Bank Fraud and Its Solutions

Introduction

Banks are considered as fundamental hardware for the Indian economy. This
specific part has been hugely developing in the ongoing years after the
nationalization of Banks in 1969 and the advancement of economy in
1991.Bank fraud is the utilization of conceivably illicit intends to acquire cash,
resources, or other property possessed or held by a monetary establishment, or
to get cash from investors by falsely acting like a bank or other budgetary
institution. In numerous examples, bank fraud is a criminal offense. While the
particular components of specific saving money fraud laws fluctuate contingent
upon locales, the term bank fraud applies to activities that utilize a plan or
ingenuity, instead of bank burglary or robbery. Thus, bank fraud is now and
again considered a white collar crime.

The banking and financial services, government and public administration, and
manufacturing industries were the most represented sectors in the fraud cases
that were examined by Association of Certified Fraud Examiners while
preparing the Global Fraud Study 2016. The frequency, complexity type and
the money involved in banking frauds have increased manifold resulting in a
very serious cause of concern for regulators, such as RBI. In the last three
years, public sector banks (PSBs) in India alone have lost close to Rs. 22,700
Crores on account of banking frauds. This amount has been increasing with
each passing year. In most cases the staff of the banks involved and in some
cases it has been because of technological attempts by outsiders.1

Banking has been defined under section 5(b) of the Banking Regulations Act
1949. According to it banking means accepting, for the purpose of lending or
investment, of deposits of money from the public, repayable on demand or
otherwise. To understand the concept of Bank Fraud, we need to understand
the concept of fraud and the various types of frauds and the ways to detect the
same and the prevention of the same.

Historical Background

A true history of fraud would have to start in 300 B.C., when a Greek merchant
name Hegestratos took out a large insurance policy known as bottomry.

1
https://www.ijbmi.org/papers/Vol(5)7/version-2/A05720109.pdf
Basically, the merchant borrows money and agrees to pay it back with interest
when the cargo, in this case corn, is delivered. If the loan is not paid back,
the lender can acquire the boat and its cargo.

Hegestratos planned to sink his empty boat, keep the loan and sell the corn. It
didn't work out, and he drowned trying to escape his crew and passengers
when they caught him in the act. This is the first recorded incident we know of,
but it's safe to assume that fraud has been around since the dawn of
commerce.2

In the earlier times, the frauds were limited to fake currency circulation (some
of which entered the banking system), forged cheques (again a case of duplicity
and printing of fake security items like cheques, Demand drafts and Pay
Orders) and advancing loans to known parties without checking the repayment
ability and cash earning proposition in the loan proposal(s). With the advent of
technology, cybercrime has become the new menace of the day. Bankers today
have to delve with newer terms with the passage of time. Hawala transactions
of yester-years have been replaced by benami accounts wherein the account
holder has no clue that he/she has a bank account and if that fact is known,
the transactions (volume and nature of the same) are absolutely unknown to
the account holder.3

Banking sector frauds have been in existence for centuries, with the earliest
known frauds pertaining to insider trading, stock manipulation, accounting
irregularity/ inflated assists etc. Over the years, frauds in the sector have
become more sophisticated and have extended to technology based services
offered to customers. The Indian banking sector too is experiencing the pain
due to increase in fraud incidents with 93 percent of our survey respondents
indicating that fraud has grown over the last two years. A majority of survey
respondents indicated that they have experienced more than 50 fraud incidents
in the retail banking segment in the last two years (average fraud loss of
around INR 10 lakh per incident) and an average of 10 fraud incidents in the
non-retail segment (average loss amount close to INR 2 crore per incident).4

Over 23,000 cases of fraud involving a whopping Rs 1 lakh crore have been
reported in the past five years in various banks, according to the Reserve Bank
of India (RBI). A total of 5,152 cases of fraud, up from over 5,000 cases in
2016-17, were reported in banks from April, 2017, to March 1, 2018. The

2
https://www.investopedia.com/articles/financial-theory/09/history-of-fraud.asp
3
https://www.ijbmi.org/papers/Vol(5)7/version-2/A05720109.pdf
4
Deloitte India Banking Fraud Survey Edition II April 2015
highest ever amount of Rs 28,459 crore is said to have been involved in these
cases of fraud reported from April, 2017, to March 1, 2018. In 2016-17, banks
had reported 5,076 cases of fraud involving Rs 23,933 crore. From 2013 to
March 1, 2018, as many as 23,866 cases of fraud, of Rs 1 lakh or above in
each case, were reported. A total of Rs 1,00,718 crore was involved in all the
cases put together. Giving the break-up, the RBI says 4,693 such cases
(involving Rs 18,698 crore) and 4,639 cases (involving Rs 19,455 crore) were
reported in 2015-16 and 2014-15 respectively. In 2013-14, banks reported
4,306 cases of fraud, involving Rs 10,170 crore.5

Meaning and Concept of Term Banking Fraud

The term 'Banking Fraud' or 'bank fraud' as it is used interchangeably, has

received very few attempts at its definition, largely due to the reason that
Banking Frauds as such have not been recognized by none of the market
regulators, legislators or experts of the field as a distinct and imminent
problem. This casual attitude towards the problem of Banking Fraud has
deprived the issue of Banking Fraud of the due attention of theorists as well. In
the Black's Law Dictionary, the meaning the term of 'bank fraud' is adopted
from an American Legislation 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 (USCA§ 1344)." 6

The Indian legislature has attempted the definition of ‘Bank fraud' while
proposing the Criminal Law (Second Amendment) Bill, 1995 in the Lok Sabha
for creation of 'Bank Frauds' as a separate offence under the Indian Penal
Code, 1860, as follows,

"Whoever dishonestly or fraudulently (a) removes or conceals or transfers or

causes to be transferred any property in his custody or control which is subject
to any form of security interest created in favour of any bank without the
express or implied consent or concurrence of such banks or he furnishes any
statement which is false in any material particular to any bank concerning any
property which is in his custody or control and which is either subject to any
form or security interest in favour of any bank or which is offered by him to

5
https://www.indiatoday.in/business/story/over-23000-bank-fraud-cases-involving-rs-1-lakh-crore-in-5-yrs-rbi-
1224794-2018-05-02
6
Bryan A. Gamer (ed.-in-chief), Black's Law Dictionary 141 (West Group, Minn., 7*edn., 1999, 5* Re. 2002).
any bank to be made subject to any security interest in favour of the bank,
shall be punished with imprisonment of either description which may extend to
two years or with fine or both".

This proposed legislative definition of 'bank fraud' dealt solely with the frauds
with respect to security interest, which is definitely a serious fraud causing
huge losses to banks. However, this proposed definition lacked the
comprehensiveness or even the scope for inclusion of various dimensions of
Banking Frauds which is desired of an evolving definition. The term 'Banking
Fraud' contains two elements namely ‘Banking' and 'fraud'. Beginning with
simple money-changing as per it’s the earliest traced history, the term
'banking' has today found synonymy with five core functions of accepting
deposits, lending, investment, repayment and facilitating of withdrawal of
money.7 And in common parlance, 'fraud' is a dishonest act done with the
intention of gaining benefit by causing loss to others. Legally speaking, 'fraud'
refers to a false statement of fact by a person or his agent who himself doesn't
believe the statement to be true, made with an intention of deceiving another
party, and inducing him to enter into a contract on that basis.'8 Thus 'fraud' is
a very wide term which includes any behaviour by which one person intends to
gain a dishonest advantage over another. It signifies not only act of commission
but also an act of omission which is intended to cause wrongful gain to one
person and/or wrongful loss to another.

Accordingly 'Banking fraud' is a broad term used to signify all types of frauds
committed in a banking system. It may be committed with accounts, negotiable
instruments, loans, securities or any other banking service. Again, it may be
pulled off by customer, employee, outsider or by the bank itself, or by two or
more of parties in connivance with each other. A common term to describe all
such frauds is 'Banking Fraud'. Banking frauds may be committed by way of
concealment, embezzlement, breach of trust, theft, cheating, forgery,
falsification of accounts, conspiracy etc.

Form of Banking Frauds

It is difficult to clarify the term 'banking fraud', in light of the fact that no
statutory definition is accessible which has been instituted as Banking fraud'.
Banking fraud is an idea which is a result of business exchanges where either
fraudulently or insincerely, improper gain to one gathering and additionally
illegitimate misfortune to another gathering happens. It appears that in light of

7
See, the statutory definition of "banking' under the Banking Regulation Act, 1949, Section 5 (b).
8
See, The Contract Act, 1872, Section 17. "Fraud" defined.
fraudulent act, the fraudsters may mean to increase undue favorable position
to himself or to offer advantage to someone else. Generally talking, banking
frauds connote to the basic man as misappropriation, embezzlement,
manipulations, scams, cheating, frauds etc. In any case, the technology
advancement has changed and extended the ambit of fraud and new kinds of
frauds are accounted for in the banking institutions.

1. THEFT
In Merriam Webster Dictionary 'theft' is defined as 'the act of stealing'
specifically the felonious taking and removing of personal liberty with
intent to deprive the rightful owner of it or an unlawful taking'.9
Oxford Dictionary defines 'theft' as 'the action or crime of stealing'.10
Collins English Dictionary defines 'theft' as the dishonest taking of
property belonging to another person with the intention of depriving
the owner permanently of its possession.11

Chambers 21stCentury Dictionary defines 'theft' as stealing; an act of

stealing someone else's property, with the intention of permanently
depriving them of it.12 As per Chambers Thesaurus, the synonyms for
theft are robbery, thieving, burglary, stealing, pilfering, larceny,
shoplifting, kleptomania, fraud, swindling, embezzlement, purloining
(formal); (colloq) pinching, nicking, swiping, lifting, nobbling.13 Meriam
Webster puts larceny, robbery, stealing and thievery as related to
theft.14

Under the Indian Penal Code, 1860, whoever intending to take

dishonestly any moveable property out of the possession of any
person without that person's consent, moves that property in order to
such taking, is said to commit theft.15

‘Theft' as a wrong is the easiest to commit as it takes least time in its

commission, is not so heavy on conscience as cheating or fraud, but
is the hardest to detect the culprit. Banks deal with the most lucrative
or tempting moveable property i.e. the money. And unlike other

9 www.merriam-webster.com/dictionary/theft.
10 Oxforddictionaries.com/defmition/english/theft.
11 www.collinsdictionary.com/dictionary/english/theft? Showcookiepolicy=true.
12 www.chambers.co.vk/search.php?query=theftetitle=21st.
13 www.chambers.co.vk/search.php?query=theftetitle=21st.
14 www.merriam-webster.com/dictionary/theft.
15
The Indian Penal Code, 1860, See Section. 378.
 moveable properties, it is comparatively much more difficult to trace
money in currency form. Thus, even the tiniest chance to steal money
is a loophole appearing treasure - trove to a thief.

In the clear cases of theft at banks, the perpetrator may be an insider

or outsider. A crooked cashier may personally use the cash due for
deposit, count money short or temporarily embezzle cash. Members of
public or members of staff other than the cashier, can also commit
theft by distracting the cashier generally or by creating emergency
situations.

2. Robbery

To 'rob' means to despoil (person etc.) of or of property by violence,

feloniously plunder (person, place, often of) deprive of what is due.16
Wharton's Law Lexicon defines 'robbery' as the unlawful and forcible
taking from the person of another, of goods or money to any value, by
violence or putting him in fear.17
Under the Indian Penal Code, robbery is defined as an aggravated
form of theft or extortion. It holds that in all robberies there is either
theft or extortion with violence, whether actual or purported. 18 Under
the ambit of banking frauds, 'robbery' is included as it is a wrong
committed against the banking system, resulting into frauds against
the customers. And even in the present times of electronic frauds,
bank robberies still pose a threat in bank premises during
transshipment of currency, at ATM premises, etc.

The Indian Penal Law rigorously punishes robbery committed

generally, and with extended punishment in cases of robberies
committed on the highway between sunset and sunrise,19 bank-
robberies get no specialist treatment under the Indian Penal Code,
1860.

16
The Oxford English Dictionary 1080 (3rd Impression 1974, Oxford University Press, Calcutta).
17
Wharton's Law Lexicon 888 (Universal Law Publishing Co. Pvt. Ltd., Delhi under Special Arrangement with Sweet
Marwell Ltd., UK, 14th edn., Indian Economy Reprint, 2001).
18
The Indian Penal Code, 1860, Section 390; for more details. See infra Chapter IV of the study
19
The Indian Penal Code, 1860, Section 392
 3. Dacoity

'Dacoity' is an offence under the Indian Penal Code, 1860, of

Hindustani origin, the preceding Hindi word being 'dakait’, meaning
gang-robbery.20 The Indian Penal Code covers a robbery committed or
attempted by five or more persons conjointly, under the head 'dacoity'.
Thus, dacoity is an aggravated form of robbery, wherein the minimum
number of participants is five under the Indian law.

A peculiar offence created to meet the law enforcement requirement of

the colony of India by the British 'dacoity' was intended to be
compulsorily punished with harsher sentence of imprisonment for life
or with rigorous imprisonment upto ten years and fine21 to have a
deterrent effect. However, here again, bank-docoity is not a separate
or distinctly punishable offence under the Indian Penal Code, 1860,
which deprives bank-dacoities of double-shielded protection which it
requires to have an effective deterrent effect against possible
perpetrators.

4. Embezzlement

The verb 'embezzle' which is derived from Anglo-french word

'enbesiler' which in turn is derived from old French term 'besillief
which means to maltreat, ravage. To 'embezzle' means to divert
(money etc.) fraudulently to one's own use.22 The Wharton's Law
Lexicon defines 'Embezzlement' as the appropriation to his own use
by a clerk or servant of money, valuable securities or chattels received
by him for and on account of his master or employer. Under the
English law, embezzlement is a felony punishable under the Larceny
Act, 1916. However, embezzlement differs from larceny in the sense
that in the former, the property misappropriated is not at the time in
actual or legal possession of owner, whilst in the later it is... unless

20
The Oxford English Dictionary, 304 (IS^h edn., 1964, Indian Reprint 1968, 3^'' Impression, 1974); See also,
'dacoit' at p.304.
21
The Indian Penal Code, 1860, Section 395. For more details, see infra Chapter IV of this study.
22
The Oxford English Dictionary, 395 (15'^ edn., 1964, Indian Reprint 1968, 3-^d Impression, 1974).
 the offender is a clerk or servant whose business it is to receive money
from his master, he is not guilty of embezzlement.23

Through the experiences in past, the banks take preventive measures

as updated from time to time. These measures include identifying the
bunko with the help of his established traits, making the commission
of embezzlement as difficult as possible by identifying the likely areas'
such as cash section, advances section, deposit accounts, foreign
exchange transactions, clearing department, sundry or nominal
accounts, inter-branch or central account branches, overdrafts and
letters of credit facilities, loan section etc. and make these areas as
secure as possible by regular periodical physical checking, timely
rotation of staff, proper maintenance of accounts, and scrutiny
thereof.

Under the Indian Penal Code, embezzlement can be covered under

numerous heads such as criminal breach of trust, in particular and
under cheating, misappropriation of property, theft et al (generally).

5. Frauds Relating to Deposit Accounts

Accepting of deposits of money from public is one of the primary

functions of banks. In fact, the definition of the banking under the
Banking Regulation Act, 1949 begins with the words 'the accepting, of
deposits of money from public'.24 Depending on the objective/purpose
of account opening, deposit accounts can be of different types. The
most popular kinds of deposit accounts in India are Fixed Deposit
Accounts,25 Savings Bank Accounts, Recurring Deposit or Cumulative
Deposit Accounts and Current Accounts.26 However, many new
products have been launched by different banks, which combine the
features of two or more types of bank accounts such as. Smart
Deposits, Call Deposits, Power Saving Deposits, Automatic Sweep
Deposits, 2-in-l Deposits, Notice Deposits, Loan Account, Joint
Account, Current Account, Saving Account Deposits (CASA), Non
Resident Ordinary Account, Non-Resident (External) Rupee Account,

23
Wharton's Law Lexicon 888 (Universal Law Publishing Co. Pvt. Ltd., Delhi under Special Arrangement with Sweet
Marwell Ltd., UK, 14'^ edn., Indian Economy Reprint, 2001).
24
The Banking Regulation Act, 1949, Section 5 (b).
25
Also known as Term Deposit', 'Bond', or 'Certificates of Deposits' in some countries.
26
Also called 'Checking Account' or 'Demand Deposit'.
 Foreign Currency Non-resident Account, Money Market Deposit
Account, Money Market Mutual Funds Account, etc.
The banking frauds with respect to deposit accounts can take
numerous forms and different possible perpetrators such as
customer, bank employee and/or an outsider crook. Instances of
deposit account frauds would be, opening of a deposit account
without introduction and verification27 (now waived off by RBI) and
using such account for cheque-frauds, fraudulent use of a dormant
account, forged signature on joint accounts, embezzlement of
deposits, operation of a personal bank within a bank by the banker,
manipulation of depositors' pass books.28

In order to have check or to minimize the chances of frauds, different

measures are considered by the banking institutions in all
transactions. Notifications, circulations, directions are issued by the
zonal banking institutions as well as by the Apex Bank to concentrate
on potential areas which are quite susceptible, where the frauds can
be easily committed.

There is plethora of cases where the cheques bearing the forged

signatures of the depositors are presented and the payment is made
by the banks. Such kinds of frauds come to limelight, only when the
customer gets updated passbook. Moreover, problems relating to
specimen signature, introducer, operation of dormant account by
dishonest person, withdrawal of money in collusion with bank
employee, unauthorized withdrawal, misuse of voucher system, bearer
cheques payments are some of the prone areas where the frauds are
regularly and continuously increasing. Moreover, many frauds remain
untraceable because of ignorance or negligence of customer or may be
if the customer is illiterate, where he authorises third person to
operate his account.
When the customer deposits the money, he entrusts it to the banking
institution and its internal mechanism. But, the threat is not only
from outsiders, but sometimes the fraud can be committed by the
employees of banking institutions. The dishonest employee of banks
may transfer the money dishonestly in wrong account or may transfer
such money for any other purpose which is beneficial to him. Salami
27
Indian Overseas Bank v. Industrial Cham Concern IT (1989) 4 SC 334.
28
S.N. Gupta, The Banking Law in Theory and Practice Vol. 1, 139-140 (Universal Law Publishing Company Pvt. Ltd.,
Delhi, 3rd edn., 1999).
 Slicing29 is an example of how the employee by deducting a very
nominal amount can misuse and provide wrongful gain to third
person or to himself. Such kind of errors or intentional acts can be
detected by the reconciliation done by the banking institutions.
However, salami slicing is usually untraceable and undefeated,
particularly in a situation where a bank is having different branches
with huge pending reconciliation work of inter-branch transactions.

6. Frauds Relating to Hypothecation

The most prominent feature of the banking institutions which

differentiates them from other institutions is to provide loan facility.
Loans are classified into two categories i.e. secured and unsecured
loans. There are three cardinal principles for banking institutions to
provide loan facility, namely, safety, liquidity and profitability. Almost
all the banking institutions of the world are following these principles
for sound lending. The bank tries to judge the capacity of the person
taking the loan to return it and his willingness to repay it. The banks
are generally lending funds for short period of time at a specific rate of
interest.37 Moreover, depending on the nature of assets, sometimes
the banks also provide loan for huge amount to the person keeping in
view the salary, income, wages, return, rent, profit, produce, capital,
property, owned commodities, approved security, liquidity, surety,
undertaking etc. The banking institutions on the basis of these visible
securities, try to provide loans to the public at large.

In case of hypothecation, a mere charge is given on the goods for the

amount of debt. But the hypothecation is a kind of security where the
goods remain in the actual physical possession of the person taking
loan. In other words, neither possession nor the ownership passes to
the banks or the lenders. This kind of transaction, known as
hypothecation which is merely created on a letter or instrument called
letter of Hypothecation', which lays down that the goods are at the
order and disposition of the lender (bank) until the debts are clear. In
simple words, hypothecation is basically by its nature, a weak
security because it is only the borrower who binds himself by virtue of

29
'Salami Slicing' enumerates the situation where the employee or official of banking company gradually and
secretly transfers very nominal amounts from the accounts of the customers and deposits it in fictions fraudulent
self-created accounts and earns benefit due to huge collection of money. Recently, the newspapers showed these
kinds of incident of fraudulent nature.
 some agreement with the banking institution. The risk of the banking
institutions, in case of hypothecation would invite two consequences.
Firstly, there is obvious practical consideration that in a situation
when a bank is having very little control over the goods, the
hypothecator will have sufficient opportunity to deal with them
fraudulently. Secondly, another risk involved is when the
hypothecator hides the word ‘hypothecation' from appearing on the
hypothecated goods and subsequently transfers the goods by showing
them as it without hypothecation. In other words, the extraordinary
complexity also invites the risk regarding transactions where the
registration is subject to the condition precedent which must show
about the goods that they are subject to hypothecation. The
intentional act of the second party deliberately trying to avoid the use
of the word 'hypothecation' gives rise to independent responsibility
without any previous onerous liability which will amount to fraud. So
far as, the hypothecation frauds are concerned, they are very common
and the cases can be found in different. Some of the examples of
hypothecation frauds are, unauthorized removal from godowns of
stock or of part thereof; hypothecating large stock of which a huge
part is of inferior quality; godowns claiming to contain hypothecated
goods put on fire, after removal of stock and insurance claimed;
removal of stock in connivance with bank employees; removal of
material by the borrower but claim of theft by him; pledging of fake
securities, bond, certificates etc.

In the transaction of hypothecation, the risk of hypothecatee is always

higher because of smart/overact/intentional act of the hypothecator.
The hypothecatee loses the rights over the hypothecated goods under
two circumstances. Such circumstances arise, firstly, in case of the
sale of hypothecated goods by the hypothecator in possession to a
bonafide purchaser without notice to hypothecatee and secondly, if
the hypothecator who is in possession of goods, makes a valid pledge
of the hypothecated goods without notice to the hypothecatee. In the
latter cases, the claims of the hypothecatee come second after the
claims of the pledge. Thus, the above observations highlight that the
chances of fraud in case of hypothecation are very high and chances
of their misuse are greater as compared to other kinds of securities.30

30
In fact, the other modes provide actual possession or transparent control over the security which minimizes the
possibility of fraud, whereas hypothecation as a constructive information or undertaking in absence of other
 7. Frauds Relating to Bills and Receipts

Banking institutions are dealing with multifarious functions in

consonance with development of trade commerce, and intercourse.
The majority of the monetary transactions of trading activities are
done by the banking institutions as per the standing instructions of
the borrowers/customers. Banking institutions as an agent of
borrower or depositors are bound to comply with the instructions of
the latter. The payment claimed from Banking Institutions as a matter
of rights is by virtue of certain receipts or bills which are in the nature
of dispatch paper etc. Whenever, such type of claim for payment is
made before the Banking Institutions they are supposed to receive
and make payment accordingly. For this purpose, Banking
Institutions are protected by virtue of Section 10 of the Negotiable
Instruments Act, 1881.

The Negotiable Instruments Act, 1881, Section 10 provides that

'paymet in due course' means payment in accordance with the
apparent tenor of the instrument in good faith and without negligence
to any person in p)ossession thereof under circumstances which do
not afford a reasonable ground for believing that he is not entitled to
received payment of the amount there in mentioned.

The Banking Institutions as per their manuals are under obligation to

inquire about the authenticity or genuineness of such bills or receipts.
No doubt, banks are quite vigilant to deal with such kind of receipts
because of which wrong payments are claimed by unauthorized
claimants. If the frauds are committed with these kinds of bills or
receipts, they obviously prove very costly for the banking institutions.
Frauds with respect to purchased bills can take form of bogus or
stolen railway or motor transport receipt, discounting of spurious bills
with inflated value and goods of which receipt is being discounted
with bank are already removed or are actually of lesser value than
claimed in the bill.

In fact, banking institutions are vigilant to confirm the authenticity of

these kinds of receipts or bills before making payment. The banks are

elements provides the uncertainty or loss of security collectively with the whereabouts of the beneficiary who has
given the fraudulent information.
 thoroughly checking the documents so that this kind of frauds may
not be committed in the future. Only after full satisfaction. Banking
Institutions release payment or honour these bills so that the parties
may not suffer any delay in case of genuine transactions. But still the
perpetrators of such frauds are better equipped with the technology
and these kinds of frauds are still prevalent in banking institutions.

8. Frauds Relating to Lending (Loan)

India, being a developing Country is playing a significant role in rural

as well as urban area to develop its infrastructure, education, to
eliminate poverty, to provide basic commodities, to establish
industrial units, to promote artisans, to produce agricultural product
and to flourish business activities etc. As a general policy of the
government to achieve these objectives, loans facility is provided to
explore the possibilities of these hidden compulsive objectives. The
Central Government and the State Governments are encouraging in
their general policy to provide loans to the agriculturists,
businessmen, children for vocational and higher studies, to establish
small and big industrial units and to carry on small artisans business
etc.

These kinds of facilities not only provide an opportunity to public at

large but also strengthen them financially so that they may uplift
their standards which results into socio-economic empowerment in
the society. But every general scenario has a dark side too. The loan
facility which is duly provided is also infected by frauds which impose
restrictions on the banking institutions to impose innumerable
standards to provide this facility. Lot of instances are there, where
loans were given to more than one person against the same property
as security; the borrowers disappeared after taking loans; bogus firms
took loans; loans taken on one pretext were used for another purpose;
inflated bills are shown for machinery and accessories never supplied;
and machinery purchased with loans first hypothecated, then sold to
third parties without informing the banks.

As a matter of fact, it is not a difficult task to prevent the loan frauds.

Proper precautions, training programmes can minimize the possibility
of committing these kinds of frauds and proper utilization can be
done to achieve the substantial objective for which this facility is
 provided. The procedural requirements or requisites need a re-look to
fill up the gap in future. As an affirmative step, the banking market
leader SBI has decided to publish in newspaper the details of loan
defaulters to make the borrowers clear their dues.

9. Frauds Relating to Cheques

The basic purpose of banking institutions is to provide the safety,

security and utilisation of money to provide proper facilities to their
customers. That is the reason why the Banking Institutions are
getting greater importance in everyone's life. The Banking Institutions
are dealing with their customers on the basis of certain instruments.
These instruments are used for the purpose of negotiation and the
customers are at liberty to get any kind of subscribed facilities from
the Banking Institutions. Negotiable Instruments Act, 1881 is such
kind of legislation which provides the principles to deal with the
Banking Institutions. Recognized instruments possessing the quality
of negotiability are entitled to be called as Negotiable Instrument for
this purpose Negotiable Instrument means promissory note, bill of
exchangers and cheque. As per Section 6, a cheque is a bill of
exchange drawn on a specified banker, and not expressed to be
payable otherwise than on demand. In Banking Institutions, so far the
frauds relating to cheques are very common. Cheque frauds are so
common that they are found relating to both very nominal amount
and to high amount.

A Voluminous number of cases are pending before the courts which

compel the administration of justice to set separate courts to
adjudicate or settle the cases relating to the cheques. Presently, the
cheque frauds include counterfeit bank drafts or traveler's cheques or
other cheques; stolen cheques encashed through impersonation;
forged signatures on cheques; material alteration in cheques with
respect to value, validity date, name of the payee, nature of cheque
with reference to its crossing, negotiability etc.; issue of cheques
against insufficient funds, cheques issued against non-existent
accounts; forged seals or stamps or fingerprints (in case of illiterate
account-holders), fidgeting done with cheque-writer etc. which are
common.
 The above information reveals that cheque frauds are very common.
The Reserve Bank of India is continuously circulating directions and
guidelines to eliminate this menace of cheque-frauds.

10. Frauds through Impersonation

To impersonate' means to pretend to be (another person) to entertain

or trick people." Banking fraud by impersonation takes place vide
opening and using a fictitious account by impersonating without
proper identification, an outsider impersonating an actual account-
holder etc. in the direct banking services, as well as posing as a fake
ATM holder or debit/credit card holder, and through the emerging
trend of identify thefts.

The major areas where the cases of impersonation are found are
situations where the maker or customer gave bearer cheque. When
the endorsee further negotiates a cheque by making endorsement
sometimes he gives endorsement in blank or endorsement in full. The
advantage of both of these endorsements is further negotiability. As a
consequential effect, a person is further making endorsement in blank
or in full which allows the subsequent parties to collect money from
banking institutions. In fact, in this process, it is quite difficult for a
Banking Institution to ascertain the identity of the person to whom
they are making payment. No doubt, the law imposes a desirable yet
discretionary requirement to cross the cheque to fix the liability of the
person drawing money. But it's only the Banking Institutions who will
be liable in the adverse circumstances. Categorically, to highlight the
different situations, the connivance of banking employees with
outsiders, if any, plays a major role, for example, utilization of
accounts for giving false credit, withdrawal, arranging person to
impersonate the actual account-holder, to issue empty demand drafts
to outsider without obtaining consideration, clearance of loan without
verification.

11. Fraud Through Material Alteration

Contracts are based on consensus ad idem, that is, meeting of the

minds on the same point in the same sense. So, if through a contract
something which is not intended to be done by a party is in fact
enforced, such enforcement is not proper in the eyes of law. Whenever
material alteration is made to any document, it renders such altered
instrument unenforceable, and an attempt to fraud is committed.

Under the banking system, documents and instruments in paper

or electronic form play a very important role. So any alteration with
respect to cheques, bank documents, security documents, passbooks
etc. which is material in the sense that it changes the effect that was
desired by the parties making it, would be a material alteration and
thus a banking fraud.

An alteration is considered material if it alters, changes or modifies

the character of an instrument, or the liabilities of parties under it, or
changes the persons who are to derive benefit under it. The most
common alteration, duly done in a number of instances is with
respect to signature or date of maturity. The general instances of
material alteration pertain to name of persons, date, amount
(alphabetically as well as numerical), endorsement, crossing etc. Such
kind of material alteration is the conclusive proof that the document
is altered to mislead the Banking Institutions to make the due
payment.

The Reserve Bank of Indians and Banking Manuals give directions or

instructions to the banking institutions to clarify from the maker
about material alteration whether it is bona fide or mala fide.
Regarding material alteration even the Indian Evidence Act does not
approve of the material alterations and considers such modifications
as latent and patent ambiguity within its purview. That is why the
banking institutions are supposed to certify by initials of the maker
the genuineness of the material alteration. Presently, in practice,
banking institutions are not making any payment in case of material
alteration which may be in the form of any kind of addition, deletion,
substitution, obliterations in any cheque/document, certified copies,
securities, bills of exchange, draft, reconciliation statement or any
other document which is supposed to be relevant as per banking
transactions.

In fact, because of material alteration, certain legal consequences

occur if the character of the instrument is changed. Then obviously,
the liabilities, time of payment, place of payment, way of operation of
cheques becomes the liability and responsibility of banking
 institutions. That is why the banks are supposed to be more vigilant
not only to make public confident in their accuracy in functioning,
but also to create their positive image against deficiencies which are
the outcome of material alteration.

12. Fraud through Forgery

Untraced latent and patent ambiguities created with mala-fide

intention by the parties to the documents used in banks, lead to
forged documents. These forgeries may be in security documents,
approved documents, endorsements, etc. In this category of banking
frauds, forged banking instruments such as forged demand drafts,
forged bills, forged cheques, forged vouchers as well as forged
documents supplied by the parties to banks such as forged title
deeds, forged identity proofs, forged security proof documents, etc. are
covered.

Thus, forgery is a technique because of which damage or injury is

duly caused to the public or to a particular person to support any
claim or title to get the illegitimate benefits for himself or to other
party. It is a very common fraud, found not only in banking
transaction but also in testamentary transactions, non-testamentary
transactions, revenue matters, declaration etc. No doubt, forging is
treated as an offence under Section 436 of the Indian Penal Code. But
the magnitude of this crime is of such a nature that if this offence
remains untraceable, it would cause injury, damages, financial loss,
loss to exchequer, as well as to property etc. In forgery, the person
makes the false document to get benefit by causing damage or injury
to other person, or to claim any title to himself or to illegally support
to claim any title to himself, or to pass property absolutely or partially
or to enter in any contract expressly or impliedly to get undue
advantage of such situation. In fact, it is such a common fraud which
cannot be eliminated absolutely but a lot of efforts are being made by
apex bodies, so that these incidents may be minimized in banking
transactions.

13. Fraud by Forged Signature

Categorically, to deal with forgery, primarily the first kind of frequent

banking fraud is through forged signatures. Signature of a person is
 his graphic identification through which by way of symbol, sign,
letter, letters, he endorses and conspicuously shows his personal and
individualistic symbolic identification to allow others to trust, and
authenticates legibly to do the transaction, expressly or impliedly. A
banker as per the legal obligation, is supposed to know signature of
his customer and in case of any doubt, the Banker has to consult
specimen signature of the customer, which they have already taken at
the time of opening of the account. The law further imposes obligation
on the banking institution that whenever the instrument has been
presented whether bearer or order, they should authenticate the
signature. The significance of forged signatures can be understood
from the fact that in the Country like USA, which is fully
technologically developed, still suffers from cheque frauds caused by
forged signatures.

14. Fraud by Forged Documents

The second kind of forgery related fraud because of which the

Banking Institutions suffered a great loss is forged documents.
Whenever a person furnishes any kind of security to get loan facility,
in those circumstances, the person produced the forged
document/security because of which in case of non-payment the
second party failed to recover money.

Banking Institutions are taking due precautions, but the active

fraudsters try to find out new means to submit forged instruments to
get undue advantage. Innumerable cases are present before the
courts, because of which Banking Institutions are suffering lot of loss.
The person who may be innocent one is unnecessarily involved in
litigation because of the overt act of submission of forged document
by other person. The problem gets aggravated, when authenticity of
these documents is legally proved because of connivance of bank
employee with the fraudsters.

15. Fraud by Forged Fingerprint/Thumb Impression

Instances are innumerable when the forged fingerprints or thumb

impressions are being used and wrong claims are duly met by
Banking Institutions. In India, where 68.8 percent population is
residing in rural area, a sizeable minority of which being illiterate.
This kind of forgery also affects majority of them. Fingerprint or
thumb impressions with use of ink are excellent mode of
identification. These kinds of thumb impressions or fingerprints can
be misused, and these issues only came in limelight, when genuine
illiterate persons raised objections in particular transactions. Without
scientific means, it's difficult to know about the genuineness of these
impressions. Banking Institutions are supposed to take help of
forensic labs to know the truth or genuineness of the impression.