In any modern economy Banking industry plays an integral part. It is the health of the banking sector that provides the realities of a country’s financial strengths. A developed and transparent banking system of a country, helps that country to sail smoothly towards its progressive goals. But if the banking system is corrupt and fraudulent then the fundamental principles of financial ethics will be overtaken by cronyism and nepotism. To know whether a country´s economy is in appropriate shape or not we need to assess the health of the banking sector through its determinants. Banking system of a country largely affects its overall economy. The life and blood of an economy are finance and banking which are very much directly interrelated. Trade and commerce are not flexible without a free and fair banking industry. Banking sector acts as the backbone of modern businesses in the 21st century. Generally, a bank is a financial institution which deals with deposits, advances, lending, mortgages and several other related services. Banks deal with the personal finances of the individuals and also invest in the commercial projects. In either of these functions, ethical and professional values are associated and their violation leads to the opening of loopholes for frauds and scams. Bank provides the financial lifelines to individuals and businesses. It manages assets in many different forms. Lending and investment across a country is possible through the banking network. The essence of banking in the modern age is countless. The more the role becomes important, comes with it are the increased accountability and ethics. This is absolutely a hidden proclamation for any banking system. The banker’s job which looks very much smooth and straightforward, in fact are very much calculative and risky. Especially the people associated with the investment in the large-scale industrial growth programs have to be very cautious due to the challenges they face during the post sanction situations.


Generally, when a fraud takes place then it effects that company’s reduction in the assets and increase in its liabilities. When we talk about banks in particular, the frauds may result in the loss of its potential customers or crisis of confidence and also trust of banking by the public which may in long run end up in another failed situation of a bank. Analysis of cases of such sort brings out few major elements that are responsible for the commission of frauds in banks.

  • Huge contribution of staff either both the supervisor and clerical or independent external elements or in connivance with outsiders in the commission of frauds.
  • When bank staff fails to follow the meticulously laid down instructions and guidelines and also the low compliance level i.e., the degree to which procedures and prudential practices framed by the Regulatory Authorities to follow to prevent such events.
  • When there is lack of training to the staff regarding prevention of such bank frauds.
  • Forgeries, manipulation of cheques, drafts and other instruments by the external elements perpetuating fraud on banks. Like in the case of Canara Bank vs. Canara Sales Corporation & Ors[1], where 42 cheques were forged where the customer was negligent to check with bank when received the details of transactions through phone reminders and the bank was also negligent enough to check whether the cheques are forged or not due to which the court held that the banks cannot escape the liability by showing the negligence of the customer and held the bank liable.
  • There is this growing trend of influential people of the society taking advantage of the banks by getting the rules bent, regulations flouted and bank norms thrown to the winds.

When a fraud happens then the bank beyond the financial losses also loose customer loyalty and the confidence of the shareholder in the institution and not to mention the impact on its reputation. Even after the implementation of the electronic tracking and improved security practices for deterring any fraud that may take place, the threat of bank frauds still exists and occurs on regular-basis. With the change in the management controls, practices and policy frameworks the effect of fraud which is a crime, and is becoming difficult to pin down can be mitigated. An integrated framework, with most comprehensive plan together, new and modern fraud detection and prevention are the need of the hour for the financial institutions. Whereas this type of approach needs to detect the incidents in transaction to protect the fraud at the point and time of the transaction. It must also span all the ways customers interact with the institution and provide structured oversight for the fraud management program.

These are the causes and the effects of a bank fraud in the Indian Banking Industry.


[1] AIR 1987 1603

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