India: Banking Frauds - Prevent Or Lament!

Last Updated: 11 July 2013
Article by PSA


The primary responsibility for preventing frauds lies with individual banks; however, the Reserve Bank of India ("RBI") routinely advises banks1 about major fraud prone areas and the safeguards necessary for prevention of frauds. This is done so that banks can introduce necessary safeguards by way of appropriate procedures and internal checks. With growing usage and dependency on electronic forms of transaction, banks have employed more secured means and platform separate from the normal channels of communication. The authenticity and integrity of such a platform is ensured through usage of specific software, which ensures the validity of the bank's electronic documents. But has such processes ensured safe and secure banking? Or, are frauds still prevalent? Is online mode secure? In this bulletin, we will discuss these crucial aspects and find out the current state of e-banking transactions, reporting requirements to be followed by banks and how secure e-banking is for the consumers.

1. E-banking transaction: how are they secured?

An electronic banking transaction involves the transmission of an electronic message from the customer to the bank directing the bank to transfer money from his account to another account either in the same bank or to another branch or any other bank anywhere in the world. This may also be a bank's electronic communication regarding the credit or debit card statement to a customer, which essentially and mostly is a statement of account.

Though e-banking still does not account for a significant portion of total transactions in India as per RBI. The generation today is increasingly opting for net transactions to settle their utility bills and do all kinds of bank-related work. With increased online usage, online frauds have also increased. E-banking transactions are made safe, its integrity and authenticity preserved by encrypting the messages. These messages are further hashed and converted into a digital signature with a private key having a secret and individualistic signer. Digital signatures cannot be unwrapped or tampered. A key pair is generated by the subscriber using asymmetric crypto system and is registered with the controlling authorities. While the private key remains with the subscriber, the other key remains with the controlling authorities and is published and is available to persons who need them.

In order to secure the e-transactions, the Information Technology (Certifying Authorities) Rules, 2000 were issued and its annexure II provides for the security guidelines for the implementation and management of information technology security. These guidelines specifically provide that the implementation of an information security program should be completed in the following stages:

  1. Adoption of security policy;
  2. Security risk analysis;
  3. Development and implementation of a information classification system;
  4. Development and implementation of the security standards manual;
  5. Implementation of the management security self-assessment process;
  6. On-going security program maintenance and enforcement; and
  7. Training

Though there are rules in place and RBI, as a guardian bank, proactively keeps a vigil on the conduct, the onus largely lies upon the banks to keep a check on frauds and fraudulent behaviors, employ means to secure transactions and report to RBI if they experience any fraud in their branches. Reporting of frauds also helps the RBI and other banks to understand the ways in which frauds are committed and employ means to keep a check on such fraudulent ways. Based on the reporting received from various banks, RBI regularly provides certain do's and don'ts for banks, which needs to be diligently followed. The Financial Fraud (Investigation, Prosecution, Recovery and Restoration of property) Bill, 2001 has been proposed to prohibit, control, investigate financial frauds; recover and restore properties subject to bank frauds, prosecute for causing financial fraud and all related matters.

2. What constitute a fraud? Can it be classified?

Let us understand the crucial elements of a fraud. Fraud is defined in section 421 of the Indian Penal Code and section 17 of the Indian Contract Act and has the following essential elements:

  1. There must be a representation and assertion;
  2. It must relate to a fact;
  3. It must be with the knowledge that it is false or without belief in its truth; and
  4. It must induce another to act upon the assertion in question or to do or not to do certain act.

Internet frauds in India are recent phenomena but over the years, it has emerged like an organized crime. Hackers may be anywhere in the world and employ any technique to commit the fraud. Even mobile transactions are hit by the frauds. There are three crucial elements which are considered responsible for the commission of frauds in banks:

  1. Involvement of bank's employee or in connivance with outsiders;
  2. Failure of the bank staff to follow the instructions and guidelines; and
  3. External elements or collusion between various parties or by a hacker.

Though there are various kinds of frauds, but purely from reporting standpoint, RBI has classified frauds on the basis of the provisions of the Indian Penal Code ("IPC"):

  1. Misappropriation (Section 403 IPC) and criminal breach of trust (Section 405 IPC);
  2. Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts and conversion of property (Sections 477A, 378 and 120 A);
  3. Unauthorized credit facilities extended for reward or for illegal gratification;
  4. Negligence and cash shortages;
  5. Cheating (Section 415 IPC) and forgery (Section 463 IPC);
  6. Irregularities in foreign exchange transactions; and
  7. Any other type of fraud not coming under the specific heads as above.

3. Reporting of banking frauds

To keep the above frauds at bay, RBI prescribes that bank should conduct annual review of frauds and apprise its board regarding the findings. While conducting the review, the most crucial aspect that must be taken into account by banks includes the following:

  1. Has the bank employed adequate system to detect frauds?
  2. How are frauds examined?
  3. What kind of action bank takes and within how much time if a person is found responsible for fraud?
  4. What are the reasons for the fraud - laxity in following the systems and procedures or loopholes in the system?
  5. What measures have been taken to ensure that the systems and procedures are scrupulously followed by the staff concerned or the loopholes are plugged?
  6. Whether frauds are reported to the local police for investigation?
  7. Whether bank maintains the data and records of these facts: (i) total number of frauds detected during the year; (ii) amount involved as compared to the previous two years; (iii) modus operandi of major frauds reported during the year along with their present position; (iv) estimated loss to the bank; (v) number of cases (with amounts) where staff are involved and the action taken against staff; (vi) time taken to detect frauds (number of cases detected within three months, six months, one year, more than one year of their taking place); (vii) status of the matters reported to the police and (viii) preventive/punitive steps taken by the bank.

In order for the RBI to continue doing this work, it is essential that banks should have proper reporting mechanism in place to report to the RBI all information about frauds and the follow-up action taken.

4. Fraud prevention measures

Inadequate measure to prevent banking fraud is the primary reason for widespread frauds. Delay in reporting by banks is another important reason. Banks should, therefore, ensure that the reporting system is suitably streamlined so that frauds are reported without any delay. Banks must fix staff accountability in respect of delays in reporting fraud cases to the RBI. Delay in reporting of frauds and the consequent delay in alerting other banks about the modus operandi and issue of caution advices against unscrupulous borrowers could result in similar frauds being perpetrated elsewhere. Banks may, therefore, strictly adhere to the timeframe fixed by RBI for reporting fraud cases failing which banks would be liable for penal action as prescribed under Section 47(A) of the Banking Regulation Act, 1949. Banks should specifically nominate an official of the rank of General Manager who will be responsible for submitting all the returns referred to in this circular. Fraud Monitoring Cell, Department of Banking Supervision, Central Office publishes a directory of officers of all banks/financial institutions responsible for reporting of frauds. All banks should furnish to the aforesaid department any changes in the names of officials that will be necessary for inclusion in the directory on priority basis as and when called for.

Banks must provide sufficient focus on the "Fraud Prevention and Management Function" to enable, among others, effective investigation of fraud cases. Banks should be able to provide promptly as well as accurate reporting of frauds to appropriate regulatory and law enforcement authorities including RBI. The fraud risk management, fraud monitoring and fraud investigation function must be owned by the bank's CEO, its Audit Committee of the Board and the Special Committee of the Board, at least in respect of large value frauds. Banks can also frame internal policy for fraud risk management and fraud investigation function, based on the governance standards relating to the ownership of the function and accountability for malfunctioning of the fraud risk management process in their banks.

So, what should banks do to safeguard the interests of its customers?

Banks can secure and preserve the safety, integrity and authenticity of the transactions by employing multipoint scrutiny – cryptographic check hurdles. Banks should rotate the services of the persons working on sensitive seats, keep strict vigil of the working, update the technologies employed periodically and engage more than one person in larger transactions. Banks can verify the credentials of the person approaching the bank, the documents they produce, the details provided in the forms they fill and utmost care in recruiting the staff. Banks should educate and make its customers aware about such frauds by sending e-mails and also providing tips on their websites. Banks can give confidence to its customers if they have prescribed and follow best practices and also the guidelines provided by RBI, have a fraud free culture and in-house grievance redressal mechanism.


1 Please see for details (last visited on July 03, 2013)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions