems that a bank face while dealing with NPA and Fraud can be summed up as follows:

 It reduces the cash flow of that particular bank, as it all depends on the cycle of lending and repayment.
 The reduction in cash flow directly hits on the overall capital that is available to the bank to give subsequent
loans.
 Also, the earnings of the bank are solely based on the repayment of loans it has lent. The loss caused by NPAs
and frauds are set off against the earning, ultimately reducing the earning and credibility of the bank.

To deal with NPAs the banks are always expected to bring about change in their policies to stop classification of NPAs,
by restructuring the loans. However, a proactive role that a bank can play in this regard is to conduct forensic audits on
loan-taking entities to ensure the security of payment. This may be the only effective way to discover financial
discrepancies at the time of giving a loan, and throughout the period of repayment. This is also a safety-net that is
available to banks. It is not uncommon to discover companies with huge cash reserves being identified as NPAs. This was
also conceptualised on the authority level wherein the rise in the numbers of NPAs was termed as a “potential damage
to the growth story” of the Indian economy. Keeping this in the background, the Finance Standing Committee of
Parliament has called for an immediate forensic audit of all restructured loans that had turned into bad debts, earlier
this year. The panel also asked the apex bank to form empowered committees at the level of RBI, banks and borrowers
to monitor large loans.

6. How instances of fraud can be reduced?

The increasing instances of white collar crimes in India stem out of two basic ideas of greed and an attitude of “not a
crime”. Thus, the courts take a strict view of such instances to decide on such matters and eradicate the rising rates of
such crimes, which are also a major hindrance to the growing state of the economy. In order to decrease the possibility
of such crimes, and also eventually reduce liability, companies can keep the following points in mind for mitigating fraud
risk.

 It is highly recommended that companies harbour a “stop before it starts policy” by creating a transparent
working environment.
 Employ teams to conduct a frequent analysis of the fraud triangle [Pressure (motive), opportunity (ability to
carry out the fraud) and rationalization (justification of dishonest intentions).]keeping in view the working
atmosphere in the company.
 Come up with policies to work on the ‘rationalisation’ aspect of the fraud triangle to strike at the root of the
problem.
 Follow a dynamic approach while defining fraud in the company transactions keeping in mind the ongoing
scenario of white collar crimes.
 The institution of strong internal controls and anti-fraud technologies in the electronic platform.
 Thorough and frequent evaluation of the company’s code of conduct.

7. What are the Challenges faced in implementing a Fraud Risk Management system?

A fraud poses significant threat to the integrity of financial Institutions. Fraud destabilizes the confidence of investors. It
can bring down institution to closure and cause employees Loss of their livelihood and investors lose their savings.

These frauds threaten the stability of banking system and Challenge the authorities to disentangle the schemes. After
conducting survey and study various cases with many articles, following points come to the surface :

• Lack of robust data governance models for data

• Ownership/verification and adherence to data Management standards
 • Lack of proper standards for collection and storage of Risk data
• Lack of information and data shared during consortium Lending
• Non-integration of risk data
• Lack of sufficient market intelligence deployed within The bank.

CHAPTER:3
DATA PRESENTATION AND ANALYSIS
 Analysis of fraud on bank wise

Number of fraud cases have declined in the banking system during 2020-21 (FY21), instances of frauds have increased in
the private banks, RBI said in its annual report on Thursday. While private banks reported a rise of 21% year-on-year (y-
o-y) in the number of frauds during FY21, public sector banks (PSBs) have reported a decline of 34% y-o-y during the
same period. In value terms, the private banks have reported a rise of 35% y-o-y in frauds during FY21, and PSBs have
reported a decline of 45% y-o-y in the similar period. Overall, the number of frauds in the banking system declined 15%
y-o-y by number and 25% y-o-y in terms of value during FY21.

If an account is declared as fraud, banks need to set aside 100% of the outstanding loans as provisions, either in one go
or spread over four quarters, as per RBI norms. According to data shared by the central bank, 59.2% of the total value of
frauds were reported by public sector banks, followed by private sector banks at 33.5% during 2020-21. Last year, 80%
of the total value of frauds were reported by public sector banks and 18.4% by the private sector banks.

2018-19 2019-20 2020-21

Bank No of No of No of
group/Institution frauds Amt. Involved Frauds Amt. Involved Frauds Amt. Involved

Public Sector
Banks 3705 64207 4410 148224 2903 81901

Private Sector
banks 2149 5809 3065 34211 3710 46,335
Foreign Banks 762 955 1026 972 521 3315
Amount of fraud involved:On Bank Wise(2018-19 to 2020-
Financial 21)
Institutions 28 553 15 2048 25 6839
Number of Fraud:On Bank Wise(2018-19 to 2020-21)
(Amounts in Crores)
Small Finance
Banks 115 8 147 11 114 30
Local Area Banks

Payment Banks 39 2 38 2 88 2
Small Finance Banks
Local Area Banks 1 0.02 2 0.43 2 0

Total 6798
Total
Foreign Banks
71534 8703 185468 7363 138422
Local Area Banks
(Amounts in Crores)
Public Payment Banks
Sector Banks
0
Small Finance Banks 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000

FRAUDS-On Bank Wise 2020-21 Amt. Involved

Financial Institutions
FRAUDS-On Bank Wise 2019-20 Amt. Involved
FRAUDS-On Bank Wise 2018-19 Amt. Involved
Foreign Banks

Private Sector banks

Public Sector Banks

0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000

2020-21 No of Frauds 2019-20 No of Frauds 2018-19 No of frauds