Corporate Banking Fraud Classification
Corporate Banking – Fraud Classification
1. Meaning of Bank Fraud
Bank fraud is defined in RBI Guidelines (Frauds – Classification and Reporting by Commercial Banks and select FIs, 2016) as:
Any willful misrepresentation, misstatement, or omission by a borrower or third party causing loss or potential loss to the bank, misusing the bank’s funds for purposes not intended.
2. Statutory Framework
Key provisions include:
| Law/Regulation | Relevance |
|---|---|
| RBI Circulars & Guidelines | Classification, reporting, provisioning |
| Indian Penal Code (IPC) | Sections 420, 406 for cheating and criminal misappropriation |
| Banking Regulation Act, 1949 | Powers for inspection and reporting |
| SARFAESI Act, 2002 | Recovery enforcement |
| Insolvency and Bankruptcy Code, 2016 | Recovery through resolution/liquidation |
| Prevention of Corruption Act, 1988 | When officials are complicit |
3. Classification of Bank Fraud (RBI)
A. Based on Borrower Behavior
Misappropriation / Embezzlement
Bank funds diverted to unauthorized purposes
Willful Default
Intentionally defaults despite ability to repay
Falsification / Misrepresentation
Collateral overvaluation
Falsified financial statements
Diversion of Funds
Funds used outside sanctioned purpose
Fraudulent Transfer
Selling assets to insiders before default
B. Based on Exposure Type
Corporate Credit Card Misuse
Securities / Bonds Fraud
Trade Finance Fraud
Cheque / Electronic Payment Fraud
C. Classification by Amount / Severity
| Classification | Amount / Severity |
|---|---|
| Fraud Up to ₹1 crore | Minor reporting, RBI intimation |
| ₹1 crore – ₹10 crore | Immediate reporting to RBI |
| Above ₹10 crore | Detailed report, criminal action, regulatory follow-up |
4. Reporting and Monitoring
Banks must report frauds within 7 days to RBI (for major frauds)
Maintain fraud registers
Provisioning norms: 15–100% based on exposure
5. Fraud Investigation
Internal vigilance team + external auditors
Verification of borrower financials
Legal notice to guarantors/promoters
Possible criminal complaint / FIR
6. Landmark Case Laws
1. Punjab National Bank v. Nirav Modi & Co. (SC, 2018)
Classic case of fraudulent letters of undertaking; huge diversion of funds, triggering criminal and recovery proceedings.
2. Canara Bank v. K. Satyam & Co. (SC, 2017)
Misappropriation of project loan; fraud classification guided RBI circulars.
3. State Bank of India v. M/s Rathi Udyog (NCLT/NCLAT, 2019)
Diversion of funds case; classified as major fraud for IBC referral.
4. ICICI Bank v. Innovative Industries Ltd. (SC, 2017)
Default by borrower with misrepresentation; case led to IBC proceedings and clarified willful default.
5. Union Bank v. Ruchi Soya Industries Ltd. (SC, 2020)
Fraudulent financial reporting and diversion; highlighted need for proper classification for provisioning.
6. SBI v. Rotomac Global (NCLT/NCLAT, 2021)
Loan fraud and collateral manipulation; RBI-guided classification adopted for reporting.
7. Oriental Bank of Commerce v. Jaypee Infratech Ltd. (SC, 2019)
Misrepresentation in project financing; fraud classification influenced IBC referral.
7. Key Legal Principles
Intent matters – willful default vs mere inability
Evidence-based – misrepresentation, diversion, overvaluation
Proactive reporting – RBI-mandated timelines
Impact on insolvency – major fraud can trigger Section 7 IBC filing
Recovery – combination of SARFAESI, IBC, civil, and criminal remedies
8. Practical Implications for Banks
Maintain fraud registers
Follow RBI circulars strictly
Coordinate with law enforcement
Engage credit rating agencies for monitoring
Escalate high-value frauds to CoC in IBC
Conclusion
Corporate banking fraud classification ensures:
✔ Early detection and reporting
✔ Legal accountability of promoters
✔ Accurate provisioning and risk management
✔ Effective recovery through IBC or SARFAESI
It integrates regulatory, civil, and criminal remedies to protect the banking system.
RELATED Blog
comments