Loan frauds: a potential catastrophe on the Indian financial system

Nandakrishna M & Ashirwad J
8th Semester Students of BB.A, LL.B (Hons.),
School of Legal Studies, Cochin University of Science and Technology (CUSAT)


Banking is the lifeblood of the financial system of any nation and plays a significant role in triggering and sustaining the economic growth. In India, this particular sector has been growing tremendously in the recent years after the nationalisation of Banks in 1969 and the liberalisation of economy in 1991. With the rapidly growing banking industry in India, frauds in banks are also increasing at a very fast rate, and fraudsters have started using various innovative methods in their modus-operandi. The main incentive for fraudsters is in yielding the monetary gain to which banking institutions are more fragile as these constitute the sector where bulk of the money are kept. Due to the nature of their daily activity of dealing with money, even after having such a supervised and well regulated system it is very tempting for those who are either associated with the system or outside to find faults in the system and to make personal gains by way of fraud. Bank frauds turn out to be a huge killer for the business sector and are an underlying factor to all human endeavours. It also increases the corruption level of a country. Even after there are various measures taken by the RBI to limit or decrease the frequency of frauds, the amount of money lost due to fraud is still on the rise. As the latest Financial Stability Report of the Reserve Bank of India (RBI) shows, the Indian banking system reported about 6,500 cases of fraud involving over ₹30,000 crore in the last fiscal. Frauds related to loan and advances occupy the largest share in the total number of bank’s fraud, which amounts to about 64% of the total amount involved in the total frauds. In 2015, the RBI introduced new mechanisms for banks to check loan frauds by taking pro-active steps by setting up a Central Fraud Registry, introduced the concept of Red Flagged Account, and Indian investigative agencies (CBI, CEIB) will soon start sharing their databases with banks. However, despite having these stringent regulatory measures over this sector, there has been a spurt in the number of scams happened and the associated arrests by the authorities in India. Through this paper, we intend to focus upon the rising instances of bank frauds in India and the prevailing legal mechanism to tackle the same. We also strive to identify the measures to combat with frauds, specifically loan &advance related frauds in the banking sector of India.

Keywords: Loan  frauds, Indian investigative agencies, RBI, Central fraud registry

Preferred Citation

Nandakrishna M & Ashirwad J, Loan frauds: a potential catastrophe on the Indian financial system, The Lex-Warrier: Online Law Journal (2019) 3, pp. 123 – 138, ISSN (O): 2319-8338

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