Public sector bank loan frauds: A 10% problem, but a 98% financial crisis

Public sector banks (PSBs) in India are grappling with a growing number of fraud cases, with borrowal account frauds comprising only 10 per cent of the total number of fraud cases but accounting for a massive 98 per cent of the total fraud value from April 2020 to September 2024, according to senior government official sources.

 

Borrowal fraud in banks, also called loan fraud, refers to any deceitful act where an individual or entity intentionally provides false information to obtain a loan or credit, often by manipulating their income, assets, or employment details to deceive a lender and secure funds they wouldn’t otherwise qualify for.

 

In contrast, non-borrowal frauds — such as forgery, misappropriation of funds, manipulation of books, diversion of funds, and misfeasance — account for 90 per cent of fraud cases but only 2 per cent of the total fraud value during the same period.

 

Within non-borrowal frauds, digital and cyber frauds dominate, making up 96 per cent of cases by number, though they account for just 22 per cent of the fraud value.

 

As of the latest data, there have been 10,928 borrowal fraud cases involving a total of Rs 1.7 trillion from April 2020 to September 2024. Meanwhile, 98,503 non-borrowal fraud cases have been reported, involving Rs 2,912.94 crore during the same period. 

 

The finance ministry held a meeting on Wednesday with PSB officials, other ministries, and investigative agencies, including the Central Bureau of Investigation (CBI), to discuss measures for expediting investigations into bank frauds. The ministry emphasised the need for enhanced cooperation between departments and agencies, which is expected to help resolve stressed banking assets more effectively.

 

The finance ministry further highlighted that frauds perpetrated by PSB staff have increased in recent months. From April 2020 to September 2024, there were 1,810 such incidents, involving Rs 1,820.74 crore.

 

Under the Reserve Bank of India’s (RBI’s) Master Circular on Frauds — Classification and Reporting, banks are required to report cases involving their own employees to the CBI or local police if fraud is suspected.

 

In a statement, the finance ministry noted that ongoing efforts to improve inter-departmental coordination will serve as a strong deterrent and could accelerate the resolution of cases. The ministry also pointed to recent amendments to the Prevention of Corruption Act, 1988, which protect bankers from investigation or prosecution for bona fide decisions, as having a positive impact.

 

Earlier this year, the RBI had warned banks about “lakhs of accounts” being misused for fraudulent transactions and the “evergreening” of loan accounts. RBI Deputy Governor Swaminathan Janakiraman raised concerns at a conference, noting that these internal accounts posed high risks due to their potential for misuse.

 

The finance ministry’s ongoing efforts aim to strengthen fraud detection, improve the speed of investigations, and ensure accountability across the banking sector.