TAMIL NADU NATIONAL LAW SCHOOL, TIRUCHIRAPPALLI

BANKING LAW PROJECT

TOPIC:- Is Fragile Regulatory System leading to Banking Scams in India

Guided by

Mohammed Azaad

Faculty of Banking Law

SubmittedBy-

Preyashi Shrivastava

BA0140044

1
 TABLE OF CONTENTS

DECLARATION ............................................................................................................................ 3
ACKNOWLEDGEMENT .............................................................................................................. 4
INDEX OF AUTHORITIES........................................................................................................... 5
CHAPTER-1 ................................................................................................................................... 7
INTRODUCTION ....................................................................................................................... 7
DEFINITION OF BANKING FRAUD .................................................................................. 8
Failure of committee framed to control banking frauds .......................................................... 9
CHAPTER-2 ................................................................................................................................... 9
BIGGEST BANKING SCAMS OF INDIA ............................................................................. 10
1. IPO Scam........................................................................................................................ 10
2. Harshad Mehta Scam ..................................................................................................... 11
3. Ketan Parekh scam ......................................................................................................... 11
4. Vijay Mallaya Scam ....................................................................................................... 12
5. Nirav Modi scam ............................................................................................................ 12
CHAPTER-3 ................................................................................................................................. 14
INSTITUTIONAL FRAMEWORK EXISTING IN INDIA FOR CURBING BANKING
FRAUDS ................................................................................................................................... 14
1. Negotiable Instrument Act, 1881 ................................................................................... 14
2. DRT Act, 1993 and SARFESI Act, 2002....................................................................... 15
SARFAESI Act, 2002............................................................................................................ 16
3. Prevention of Money Laundering Act, 2002 .................................................................. 16
4. Payment and Settlement Scheme Act, 2007................................................................... 17
5. Banking Ombudsman Scheme ....................................................................................... 18
CHAPTER-4 ................................................................................................................................. 20
CRITICAL ANALYSIS OF INDIAN BANKING ACTS IN RELATION TO CURBING OF
FRAUDS ................................................................................................................................... 20
CHAPTER-5 ................................................................................................................................. 23

2
 CONCLUSION AND SUGGESTIONS ................................................................................... 23

DECLARATION

I Preyashi Shrivastava hereby declare that the work entitled “Is Fragile Regulatory System
leading to Banking Scams in India” is my original work. I have not copied from any other
student’s work or from any other source except quotation and summaries which have been duly
acknowledged.

DATE:02.11.2018 SIGNATURE:

3
 ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my teacher Mr

Mohammed Azaad.who gave me the golden opportunity to do this wonderful project on the topic
“Is Fragile Regulatory System leading to Banking Scams in India”, which also helped me in
doing a lot of Research and I came to know about so many new things I am really thankful to
them.

Secondly I would also like to thank my parents and friends who helped me a lot in
finalizing this project within the limited time frame.

4
 INDEX OF AUTHORITIES

Cases

Allahabad Bank v. Deepak Kumar Bhole, 1997 ISJ (Banking) 337 SC....................................... 11
Bank of India v Ketan Parekh & Ors., S.L.P.(C) No.7744 of 2006……………………………..11
Harshad S. Mehta v Central Bureau of Investigation, 1998 (5) BomCR 783………………… ..11
National Securities Depository Ltd V SEBI, Civil Appeal No. 5173 OF 2006…………………10

Rajinder Steels Ltd. v. U.O.I., 2000 Cri LJ 625 (Del) .................................................................. 13

Bank of India v. Vijay Ramniklal Kapadia and Others, AIR 1997 Guj…………………………15

Statutes

The Banking Regulation Act, 1949 ................................................................................................ 7

The Federal Bank law Act, 1884………………………………………………………………20

The Frauds Act,2006…………………………………………………………………………...20

The Indian Contract Act, 1872........................................................................................................ 7

The Indian Penal Code, 1860 .......................................................................................................... 7
The Banking Ombudsman Scheme, 2006 ..................................................................................... 15
The Prevention of Money Laundering Act, 2002 ......................................................................... 14
The Reserve Bank of India Act, 1934 ........................................................................................... 15
The SARFAESI Act, 2002 ............................................................................................................ 13

Online sources

1. Sujata Bali, Banking frauds in India _ emerging trends and legal challenges in 21st century,
ch-1, http://shodhganga.inflibnet.ac.in/handle/10603/129054 .................................................... 8
2. The Fugitive Economic Offenders Bill, 2018, http://www.prsindia.org/billtrack/the-fugitive-
economic-offenders-bill-2018-5166/ ........................................................................................ 17

5
Dictionary

Bryan A. Gamer (ed.-in-chief), Black's Law Dictionary 141 (West Group, Minn., 7th edn., 1999,
5 Re. 2002) .................................................................................................................................. 8

Newspaper Article

1. Indrani Barpujari, Facilitating Access or Monopoly: Patent Pools at the Interface of Patents
and Competition Regimes, 15 JIPR 345-356 (2010) ................................................................... 1
2. Lekha Rattanani, Securities scam: Harshad Mehta throws banking system, stock-markets into
turmoil, India today, May 31, 1992, https://www.indiatoday.in/magazine/cover-
story/story/19920531-securities-scam-harshad-mehta-throws-banking-system-stock-markets-
into-turmoil-766377-2013-06-14 .............................................................................................. 10
3. N Sunderesha Subramaniam, The Scam that changed the India’s primary market, Business
Standard, August 2, 2016 ............................................................................................................ 9
4. Vijay Mallya loses over Rs 10,000 crore UK lawsuit filed by Indian Banks, times of India,
May 8, 2018,
http://timesofindia.indiatimes.com/articleshow/64082772.cms?utm_source=contentofinterest&
utm_medium=text&utm_cam ................................................................................................... 10
5. Rohan Abraham, A SWIFT autopsy : How Nirav Modi defrauded PNB, The Hindu, Feb 24,
2018, https://www.thehindu.com/news/national/a-swift-autopsy-how-nirav-modi-defrauded-
pnb/article22844201.ece ............................................................................................................... 11

6
 CHAPTER-1

INTRODUCTION
The banking system of any country plays a major role in holding the savings of the people. When

people earn money they save some amount of it in the bank for their future. When these amounts

are saved in the bank by the larger number of the people, it becomes a huge amount in the hands

of the bank. So instead of keeping all that account at a time, it also lends loan to the people

which they have to repay with interest in due course of time. Thus this interest taken from people

is actually the profit of the bank. When people do not repay their loan then it results in non-

performing assets which cause huge loss to the bank.

Banking system, after nationalization in 1969 and LPG in 1991 has undergone a numerous

changes in lieu of technological advancement. The Banking Regulation Act, 1949 defines

banking as the “accepting the money from the public for the purpose of investment and

depositing and the amount collected is repayable on demand by means of instrument like

cheques, draft, order or otherwise.”1 The services which were earlier limited only to lending and

borrowing is now extended to various other services called as core banking services, Automatic

teller machine, credit cards, Internet banking, e cheques , SWIFT, NEFT etc. but at the same

time technological advancement also resulted in greater frauds which is happening every minute

taking advantage of lacunas prevailing in system and procedures. Our legislations are still not

equipped to deal with the technological advancement.

1
The Banking Regulation Act, 1949, Section 5(b).

7
Definition Of Banking Fraud

The basic Indian penal legislation, Indian Penal code,1860 is silent upon the definition of the

word ‘fraud’. They simply talks about fraudulently2, dishonestly3, cheating4 in the provisions but

not the fraud as such. The Indian Contract Act, 1872 however defines fraud as to any act which

is done with the intention of deceiving the other party.5

If more precisely observed the definition of banking fraud then it can be construed that it is

mainly consist of two terms- “banking” and “Fraud”. The word banking is already been defined

as including the core function of the bank like depositing, reinvestment, lending etc. and Fraud in

general parlance or with statutory provision in Contract Act can be defined as an act of deceiving

someone. Thus banking fraud can be classified as “The act of deceiving someone in the course of

performing core function of the bank.” Traditionally its scope was limited but now by means of

technological advancement its scope has been increased and now can be done either via

instruments like Cheques, negotiable instrument, drafts etc. or through internet by means of

SWIFT, NEFT or by disclosing secret information.6

Legally, according to black law dictionary banking frauds are defined as “The criminal offense of

knowingly executing or attempting to execute, a scheme or artifice to defraud a financial

institution or to obtain property owned by or under the control of a financial institution, by

means of false or fraudulent pretenses, representations, or promises.” 7

2
The Indian Penal Code, 1860, Section 25
3
Id, Section 24
4
Id, Section 415
5
The Indian Contract Act, 1872, Section 17.
6
Sujata Bali, Banking frauds in India _ emerging trends and legal challenges in 21st century, ch-1,
http://shodhganga.inflibnet.ac.in/handle/10603/129054.
7
Bryan A. Gamer (ed.-in-chief), Black's Law Dictionary 141 (West Group, Minn., 7 th edn., 1999, 5 Re. 2002).

8
Failure of committee framed to control banking frauds

The banking frauds were rampantly increasing therefore “Committee on Legal Aspect of Bank

Fraud” was formed under the chairmanship of N.L. Mitra, which submitted its report to RBI in

2001 with certain suggestion in order to reduce these banking frauds. The major suggestion put

forth by them in the report was to make amendments in Criminal Statutes like Indian Penal

Code,1860, Indian Evidence Act, 1872 and Code of Criminal procedure, 1973 by incorporating

the clear definition of frauds so as to also include banking fraud within its purview as this is

matter of both public and private concern. After incorporating the proper definition of fraud then

punitive measure is to be decided according to the gravity of the crime but the proposed measure

are not yet incorporated.

Therefore in order to stop these frauds there is dire need to made proposed amendments in the

mentioned legislation. Also the biggest banking frauds committed in India are to be looked upon

in order to nature, pattern and other loopholes existing in the legislation, of which advantage is

taken by the scamsters.

9
 CHAPTER-2

BIGGEST BANKING SCAMS OF INDIA

It has almost been seventy years but still India is developing country and not able to fulfill the

guidelines issued to them for providing employment and remove poverty under the directive

principles. One of the reason for not fulfilling these guidelines could be these banking scams as

they cause huge laws to the government. The Biggest banking scams taken place in India are as

follows:-

1. IPO Scam8:- This scam has taken place in yes bank with the involvement of directors,

promoters and intermediaries manipulating initial public offers. From the year 20013 to

2005, around twenty one IPO were manipulated. This scam had been made possible

because at that time mostly procedure was done in demat form. Application having

money value below RS.50,000 does not require PAN Card and above that also, it can be

excused as sometime it get missed in transit which makes cross checking of the duplicate

applications impossible. Thus this case resulted in putting proper framework of KYC and

stronger internal survellience mechanisms and RBI also imposed fines of 5 lakhs to 20

lakhs on certain banks for violating the principles of Money laundering Act.9

8
National Securities Depository Ltd V SEBI, Civil Appeal No. 5173 OF 2006
9
N Sunderesha Subramaniam, The Scam that changed the India’s primary market, Business Standard, August 2,
2016 02:05 IST

10
 2. Harshad Mehta Scam10:- This scam was considered as the biggest bank of the 20th

century which has shaken the stock market and caused a huge loss to the banking scam.

This scam was made possible due to presence of various loopholes in the banking system.

He has taken advantage of inter bank Ready forward deal wherein he was acting as

intermediary and in the meanwhile used to keep certain amount in his pocket. The money

made is then invested in buying shares of various companies like ACC, Videocon, Sterile

etc due to which he became the prominent stock holder. He traded so much in ACC that

its share value raised from Rs. 200 to 9000. This scam was exposed by the reporter

leading to seventy criminal charges including manipulation of market, illegally raising

the share value etc. against Harshad Mehta. This scam brought many positive changes

like establishment of SEBI, NSE for more transparency in the stock market.11

3. Ketan Parekh Scam12:- This scam was based on pump and dump scheme wherein rates

of the shares are artificially inflated in order to attract the investors and then sell the

cheaper shares at higher rates. The scam started with the help employee of MMCB and

GTB bank as they were issuing pay orders in his favor beyond the limit prescribed by the

RBI. Pay order are the instruments like demand draft. The MMCB bank issued him pay

order of 137 crore which were then given to stock exchange branch of Bank of India. The

bank of India then send the issued pay order to clearing house and generally it was rule

that when t epay order is not return in three days then it got clearance. But in the present

case RBI after 11 days return the pay order and during that period Bank of India

assuming that pay order got cleared, transferred the mentioned amount to the company of

10
Harshad S. Mehta v Central Bureau of Investigation, 1998 (5) BomCR 783
11
Lekha Rattanani, Securities scam: Harshad Mehta throws banking system, stock-markets into turmoil, India today,
May 31, 1992, https://www.indiatoday.in/magazine/cover-story/story/19920531-securities-scam-harshad-mehta-
throws-banking-system-stock-markets-into-turmoil-766377-2013-06-14
12
Bank of India v Ketan Parekh & Ors., S.L.P.(C) No.7744 of 2006

11
 Ketan Parekh. Then pay order also got bounced because MMCB did not participated in

the clearing process and also the MMCB bank were lack of fund. Thus bank of India

suffered a loss of 137 crore. Additionally by pump and dump scheme and circular trading

he also attracted institutional investors so they also suffered a huge loss.13

4. Vijay Mallaya Scam:- One of the major scams in banking sector was done by the Vijay

Mallya, where he had defrauded several banks with the amount to the tune of 12,000

crore. The scam involved lending of big amount to Vijay Mallya to fund Kingfisher

airlines, which he used those advances to buy properties and several teams across the

world. The major concern here is that inspite of being under huge debts several banks lent

him huge amounts based on his influence. When the debts became huge and banks asked

for their repayment and support from government was taken back, he fled from country

without paying debts.14

5. Nirav Modi scam:- The current controversy surrounding the PNB fraud scam highlights

the inefficiency of RBI, the scam concerns Rs. 11,400 crore fraudulent transactions. The

scam has its origin to the issue of Letter of Understand (LOU) in favour of Nirav Modi’s

firms to overseas branches of Indian banks. The LOU issued was never registered on the

bank’s core Banking system, which the fraudulent transaction get unnoticed.

13
MSG, The Ketan Parekh Scam, https://www.managementstudyguide.com/ketan-parekh-scam.htm (last accessed
Oct, 28, 2018, 8.00 PM (N.T.M)).
14
Vijay Mallya loses over Rs 10,000 crore UK lawsuit filed by Indian Banks, times of India, May 8, 2018,
http://timesofindia.indiatimes.com/articleshow/64082772.cms?utm_source=contentofinterest&utm_medium=text&u
tm_cam

12
 The RBI Guidelines mandates that such LOU can be issued for not more than 90 days,

inspite of having such criteria PNB issued LOUs for a period of 1 year, and by not

registering the same with the core banking system made it escaped the radar of

Regulatory bodies. Nothing could have been possible hadn’t there been collusion

between Nirav Modi and the officials of PNB.15

Other than these biggest scams, there are also various frauds happening in bank on daily basis in

relation to deposit account, hypothecation, bill and receipts, lending loan, cheques, frauds

through impersonation, forged signatures, modus operandi etc. Also in the case of “Allahabad

Bank v. Deepak Kumar Bhole16 the Supreme Court said that one of the most serious offences

involving "moral turpitude" would be where a person employed in a banking company dealing

with money of general public, commits forgery and wrongfully withdraws the money which he is

not entitled to withdraw.”

15
Rohan Abraham, A SWIFT autopsy : How Nirav Modi defrauded PNB, The Hindu, Feb 24, 2018,
https://www.thehindu.com/news/national/a-swift-autopsy-how-nirav-modi-defrauded-pnb/article22844201.ece
16
Allahabad Bank v. Deepak Kumar Bhole 1997 ISJ (Banking) 337 SC

13
 CHAPTER-3

INSTITUTIONAL FRAMEWORK EXISTING IN INDIA FOR CURBING BANKING

FRAUDS

There are various banking sector legislations containing provision in relation to curbing of

frauds. But the exponential increase of frauds put the provision of these legislation into question,

Thus in order to point out the loopholes in the existing framework there is a need to go through

these major banking legislation. The major banking legislations are as follows:-

1. Negotiable Instrument Act, 1881:- Section 14 of the mentioned Act defines negotiation as

when the cheque, promissory note or bill of Exchange is transferred to other person so as to

construe the holder.

To be a negotiable instrument, an instrument must be;

(i) In writing (typing, printing, engraving included),

(ii) Signed by maker or drawer (as the case may be),

(iii) Unconditional promise or order (as the case may be),

(iv) To pay a certain sum of money only and nothing

(v) Payable at a certain time,

(vi) Accepted by the drawee, in case of a bill of exchange, and

(vii) Transferable either by mere delivery or by endorsement and delivery.17

In order to curb the banking fraud in relation to negotiable instrument, an amendment is made in

the Act and chapter VIII to deal with the offence was added. Chapter XVII containing Section

138 to 142 can be summarized as follows:-

17
Supra note 6, Ch V.

14
 i. It extended the definition of the cheques to include e-cheques and if they are bounced due

to insufficiency of funds, then it would be called as offence and also dishonor of cheques

would be covered within offence.

ii. The court also empowered to try cases as soon as possible within six months of filing of

complaint.

iii. It also brought certain procedural changes, as to given fixed period to making the

payment, filing of complaint etc.

iv. The offence within this Act also made compoundable.

In the case of Rajinder Steels Ltd. v. Union of India18, the constitutional validity of Chapter

XVII was challenged and the Delhi High Court upheld the provision and stated that these

provisions have been incorporated in the larger public interest, and there are inbuilt

safeguards such as validity period of six months of receipt of information of dishonour, and

period of further fifteen days to make the payment, for the sake of honest drawers. Also,

Parliament has competence to enact Section 138 to 142 by virtue of Entry 45 and 46 of List I

of the Seventh Schedule of the Constitution of India, 1950.

2. DRT Act, 1993 and SARFESI Act, 2002:-

DRT Act, 1993 came into force to provide speedy trial in relation to recovery of debt due to

bank. “The Act defines 'debt' as any liability (inclusive of interest) which is alleged as due from

any person by a bank or a financial institutions during the course of any business activity

undertaken by the bank or the financial institutions or the consortium under any law for the time

being in force, in cash or otherwise, whether secured or unsecured or whether payable under

18
Rajinder Steels Ltd. v. U.O.I., 2000 Cri LJ 625 (Del)

15
adecree or order of any civil court or otherwise, and subsisting on and legally recoverable on, the

date of application.”19 Thus according to the present in order to recover the amount , it should

necessarily fall within the definition of debt.

“In the case of Bank of India v. Vijay Ramniklal Kapadia and Others20 the Gujarat, High Court

explained that any liability due from any person by a bank during the course of any business

activity undertaken by the Bank will constitute a 'debt'. Therefore, a fraud committed by an

employee of the bank cannot or should not be construed a 'debt'.”

SARFAESI Act, 2002:- This Act brought new security measures and procedure to recover the

debt due to the bank but the mentioned does not apply in derogation to any other existing Act.21

The Act, provides penalties for default in filing under Sec. 23, the particulars of every transaction

of any securitization or reconstruction of assets and in other offences. Thus it created a strong

debt recovery mechanism against banking fraud happening in relation to loans and

hypothecation.

These Act though provide strong mechanism to recover debt and also very relevant in case of

loan and hypothecation amount due but at the same time, they are only concerned with due debt,

not to make good loss of the bank for any other reason. Therefore do not solve the problem

related to banking fraud to much extent.

3. Prevention of Money Laundering Act, 2002:-

The Act defines the offence of money laundering and prescribes punishment for it 22, provides for

attachment and confiscation of property, and for adjudicating authorities23, makes it obligatory
19
The Recovery of Debts due to Banks and Financial Institutions Act, 1993, Section 2(g)
20
Bank of India v. Vijay Ramniklal Kapadia and Others, AIR 1997 Guj. 75 at p.76
21
The SARFAESI Act, 2002, Preamble.

16
for the banking companies, financial institutions and intermediaries to maintain records and

furnish information, confers power of survey, seizure, search, arrest of persons, retention of

property/records etc.24, establishes Appellate Tribunal (from where the appeal lies to the High

Court), Special Courts25, and authorities and provides for reciprocal arrangement with foreign

countries for assistance in certain matters and procedure for attachment and confiscation of

property, while making some provisions of punishment in case of vexatious search, false

information etc26. The Act also prescribes for rigorous imprisonment for term not less than three

years, extendable up to seven years and fine up to five lakh rupees and if the proceeds of crime

involved in money laundering.” The procedure of this Act is made in consultation with the RBI.

The prevention of Money Laundering Act, 2011 also provided stricter regime in relation to

compliance with the prescribed provision otherwise would lead to heavy penalty.27

4. Payment and Settlement Scheme Act, 2007:- With the advent of technology, this act

provides the guidelines in order to circumvent those technological scams in relation to online

transactions etc. The mentioned gave huge power in the hands of the RBI as in carry out the

enquiry, to audit, to inspect, give directions Section 24 and 25 of the Act provides for stricter

penalties as mentioned in any other Acts before. It impose penalty double of the amount

involved in electronic misuse. With the safer provision of this Act, RBI directs the bank to

leave the traditional method of lending and deposition of money, and go for electronic

medium like by way of NEFT, RTGS etc. Though shifting from traditional method of

documented form to newer approach of electronic medium may curb the offline scamsters for

22
The Prevention of Money Laundering Act, 2002, Section 3 and 4 respectively.
23
Id, Section 5-11.
24
Id, section 12-15
25
Id, section 43-47.
26
Id, section 62-75
27
Id, section 4.

17
 committing but at the same time new regime would attract new scamsters therefore now the

law should be framed keeping in the mind the new scamsters.

5. Banking Ombudsman Scheme:- The Banking Ombudsman Scheme was first introduced by

the Reserve Bank of India in 1995 for banking customers in India, in exercise of the powers

conferred on it by Section 35A of the Banking Regulation Act, 1949. 28Banking Ombudsman

Scheme covered new areas such as credit card complaints, deficiencies in providing

promised services even by banks sales agents, levying service charges without prior notice to

customer and non-adherence to the fair practices code as adopted by individual banks.” With

the amendment in 2007 and 2009 it brought out more effective administration in order to

resolve the customer complaint with the satisfaction of the customer.29

There is limitation on the power of the Banking Ombudsman with reference to the amount of

award. The Banking Ombudsman cannot pass an award directing payment of an amount

greater than actual loss suffered by the complainant as a direct consequence of the act of

omission or commission of the bank or ten lakh rupees whichever is lower.30

This scheme also includes preventive measures against banking fraud in its ambit. Thus

indirectly, after August 2009, a customer affected by banking fraud has a limited yet viable

option to approach Banking Ombudsman for redressal of his grievances caused by banking

frauds.31

Other than the above mentioned legislations there are also other Acts like Prevention of

Corruption Act of 1947, the Consumer Protection Act of 1986, The India Penal Code, 1860

and the most recent of these, the Information Technology Act of 2000 which also brought

28
The Reserve Bank of India Act, 1934: Section 35A
29
RBI Press Release: 2005-2006/783 dated December 26, 2005, para 1 and 2
30
The Banking Ombudsman Scheme, 2006, para 12(5).
31
Id, para 12(9).

18
 banking frauds within its purview by including certain provision such as circumvention of

technology, unfair trade practices, corruption, forgery, cheating etc.32

32
Supra note 14.

19
 CHAPTER-4

CRITICAL ANALYSIS OF INDIAN BANKING ACTS IN RELATION TO CURBING

OF FRAUDS

The Banking Sector though being so largest and almost the part of everybody life but still

there is no specific legislation dealing directly with the banking frauds. There are five major

legislation dealing with the Banking sector but nowhere the definition of Banking fraud is

defined. Even the definition of fraud is also not yet defined however being suggested by N.L

Mitra committee long back. The definition of the same is however defined in other

legislation like Section 1344 of the federal Bank fraud Act, 1984 defines bank fraud as

follows

Whoever knowingly executes, or attempts to execute, a scheme or artifice--

(1) to defraud a financial institution; or

(2) to obtain any of the moneys, funds, credits, assets, securities or other property owned by,

or under the custody or control of, a financial institution, by means of false or fraudulent

pretenses, representations, or promises; shall be fined not more than $1,000,000 or

imprisoned not more than 30 years, or both.

Similarly section 1 of UK Fraud Act, 2006 also defines fraud. Thus until the term is properly

defined it is very difficult to constrain its scope and prescribe the liabilities. Also if we see the

recent crime committed in India i.e. of Nirav Modi, we can evidence the same pattern followed

as the same being followed in 20th century by Ketan Parekh. The only difference was, in Ketan

Parekh scam there was issuance of pay order and here it is LOU. So there is no stringent law

dealing with the issuance of these document. Even RBI if issued certain guidelines, that is also

20
not being followed. Also till now there is no laws dealing with the offenders who after

committing frauds were running to the other countries and this is the reason people like Vijay

Mallaya, Nirav modi and Mehul Choksi has committed fraud in India and taken refuge in other

countries. Recently only a bill is passed named Fugitive Economic Offenders Bill wherein if a

person committed a fraud involving an amount more than 100 crore then that person would be

declared economic fugitive offender and according money laundering Act, 2002 all his property

would be confiscated and within six weeks he has to appear before the special court formed

under PMA, 2002.33

RBI (Master Circular No. 229, July 2012) has initiated that all the frauds involving an

aggregate of Rs.0.1 million and above should be compulsorily reported. All frauds below

Rs.0.1 million are also to be reported to the RBI in consolidated form, category wise. Then

also many frauds remain unreported. Also RBI has instructed the banks to consider e-banking

frauds as operational risks and obtain insurance but the banks takes no notice of the

instructions and try to cut costs on security at the cost of the customers. Also In India

recovering of fraud amount is almost negligible and private sector banks like ICCI, HDFC

are major victim of it.34

Also after shifting from traditional approach to electronic there is also increased new pattern

of crime done via digitally.

Thus the key facts responsible for commission for banking fraud in India are as follows35:-

1. Involvement of the banking staff either independently or with the involvement with the

outsiders.

33
The Fugitive Economic Offenders Bill, 2018, http://www.prsindia.org/billtrack/the-fugitive-economic-offenders-
bill-2018-5166/, (last visited Nov 1, 2018, 8.30 PM (N.T.M.)).
34
Supra note 6, Ch VIII
35
Id

21
 2. Lapse on the part of the bank staff to strictly follow the provisions and guidelines

specified, ·

3. External elements enabling frauds on banks by forgeries or manipulations of cheques,

drafts and other instruments, and ·

4. Increasing involvement of the bureaucrats’, senior bank officials, politicians in power to

swindle the banks by getting the rules bent and ignoring the regulations.

22
 CHAPTER-5

CONCLUSION AND SUGGESTIONS

India is the land of various banking scam and most of these banks follows the same patterns like

forging of documents, misappropriation, artificial creating market, fake issuance of negotiable

instruments with no proper verification , corruption etc. There are various legislation dealing

with the banking system but none of the Acts provided effective remedy concerning with the

banking fraud. The major reason for this lacuna is that none of the legislation dealing with the

banking sector defines banking fraud. Even most of the penal legislation are silent on the

definition of fraud. When the definition of the fraud is itself not clear then it is very difficult to

define the scope of the legislations. RBI though vested with the monitoring and supervisory

power but still not vested with the punitive power. The major it can do is the cancellation of the

license of the bank. Though many changes by way of master circular were proposed by the RBI

and some of them are still not followed by various banks. RBI encourages the bank to shift

towards the electronic medium in order to provide more security by way of providing stringent

passwords. But the above mentioned electronic medium has its own problem like data theft,

tampering of data, hacking etc.

Though it is impossible to stop all banking frauds but stringent legislations especially dealing

with the banking frauds are to be made with proper definition. Punitive powers also to be vested

in the hands of the RBI.

23
Suggesstions

1. there is dire need to give definition to these terms such definitions will serve the dual

purpose of first acknowledgment of Banking Fraud as a legislatively recognized distinct

offence and secondly of directly hitting at the menace of Banking Frauds through

provision of greater punishment.

2. While recognizing Banking Frauds as a distinct offence, care must be taken to clearly

define it as a socio-economic offence so that the benefits of plea-bargaining under

Chapter XXIA of the Code of Criminal Procedure, 1973 may not be extended to the

perpetrators of the offence of Banking Fraud.

3. If the Reserve Bank of India finds the increasing number of banks indispensable, it must

be ready to take up a bigger and stricter regulatory role in banks and shun away its

present take on Banking Frauds as shown by its annual Master Circular whereby it holds

the banks primarily responsible with respect to frauds in banks and restricts its own role

to laying down of ex post facto course of action.

4. Legislation should clear the intention in relation to Section 138 of the Negotiable

Instrument Act because creating the liability in case of bouncing of cheques, shows the

legislative intent of making it criminal offence but the judiciary gives the contradictory

views on this.

5. Prevention is better than cure, therefore priorly steps to be taken in order to stop banking

frauds like the requirement of identity proof needs to be made more precise. Biometric

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 recognition system or use of ubiquitous Aadhar Card as a bank-customer's identity proof

will definitely prove helpful in minimizing the possibilities of Banking Frauds,

6. The RBI as the 'Supervisor' of the Indian banking sector had taken up diverse roles in the

central banking, promotional, development and regulatory activities. This multiplicity of

role-playing by the RBI causes inefficiency in dealing with critical emerging issue of

Banking Fraud.

7. Now the banking frauds also involves the element of various securities related issues

therefore SEBI as being the regulator of security market they should also step into the

matter of banking fraud.

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 REFERENCES

PRIMARY SOURCES

Cases

Allahabad Bank v. Deepak Kumar Bhole, 1997 ISJ (Banking) 337

Bank of India v Ketan Parekh & Ors., S.L.P.(C) No.7744 of 2006
Harshad S. Mehta v Central Bureau of Investigation, 1998 (5) BomCR 783

National Securities Depository Ltd V SEBI, Civil Appeal No. 5173 OF 2006

Rajinder Steels Ltd. v. U.O.I., 2000 Cri LJ 6 Del

Bank of India v. Vijay Ramniklal Kapadia and Others, AIR 1997 Guj

Statutes

The Banking Regulation Act, 1949

The Federal Bank law Act, 1884

The Frauds Act,2006

The Indian Contract Act, 1872

The Indian Penal Code, 1860
The Banking Ombudsman Scheme, 2006
The Prevention of Money Laundering Act, 2002
The Reserve Bank of India Act, 1934
The SARFAESI Act, 2002

SECONDARY SOURCES

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Articles referred

1. S. Gayathri & T. Mangaiyarkarasi, A Critical Analysis of the Punjab National Bank Scam
and Its Implication, 119 IJPAM 14853,14866 (2018)..
2. Dr. S Venkata Ramana & Dr. S Gopi Krishna, A study on impact of fraud in Indian
banking sector, 2 IJARD 544,547 (2017)
3. Rajrishi Singhal, Why banking frauds are so frequent at PSU banks, Livemint, (Mar 9,
2018, 02.00 A.M.).
4. Hemant Singh, Which are the biggest Banking Scams of India?, Jagran Josh (Jul 10,
2018, 06.49 P.M.)
5. The top banking frauds of all time, News 18, Dec 29, 2010,
https://www.news18.com/news/business/the-top-banking-frauds-of-all-time-356164.html
6. Here are the biggest banking scams witnessed in India, ETNOWNEWS, Apr,25,2018,
https://www.timesnownews.com/businesseconomy/companies/article/bank-frauds-nirav-
modi-fraud-rs-11400-crore-top-financial-institution-scams-in-india-vijay-mallya-
winsome-diamonds/199024

Newspaper Article

1. Indrani Barpujari, Facilitating Access or Monopoly: Patent Pools at the Interface of Patents
and Competition Regimes, 15 JIPR 345-356 (2010)
2. Lekha Rattanani, Securities scam: Harshad Mehta throws banking system, stock-markets into
turmoil, India today, May 31, 1992, https://www.indiatoday.in/magazine/cover-
story/story/19920531-securities-scam-harshad-mehta-throws-banking-system-stock-markets-
into-turmoil-766377-2013-06-14
3. N Sunderesha Subramaniam, The Scam that changed the India’s primary market, Business
Standard, August 2, 2016
4. Vijay Mallya loses over Rs 10,000 crore UK lawsuit filed by Indian Banks, times of India,
May 8, 2018,
http://timesofindia.indiatimes.com/articleshow/64082772.cms?utm_source=contentofinterest&
utm_medium=text&utm_cam

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5. Rohan Abraham, A SWIFT autopsy : How Nirav Modi defrauded PNB, The Hindu, Feb 24,
2018, https://www.thehindu.com/news/national/a-swift-autopsy-how-nirav-modi-defrauded-
pnb/article22844201.ece
1.

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