1

Banking system in india

NTCC PROJECT WORK

An Ntcc report is submitted in the partial fulfillment of

the degree of Bachelor of Commerce.

SUBMITTED TO: SUBMITTED BY:

Prof. Bhavna Taneja Priyanka Raj
B.com (H), Semester- 3
Enrollment no. :
A35904617030
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ACKNOWLEDGEMENT

I have taken efforts in this project. However, it would not have been possible without the kind
support and help of many individuals. I would like to extend my sincere thanks to all of them.

I am highly indebted to Professor Bhavna Taneja for her guidance and constant supervision
as well as for providing necessary information regarding the project & also for her support in
completing the project.

I would like to express my gratitude towards my parents for their kind co-operation and
encouragement which help me in completion of this project.

My thanks and appreciations also go to my colleague in developing the project and people
who have willingly helped me out with the project.
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BONA FIDE CERTIFICATE

Certified to be the Bonafide work done by Miss Priyanka Raj of B.Com (hons.) 2nd year
during the year 2018-2019 under my supervision.

Internal examiner

Submitted for the Project work of Non-Teaching Credit Courses on the topic “Banking
System in India”

Date:
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STUDENT DECLARATION
I Priyanka Raj hereby declare that the project work entitled “Banking System
in India” submitted to the Amity University, Jharkhand, is a record of an original work
done by me under the guidance of Professor Bhavana Taneja a n d t h i s p r o j e c t
w o r k i s s u b m i t t e d i n t h e p a r t i a l f u l f i l l m e n t o f t h e requirements for
the award of the degree of Bachelor Of Commerce. The results embodied in this thesis have
not been submitted to any other University or Institute for the award of any degree of
Bachelor Of Commerce. The results embodied in this thesis have not been submitted to any
other University or Institute for the award of any degree or diploma.

Place: Ranchi Signature of Candidate

Date: 28/09/18
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PREFACE
This project report has been prepared in partial fulfillment of the requirement for the Non-
Teaching Credit Courses (NTCC) on the topic: Banking System in India semester 3 for the
academic year 2018-2019.

This project contains information about the structure, classification and need of Banking
System in India and also some of the biggest Banking related frauds and solutions to it.

The project starts with the introduction to Indian Banking System and Government policy on
Banks and everything related to Banking System in India.

The information presented in this project report is obtained from sources like newspapers,
different websites, Youtube and practical knowledge.
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CONTENTS
Serial no. Particulars Page no.

1. CHAPTER-1 7-10
1.1)Introduction 7
1.2)Need of Bank 8
1.3)History 9
1.4)Government Policy on banking industry 10
2. CHAPTER-2 11-18
2.1)Classification of Banks 11
2.2)Reserve Bank of India 12
2.2.1)Functions of RBI 12-13
2.3)Commercial Bank 14
2.3.1)Types of Commercial Bank 14-15
2.3.2)Functions of Commercial Bank 15-16
2.4)Foreign Bank 16
2.5)Non-Scheduled Banks 17
2.6)Cooperatives 18
3. CHAPTER-3 19-22
3.1)Banking Fraud and scams 19
3.2)Biggest banking frauds in the history of India 20-21
3.3)Preventive measures and solution to banking 22
frauds
4. REFRENCES 23
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CHAPTER 1:
1.1 INTRODUCTION
Banking is an industry that handles cash, credit, and other
financial transactions. Banks provide a safe place to store
extra cash and credit. They offer savings
accounts, certificates of deposit and checking accounts.
Banks use these deposits to make loans. These loans
include home mortgages, business loans, and car loans.

A banking system also referred as a system provided by the

bank which offers cash management services for
customers, reporting the transactions of their accounts and
portfolios, throughout the day. The banking system in India , should not only be hassle free
but it should be able to meet the new challenges posed by the technology and any other
external and internal factors. For the past three decades, India’s banking system has several
outstanding achievements to its credit. The Banks are the main participants of the financial
system in India. The Banking sector offers several facilities and opportunities to their
customers. All the banks safeguards the money and valuables and provide loans, credit, and
payment services, such as checking accounts, money orders, and cashier’s cheque. The banks
also offer investment and insurance products. As a variety of models for cooperation and
integration among finance industries have emerged, some of the traditional distinctions
between banks, insurance companies, and securities firms have diminished. In spite of these
changes, banks continue to maintain and perform their primary role—accepting deposits and
lending funds from these deposits.

Banking has the prime, foremost and most significant share in shaping up Indian Economy.
India's Banking System has no longer confined to only the metropolitans, but have reached
even to the remote corners of the country.
 The banks help in mobilising savings through network of branch banking.
 The ultimate savings of people result in capital formation which forms the basis of
economic development.
 The banks finance the industrial sector. they not only provide finance for industry
but also help in developing the capital market for India. For eg, recently NTPC, the
country's largest thermal power producer has signed a term loan agreement with SBI
for 10,000 crore INR for funding it's capital Expenditure.
 Banks promote entrepreneurship by underwriting the shares of new and existing
companies.
 Most importantly, Banks finance education loans for a larger significant population.
People in developing countries being poor and having low incomes do not possess
sufficient financial resources for higher education thus the banks not only help
inhuman capital formation but also in increasing entrepreneurial activities and nation
building habits in developing countries
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1.2 NEED OF BANKS

Before the establishment of banks, the financial activities were handled by money lenders and
individuals. At that time the interest rates were very high. Again there were no security of
public savings and no uniformity regarding loans. So as to overcome such problems the
organized banking sector was established, which was fully regulated by the government. The
organized banking sector works within the financial system to provide loans, accept deposits
and provide other services to their customers.

The following functions of the bank explain the need of the bank and its importance:

• To provide the security to the savings of customers.

• To control the supply of money and credit

• To encourage public confidence in the working of the financial system, increase savings
speedily and efficiently.

• To avoid focus of financial powers in the hands of a few individuals and institutions.

• To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types of
customers
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1.3 HISTORY OF INDIAN BANKING SYSTEM

The first Bank in India, called The General Bank of India was established in the year 1786.
The East India Company established The Bank of Bengal/Calcutta (1809), Bank of Bombay
(1840) and Bank of Madras (1843). The next bank was Bank of Hindustan which was
established in 1870. These three individual units (Bank of Calcutta, Bank of Bombay, and
Bank of Madras) were called as Presidency Banks. Allahabad Bank which was established in
1865, was for the first time completely run by Indians. Punjab National Bank Ltd. was set up
in 1894 with head quarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank
of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. In
1921, all presidency banks were amalgamated to form the Imperial Bank of India which was
run by European Shareholders. After that the Reserve Bank of India was established in April
1935.

After independence, Government has taken most important steps in regard of Indian Banking
Sector reforms. In 1955, the Imperial Bank of India was nationalized and was given the name
"State Bank of India", to act as the principal agent of RBI and to handle banking transactions
all over the country. It was established under State Bank of India Act, 1955. Seven banks
forming subsidiary of State Bank of India was nationalized in 1960. On 19th July, 1969,
major process of nationalization was carried out. At the same time 14 major Indian
commercial banks of the country were nationalized. In 1980, another six banks were
nationalized, and thus raising the number of nationalized banks to 20. Seven more banks were
nationalized with deposits over 200 Crores. Till the year 1980 approximately 80% of the
banking segment in India was under government’s ownership. On the suggestions of
Narsimhan Committee, the Banking Regulation Act was amended in 1993 and thus the gates
for the new private sector banks were opened.

The following are the major steps taken by the Government of India to Regulate Banking
institutions in the country:-

1949 : Enactment of Banking Regulation Act.

1955 : Nationalization of State Bank of India.

1959 : Nationalization of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalization of 14 major Banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalization of seven banks with deposits over 200 Crores

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1.4 GOVERNMENT POLICY ON BANKING

INDUSTRY(Source:-The federal Reserve Act 1913 and The
Banking Act 1933)
Banks operating in most of the countries must contend with heavy regulations, rules enforced
by Federal and State agencies to govern their operations, service offerings, and the manner in
which they grow and expand their facilities to better serve the public.

A banker works within the financial system to provide loans, accept deposits, and provide
other services to their customers. They must do so within a climate of extensive regulation,
designed primarily to protect the public interests.

The main reasons why the banks are heavily regulated are as follows:

• To protect the safety of the public’s savings.

• To control the supply of money and credit in order to achieve a nation’s broad economic
goal.

• To ensure equal opportunity and fairness in the public’s access to credit and other vital
financial services.

• To promote public confidence in the financial system, so that savings are made speedily and
efficiently.

• To avoid concentrations of financial power in the hands of a few individuals and

institutions.

• Provide the Government with credit, tax revenues and other services.

• To help sectors of the economy that they have special credit needs. For example- Housing,
small business and agricultural loans, etc.
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CHAPTER 2:
2.1 Classification of Banking Industry in India
Indian banking industry has been divided into two parts, organized and unorganized sectors.
The organized sector consists of Reserve Bank of India, Commercial Banks and Co-operative
Banks, and Specialized Financial Institutions (IDBI, ICICI, IFC etc). The unorganized sector,
which is not homogeneous, is largely made up of money lenders and indigenous bankers.

An outline of the Indian Banking structure may be presented as follows:-

1. Reserve Bank of India.

2. Indian Scheduled Commercial Banks.

a) State Bank of India and its associate banks.

b) Twenty nationalized banks.

c) Regional rural banks.

d) Other scheduled commercial banks.

3. Foreign Banks

4. Non-scheduled banks.

5. Co-operative
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2.2 RESERVE BANK OF INDIA

The Reserve bank of India is a central bank and was established in April 1, 1935 in
accordance with the provisions of reserve bank of India act 1934. The central office of RBI is
located at Mumbai since inception. Though originally the reserve bank of India was privately
owned, since nationalization in 1949, RBI is fully owned by the Government of India. It was
inaugurated with share capital of Rs. 5 Crores divided into shares of Rs. 100 each fully paid
up.

RBI is governed by a central board (headed by a governor) appointed by the central

government of India. RBI has 22 regional offices across India. The Reserve bank of India
was nationalized in the year 1949. The general superintendence and direction of the bank is
entrusted to central board of directors of 20 members, the Governor and four deputy
Governors, one Governmental official from the ministry of Finance, ten nominated directors
by the government to give representation to important elements in the economic life of the
country, and the four nominated director by the Central Government to represent the four
local boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Board
consists of five members each central government appointed for a term of four years to
represent territorial and economic interests and the interests of cooperative and indigenous
banks.

The RBI Act 1934 was commenced on April 1, 1935. The Act, 1934 provides the statutory
basis of the functioning of the bank. The bank was constituted for the need of following: - To
regulate the issues of banknotes. - To maintain reserves with a view to securing monetary
stability - To operate the credit and currency system of the country to its advantage.

2.2.1 Functions of RBI as a central bank of India

Bank of Issue: The RBI formulates, implements, and monitors the monitory policy. Its main
objective is maintaining price stability and ensuring adequate flow of credit to productive
sector.

Regulator-Supervisor of the financial system: RBI prescribes broad parameters of banking

operations within which the country’s banking and financial system functions. Their main
objective is to maintain public confidence in the system, protect depositor’s interest and
provide cost effective banking services to the public.

Manager of exchange control: The manager of exchange control department manages the
foreign exchange, according to the foreign exchange management act, 1999. The manager’s
main objective is to facilitate external trade and payment and promote orderly development
and maintenance of foreign exchange market in India.
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Issuer of currency: A person who works as an issuer, issues and exchanges or destroys the
currency and coins that are not fit for circulation. His main objective is to give the public
adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role: The RBI performs the wide range of promotional functions to support
national objectives such as contests, coupons maintaining good public relations and many
more.

Related functions: There are also some of the related functions to the above mentioned main
functions. They are such as, banker to the government, banker to banks etc….

• Banker to government performs merchant banking function for the central and the state
governments; also acts as their banker.

• Banker to banks maintains banking accounts to all scheduled banks.

Controller of Credit: RBI performs the following tasks:

• It holds the cash reserves of all the scheduled banks.

• It controls the credit operations of banks through quantitative and qualitative controls.

• It controls the banking system through the system of licensing, inspection and calling for
information.

• It acts as the lender of the last resort by providing rediscount facilities to scheduled banks

Supervisory Functions: In addition to its traditional central banking functions, the Reserve
Bank performs certain non-monetary functions of the nature of supervision of banks and
promotion of sound banking in India. The Reserve Bank Act 1934 and the banking regulation
act 1949 have given the RBI wide powers of supervision and control over commercial and
co-operative banks, relating to licensing and establishments, branch expansion, liquidity of
their assets, management and methods of working, amalgamation, reconstruction and
liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call
for returns and necessary information from them. The nationalization of 14 major Indian
scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the
growth of banking and credit policies towards more rapid development of the economy and
realization of certain desired social objectives. The supervisory functions of the RBI have
helped a great deal in improving the standard of banking in India to develop on sound lines
and to improve the methods of their operation.

Promotional Functions: With economic growth assuming a new urgency since

independence, the range of the Reserve Bank’s functions has steadily widened. The bank now
performs a variety of developmental and promotional functions, which, at one time, were
regarded as outside the normal scope of central banking. The Reserve bank was asked to
promote banking habit, extend banking facilities to rural and semi-urban areas, and establish
and promote new specialized financing agencies.
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2.3 Commercial Banks

Commercial Bank can be described as a financial institution that offers basic investment
products like a Savings Account, Current Account, etc to the individuals and Corporate.
Along with that, it provides a range of financial services to the general public such as
accepting deposits, granting loans and advances to the customers.

2.3.1 Types of Commercial Banks

Commercial banks are classified into two categories i.e. Scheduled Commercial
Banks and Non-Scheduled Commercial Banks. Further, scheduled commercial banks are
further classified into three types:
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 Private Bank: When the private individuals own more than 51% of the share capital, then
that banking company is a private one. However, these banks are publicly listed
companies in a recognized exchange.
 Public Bank: When the Government holds more than 51% of the share capital of a
publicly listed banking company, then that bank is called as Public sector bank.
 Foreign Bank: Banks set up in foreign countries, and operate their branches in the home
country are called as foreign banks.

Non-scheduled commercial banks refer to the banks which are not covered in the Reserve
Bank of India’s second schedule. The paid-up capital of such banks is not more than Rs. 5
lakhs.

2.3.2 Functions of Commercial Bank

1. Primary functions:
 Accepting Deposits: The primary function for which the commercial banks were
established is to accept deposits from the general public, who possess surplus funds
and are willing to deposit them so as to earn interest on it. There are various products
offered by the bank to the customers for the deposit of their money, which includes
savings account, current account, fixed deposit and recurring deposit

 Advancing Loans: The bank provides loan to the customers in the form of term loans,
cash credit, overdraft and discounting of bills of exchange.

2. Secondary functions:
 Agency Services: There are some facilities provided by the commercial banks in
which they act as an agent of the customers. Such services are:
 Collection and payment of rent, interest and dividend.
 Collection and payment of cheque and bills.
 Buying and selling securities.
 Payment of insurance premium and subscriptions.

 General Utility Services: Commercial banks provide general utility services to the
customers and charges a fee for the same. It covers services like:
 Safekeeping of valuables, documents etc, in locker or vault.
 ATM card, credit card and debit card facility.
 Issue of demand draft, pay order and traveller’s cheque.
 Internet and mobile banking.
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 Transfer of funds: Banks assist in the transfer of funds from one person to another
or from one place to another through its credit instruments.
 Credit Creation: The commercial banks are authorized to create credit, by granting
more loans than the amounts deposited by the customers.

A commercial bank offers an array of facilities such as internet banking, mobile banking,
ATM facility, credit card facility, NEFT, RTGS and so forth for which it charges a definite
sum as a fee for providing these facilities.

2.4 Foreign Banks

A Foreign branch bank is a type of foreign bank that is obligated to follow the regulations of
both the home and host countries. Because the foreign branch banks, loan limits are based on
the parent bank's capital, foreign banks can provide more loans than subsidiary banks.

According to the new rules set by Reserve Bank of India in the new budget, some decisions
regarding foreign banks in India have been taken. The steps taken by the central monetary
authority provide some extent of liberty to the foreign banks and they are hopeful to grow
unshackled. The foreign banks in India are now allowed to set up local subsidiaries in the
country. The policy also states that the foreign banks are not allowed to acquire any Indian
bank unless the Indian bank is listed as a weak bank by the RBI. The Indian subsidiaries of
the foreign banks are not allowed to open branches freely in the country.

Some of the example of Foreign Banks in India:

 Doha Bank
 Bank of America
 Barclays Bank
 Citi Bank
 HSBC Bank
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2.5 Non-Scheduled Banks

Non-Scheduled Bank refers to the banks which are not listed in the Second Schedule of
Reserve Bank of India.

In finer terms, the banks which do not comply with the provisions specified by the central
bank, within the meaning of the Reserve Bank of India Act, 1934, or as per specific
functions, etc. or as per the judgement of the RBI, are not able to serve and protect the
depositor’s interest, are known as non-scheduled banks.

Non-Scheduled Banks are also required to maintain the cash reserve requirement, not with
the RBI, but with themselves. These are local area banks.

They are:

Coastal Local Area Bank Ltd : This bank was established on 27th December 1999. Its area
of operation includes three contiguous districts viz. Krishna, Guntur and West Godavari. Its
head office is located at Vijayawada in Andhra Pradesh.

Capital Local Area Bank Ltd : This bank was established on 14th January 2000. Its area of
operation includes three districts viz. Jalandhar, Kapurthala and Hoshiarpur in Punjab. The
head office is at Phagwara (Punjab).

Krishna Bhima Samruddhi Local Area Bank Ltd : This bank was established on 28th
February 2001 with an area of operation comprising three contiguous districts of
Mahbubnagar in Andhra Pradesh and Raichur and Gulbarga in the state of Karnataka with its
head office at Mahbubnagar(Andhra Pradesh).

Subhadra Local Area Bank Ltd, Kolhapur : This is smallest Local Area Bank with only 8
branches. Its head office is in Kolhapur.
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2.6 Cooperative Bank

A cooperative bank is an institution which is owned by its members. They are the culmination of
efforts of people of same professional or other community which have common and shared
interests, problems and aspirations. They cater to services like loans, banking, deposits etc. like
commercial banks but widely differ in their values and governance structures. They are usually
democratic set-ups where the board of members are democratically elected with each member
entitled to one vote each. In India, they are supervised and controlled by the official banking
authorities and thus have to abide by the banking regulations prevalent in the country. The basic
rules, regulations and values may differ amongst nations but they have certain common features.

 Customer-owned
 Democratic structures
 Profits are mainly pooled to form reserves while some amount is distributed to members
 Involved in community development
 Foster financial inclusion by bringing banking to the doorstep of the lowest segment of
society.

These banks are small financial institutions which are governed by regulations like Banking
Regulations Act, 1949 and Banking Laws Cooperative Societies Act, 1965. They operate both in
urban and rural areas under different structural organizations. Their functions are decided by the
level at which they operate and the type of people they cater to.
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CHAPTER 3:

3.1 BANKING FRAUDS ANS SCAMS

Bank fraud is the use of potentially illegal means to obtain money, assets, or other property
owned or held by a financial institution, or to obtain money from depositors by fraudulently
posing as a bank or other financial institution. In many instances, bank fraud is a criminal
offence. While the specific elements of particular banking fraud laws vary depending on
jurisdictions, the term bank fraud applies to actions that employ a scheme or artifice, as
opposed to bank robbery or theft. For this reason, bank fraud is sometimes considered a
white-collar crime.

 A survey by FIS, a financial services technology provider, showed that 18% of Indians
suffered from an online banking fraud in the past year.
 This was a higher percentage than any other country’s respondents.
 In December, Ravi Shankar Prasad, the minister for information technology, said that there
were over 25,800 cases of digital fraud in India in 2017.
 A major portion of frauds affected Indians between the ages of 27 to 37 - the most regular
users of online banking channels. Around 25% of the people in this age group reported a
fraud.
 This past December, Ravi Shankar Prasad, the minister for information technology, said that
there were over 25,800 cases of digital fraud in India in 2017 resulting in the theft of nearly
₹1.8 billion rupees. As the use of digital banking applications becomes more widespread, it is
likely that the rate of frauds will only increase further.
 Public Sector Banks in India lost at least 227.43 billion (Rs 22,743 crore) owing to fraudulent
banking activities between 2012 and 2016, according to an IIM-Bangalore study.
 There have been over 25,600 cases of banking fraud, worth Rs 1.79 billion up to December
21 last year.
 According to data released by the apex bank for the first nine months of FY17, approximately
455 cases of fraud transactions - each of Rs 1,00,000 or above - were detected at ICICI Bank;
429 at State Bank of India, 244 at Standard Chartered Bank and 237 at HDFC Bank.
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3.2 SOME OF THE BIGGEST SCAMS IN HISTORY OF

BANKING SYSTEM
2011

- In 2011, investigative agency CBI revealed that executives of certain banks such as the
Bank of Maharashtra, Oriental Bank of Commerce and IDBI created almost created 10,000
fictitious accounts, and an amount of Rs 1.5 billion or Rs 1,500 crore worth loans was
transferred.

2014

- Three years later in 2014, Mumbai Police filed nine FIRs against a number of public sector
related to a fixed deposit fraud to the tune of Rs 7 billion or Rs 700 crore. In the same
year, Electrotherm India, which defaulted payment of Rs 4.36 billion or Rs 436 crore to the
Central Bank. Apart from that, Bipin Vohra, a Kolkata-based industrialist allegedly defrauded
the Central Bank of India by receiving a loan of Rs 14 billion using forged documents.

- Besides, another scam that was unfolded in 2014 was the bribe-for-loan scam involving ex-
chairman and MD of Syndicate Bank SK Jain for involvement in sanctioning Rs 80 billion
or Rs 8,000 crore.

- In 2014, Vijay Mallya was also declared a willful defaulter by Union Bank of India,
following which other banks such as SBI and PNB followed suit.

2015

- In 2015, another fraud that raised eyebrows involved employees of Jain Infraprojects, who
defrauded Central Bank of India to the tune of over Rs two billion. In the same year,
employees of various banks were involved in a foreign exchange scam involving a phony
Hong Kong corporation. They had defrauded the systems to move out Rs 60 billion.

2016

- One of the biggest banking frauds of 2016 is the one involving Syndicate Bank, where
almost 380 accounts were opened by four people, who defrauded the bank of Rs 10 billion
using fake cheques, LoUs and LIC policies.

2017

- In 2017, Mallya's debt - owing to defunct Kingfisher Airlines - rises to Rs 9.5 billion
or Rs 9,500 crore to IDBI and other bank branches. CBI prepares chargesheet but he had fled
the country in 2016. Currently residing in the UK, Mallya's extradition is being sought at the
country's Westminster Court.

- In the same year, Winsome Diamonds - also known to be India's second largest corporate
defaulter - came under the scanner after CBI booked six cases against the group and the
companies under it. This case is similar to the one observed in the fresh bank fraud involving
Nirav Modi group: Letters of Undertaking were issued by Indian Banks to Jatin Mehta's
 21

Winsome Diamonds. It may be noted that the gaps were first discovered in 2014. From mid-
2013 the group failed to payback its debts, and was declared a willful defaulter by banks. The
total debt amounts to almost Rs 7,000 crore.

- Another case that grabbed eyeballs in the same years involved Deccan Chronicle Holdings
for causing a loss of Rs 11.61 billion; CBI registered FIR against five PSBs and
six chargesheets were filed against the company.

- A Kolkata business tycoon Nilesh Parekh, a promoter of Shree Ganesh Jewellery House,
was arrested by CBI in 2017 for causing a loss of Rs 22.23 billion to at least 20 banks.
Parekh, arrested at Mumbai airport last year, allegedly defrauded banks by diverting loan
money via shell companies in Hong Kong, Singapore, and the UAE.

- In this case, CBI filed a case against the former zonal head of the Bank of Maharashtra and
a director of a private logistics company based in Surat, owing to an alleged scam
involving Rs 8.36 billion.

2018

- Last but not the least by any means, the fresh bank fraud to the tune of Rs 11,450 crore
involving diamond merchant Nirav Modi. It has come to light that the company, in
connivance with retired employees of PNB, got at least 150 Letter of Undertakings (LoUs),
allowing Nirav Modi Group to defraud the bank and many other banks who gave loans to
him. In this case, however, fake LoUs were recycled by the diamond jewellery group and
illegally issued to other banks for borrowing money. Nirav Modi, his family and partners
have fled the country and is currently in the United States.

- Another case that came to light this year concerns a former Andhra Bank director, who was
arrested by Enforcement Directorate, in connection to an alleged Rs 5 billion bank fraud case,
involving a Gujarat-based pharma firm.
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3.3 PREVENTION TO BANKING RELATED FRAUDS

 The solution lies in strengthening the internal controls, checks and balances and at the
same time investing in latest technology and training people to use it.
 Minimize human interference and maximize technology-based transactions.
 There should be vigilant backgrounds checking for the employees working in financial
institutions.
 Regular credit checks on their employees who at the end of the day handle large amounts of
clients’ money.
 It is extremely important to educate all stakeholders in the banking ecosystem on information
security, as banking frauds are not technology frauds but process frauds.
 Making information security training compulsory for all bank employees is an important step
in significantly reducing bank frauds.
 The systems should be open systems.
 Banks should also have a crises management system in place, for immediate external and
internal communication.
 Even though Blockchain is new technology, its potential to reduce fraud in the financial
world is getting a lot of attention since such as stock exchanges and money transfer
services suffer from economic crime every year. Most banking systems around the world
are built on a centralized database that is more vulnerable to cyberattack because it has
one point of failure rather than many—once hackers breach the one system they have full
access. The blockchain is essentially a distributed ledger where each block contains a
timestamp and holds batches of individual transactions with a link to a previous block.
This technology would eliminate some of the current crimes being perpetuated online
today against our financial institutions.
 Know Your Customer: Financial institutions spend anywhere from $60 million up to
$500 million per year to keep up with Know your Customer (KYC) and customer due
diligence regulations according to a Thomson Reuters Survey. These regulations are
intended to help reduce money laundering and terrorism activities by having requirements
for businesses to verify and identify their clients. Blockchain would allow the
independent verification of one client by one organization to be accessed by other
organizations so the KYC process wouldn’t have to start over again. The reduction in
administrative costs for compliance departments would be significant.
 Smart Contracts: Because blockchains can store any kind of digital information, including
computer code that can be executed once two or more parties enter their keys,
blockchains enable us to have smart contracts. This code could be programmed to create
contracts or execute financial transactions once a certain set of criteria has been
achieved—delivery of products could signal an invoice to be paid for example.
 Payments: Blockchain disruption could be highly transformative in the payments
process. It would enable higher security and lower costs for banks to process payment
between organizations and their clients and even between banks themselves. In the
current reality, there are a lot of intermediaries in the payment processing system, but
blockchain would eliminate the need for a lot of them.
 23

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