This Blog is written by Ananya Sharma, a Fourth-Year Law Student of Symbiosis Law School

INTRODUCTION-

In the year 2016, “The King of Good Times”[1] flew from India with Rs. 9000 crores[2]. And we thought that the Indian banking sector had learned their lesson. Soon after, in the year 2018, after the Kingfisher scandal, the infamous PNB scam took place whereby Nirav Modi escaped India with Rs. 12,000 crores.[3] Which he stole through collusion with an employee in the small Brady House, Mumbai branch. If the loopholes are not fixed by the government and the banks, India is not far from another scam which might be double the amount of both.

Indian banks are vulnerable to fraud by big businessmen due to some loopholes. These can be divided into three categories-

1. Procedural loopholes-

a. Banks fail to do proper due diligence on these businessmen as they tend to borrow large sums of money. They do not conduct proper background checks and do not properly analyse the financial statements of these individuals, which leads to loans being approved on a falsified basis.

b. Seeing their benefit, banks often send wrong reports or delay in sending reports to regulatory authorities like the Reserve Bank of India due to which such authorities cannot timely aid banks which have been defrauded.

c. Often banks fail to conduct timely audits and checks in their branches, and due to this oversight, the employees can get a free hand in helping fraudsters commit the crime.

2. Systematic loopholes-

a. The government and bodies regulating the functions of banks have made strict regulations and laws on their functioning, but enforcement of these laws and regulations is often weak which makes it easier for businessmen to defraud and flee the country. Even legal proceedings after such frauds consume a lot of time which makes it more difficult to recover the money and nab the culprits.

b. There exist various kinds of regulations for different institutions in the banking sector, and such loopholes can give opportunities to businessmen to commit fraud.

3. Operational loopholes-

a. There exists a long and complex hierarchy of financial instruments which makes it difficult to catch any such fraud for a long time and businessmen can use it to their advantage to hide their crimes for longer periods.

b. Corruption plays a major role in such loopholes. Collusion between the government and businessmen can often pressure the banks to approve loans without proper due diligence.

These are some of the loopholes that have existed for a long time and to date, they make the banking sector vulnerable to fraud and scams by businessmen looking to fill their pockets and flee the country.

Frauds in the banking industry are multifaceted. The banking industry in India has a very intricate structure. The highest regulatory authority is the Reserve Bank of India (RBI). Different types of banks exist, including private, foreign, nationalized, and non-banking financial entities. Depending on what kind of ownership they have, banks are required to follow certain standards and policies. Fraud by bank personnel and clients is made possible by systemic flaws in the documentation, processing, and clearing of banking transactions. For banks, one of the biggest concerns has been the lack of sophisticated technology innovation in fraud detection and prevention. The most prevalent method these days is account takeover fraud via customer account violation. The severity of these incidents was increased by the elderly, rural customers' lack of knowledge about digital banking, and the educated customers' careless attitude. Although banks are working to improve their banking software and inform consumers on how to avoid phishing and data breaches, hackers are still finding new ways to get around them. The number of wire transfer beaches has increased dramatically recently, tricking lenders and their customers alike. There are instances where fraudsters open bank accounts to perpetrate fraud. In these situations, consumers falsify their name, address, and identity documentation, and the bank's verification system is far from up to date.

CONCLUSION-

The stability of the Indian financial system is greatly impacted by bank fraud. Insufficient efforts to prevent and detect fraud led to a rise in bad loans from banks, which hurt economic growth. Detecting fraud is a top priority for banks since it can take many different forms and be committed directly or indirectly by a variety of individuals. Artificial intelligence, forensic science, and scientific checks and measurements make it simple to identify fraud and stop significant losses for banks, clients, other stakeholders, and the economy. Trained professionals can be employed and positioned in various financial system positions to introduce strong mechanisms into governance. The interface between several banks can improve banking operations' transparency and make detection easier.

References:

[1] ‘Vaishnav Shukla, ‘Bank frauds’ (2018) Supremo Amicus accessed 5 Sept. 2024.

[2] Prudhivi Renuka Sai, ‘Vijay Mallya and Consortium of Banks: A Detailed Study’ (2023) Indian J. Integrated Rsch L. accessed 8 Sept. 2024.

[3] Dr. Sushil Pande & Mr. Ved Prakash, ‘Case Study on Scam in Indian Banking Industry (Nirav Modi)’ Pramana Research Journal, ISSN 2249-2976 accessed 8 Sept. 2024.