India's banking system, long regarded as a cornerstone of the nation's economic stability and a symbol of public trust, stands at a troubling crossroads.
According to the Reserve Bank of India's Annual Report for the financial year 2024–25, ended March 31, 2025, the total value of reported bank frauds nearly tripled to Rs. 36,014 crore, or approximately $4.2 billion, representing a sharp rise from Rs. 12,230 crore in the previous year.
Although the number of cases declined from roughly 36,060 to 23,953, the average size of each fraud increased dramatically. Public sector banks accounted for 71 percent of the total value, amounting to Rs. 25,667 crore, with credit and advances-related frauds surging to Rs. 33,148 crore.
These figures are not mere statistics. They expose a deep and systemic crisis marked by insider collusion, governance failures at the highest levels, ethical compromises, regulatory shortcomings, political influence, and judicial delays. "The first step toward reform is acknowledging the depth of institutional failure," says former deputy governor of the RBI Viral V. Acharya.
Hallmarks of High-Profile Scandals
The litany of high-profile scandals illustrates how pervasive the problem has become.
In 2018, Punjab National Bank suffered one of India's largest banking frauds when diamond merchants Nirav Modi and Mehul Choksi, in collusion with bank officials, obtained unauthorised Letters of Undertaking worth between Rs. 11,400 crore and over Rs.14,000 crore through the SWIFT system without any collateral or proper approval. The fraud persisted for years undetected.
Similarly, Punjab and Maharashtra Cooperative Bank concealed a Rs. 6,500 crore exposure to the Housing Development and Infrastructure Limited group, which constituted nearly 73 percent of its loan book, by creating around 21,000 fictitious accounts and maintaining parallel books.
Yes Bank's near-collapse involved serious governance lapses and allegations of improper lending to the DHFL promoters, leading to the arrest of its co-founder and former Managing Director Rana Kapoor by the Enforcement Directorate on charges of receiving substantial kickbacks.
Kingfisher Airlines defaults left banks with over Rs. 9,000 crore in unpaid loans, emblematic of crony lending practices associated with Vijay Mallya.
"Banking is built on trust. Once trust erodes, the costs to the economy become immeasurable."
— Mark Carney
Private Banks Under Scrutiny
Private sector banks, often perceived as more professionally managed, have not escaped scrutiny.
In the ICICI Bank case, former Managing Director and Chief Executive Officer Chanda Kochhar was held guilty by the PMLA Appellate Tribunal in July 2025 for accepting a Rs. 64 crore bribe in exchange for sanctioning a Rs. 300 crore loan to the Videocon Group between 2009 and 2010. The tribunal established that funds were routed through her husband Deepak Kochhar's company, NuPower Renewables, highlighting clear conflicts of interest and money laundering.
"Good governance is not a compliance exercise; it is a culture."— Shaktikanta Das
The HDFC–MSRDC Controversy
At HDFC Bank, the Maharashtra State Road Development Corporation episode around 2021 reveals sophisticated efforts to circumvent regulations. The bank aggressively pursued Rs. 25,000 crore in deposits from MSRDC's land acquisition funds. While offering ordinary depositors around 3.5 percent interest, it effectively committed 6.01 percent to MSRDC.
The roughly 2.51 percent differential was allegedly routed through the marketing department as sponsorship payments for a so-called Road Safety Awareness Campaign, disbursed via four local vendors for a total of between Rs. 39.7 crore and Rs. 45 crore. Formal letters were signed by junior staff with only verbal clearances from zonal heads. Vendor invoices lacked proper validation, and there were no event confirmation certificates.
This arrangement violated the RBI's Master Directions on Interest Rate on Deposits, which require uniform rates across customers for similar deposits and tenor, with full transparency and board-approved policies. Such camouflaging through non-CSR marketing expenses raised serious questions about both internal controls and regulatory compliance.
"Ethics and integrity are the foundation of sustainable finance."— Christine Lagarde
Leadership Accountability at HDFC
The repercussions within HDFC Bank were significant. Part-time Chairman Atanu Chakraborty resigned on March 18, 2026, explicitly stating that certain practices and happenings observed over the preceding two years were not in congruence with his personal values and ethics.
An internal vigilance probe implicated senior leaders, including Managing Director and Chief Executive Officer Sashidhar Jagdishan. Chief Marketing Officer Ravi Santhanam reportedly described the marketing department's role as facilitating the camouflage of differential interest as legitimate spending.
In a separate but related development, the bank terminated three senior executives over the mis-selling of Additional Tier-1 bonds to non-resident Indian clients through its Dubai and Bahrain branches: Sampath Kumar, Harsh Gupta, and Payal Mandhyan. Around a dozen other executives faced penalties in total.
Additional incidents, such as IDFC First Bank's unauthorised transactions involving approximately 597 crore rupees in Haryana government accounts and Bank of Baroda's 8.7 crore rupee currency chest theft by an employee, further highlight ongoing insider vulnerabilities.
"Culture is what people do when nobody is watching."— Warren Buffett
Why Oversight Mechanisms Fail
These failures stem from profound weaknesses in oversight mechanisms. Internal, statutory, and external auditors, including Big Four firms, frequently miss red flags due to collusion by insiders who bypass core banking systems, conflicts arising from lucrative non-audit consulting services, and a reliance on tick-box compliance rather than forensic investigation. Parallel records, off-system transactions, and verbal approvals evade periodic sampling-based reviews.
Bank boards and their independent directors, tasked with fiduciary duties under the Companies Act 2013, the Banking Regulation Act 1949, and RBI guidelines, often face severe information asymmetry. Management controls the flow of data, while part-time directors juggle multiple commitments, lack sufficient domain expertise in rapidly evolving areas, and sometimes defer to powerful chief executives due to groupthink or fear of losing their positions. Audit and risk committees too often accept management representations without rigorous challenge.
"The challenge in governance is not merely rules, but the courage to enforce them."— Nandan Nilekani
Regulatory, Political, and Judicial Shortcomings
The regulatory framework, political realities, and judicial processes have not provided adequate counterbalance.
In FY25, the Reserve Bank of India levied penalties amounting to Rs. 54.78 crore across 353 regulated entities for violations including cybersecurity shortcomings, Income Recognition and Asset Classification norms, Know Your Customer directions, fraud reporting under Master Directions, and Central Repository of Information on Large Credits submissions.
Such fines, while numerous, remain modest relative to the scale of institutions and are typically treated as operational costs rather than catalysts for cultural change. Enforcement agencies secure some asset attachments and convictions, as in the Chanda Kochhar case, yet multi-agency coordination issues and procedural complexities often prolong matters.
Political influence remains particularly entrenched in public sector banks, which control around 60 percent of banking assets. Government oversight of appointments and occasional informal pressure for directed lending, infrastructure financing, or election-related credit flows have contributed to evergreening of loans and concealment of stress.
Private banks face competitive pressures when pursuing large government-linked deposits, as seen in the MSRDC matter. This broader ecosystem nurtures quid pro quo arrangements and ethical compromises.
Courts, though active in select rulings, are severely overburdened. Landmark cases involving Nirav Modi, Mehul Choksi, Vijay Mallya, Rana Kapoor, and numerous others routinely extend over a decade.
Recovery rates for fraud amounts have historically remained low, often below 15 percent and sometimes under 1 percent in older cases according to past disclosures. Such delays effectively shield influential actors while taxpayers shoulder repeated recapitalisation costs for public sector banks.
"Delayed justice in financial crime ultimately becomes denied justice for society."— Arun Jaitley
Imperative for Deep Reform
India can no longer rely on incremental or cosmetic reforms. A comprehensive overhaul is imperative. This includes full separation of audit and consulting services for external auditors, mandatory joint audits with cooling-off periods, and genuine empowerment of boards through domain experts and limits on multiple directorships.
Robust whistleblower protections, artificial intelligence-driven real-time monitoring of transactions and reconciliations between systems such as SWIFT and core banking, and depoliticised appointment processes in public sector banks through independent mechanisms are essential.
Faster special commercial courts dedicated to financial crimes, clearer personal liability provisions for directors and executives including disqualification and bonus clawbacks, and stricter enforcement of existing laws must become priorities.
The Banking Laws Amendment Act of 2025, which seeks to strengthen governance and depositor safeguards, along with broader visions such as the High-Powered Committee on Banking for Viksit Bharat 2047, provide useful foundations, but execution will determine their impact.
"Technology can strengthen oversight, but only integrity can sustain institutions."— Uday Kotak
A Sobering Verdict on Governance
The nearly threefold increase in fraud values to Rs. 36,014 crore is far more than a data point. It serves as a sobering verdict on the state of governance in Indian banking.
When a respected chairman resigns on ethical grounds, a former chief executive is adjudged guilty of bribery after prolonged proceedings, and multiple senior functionaries face termination or implication in deposit irregularities and mis-selling episodes, the system is flashing clear warning signals.
Public sector banks' overwhelming share of frauds and the dominance of credit-related scams reflect chronic oversight weaknesses, while creative workarounds in private banks expose the tensions between aggressive growth targets and ethical conduct.
Restoring depositor confidence, attracting patient capital, and supporting India's long-term economic ambitions require far more than additional circulars or modest financial penalties. It demands a profound cultural transformation in which integrity consistently outweighs short-term business targets, genuine accountability supersedes political or commercial influence, and the public interest prevails over private or electoral considerations.
With fraud values escalating so dramatically in a single year despite repeated regulatory tightening, the window for decisive action is narrowing. Whether India's regulators, bank boards, political leadership, and judiciary can muster the collective resolve to enact deep structural changes, including greater institutional autonomy and faster justice, will ultimately decide whether the banking sector becomes a reliable engine of progress or a persistent vulnerability on the path to a developed India.
The evidence accumulated so far leaves little room for complacency. Urgent and thorough reform is not an option but an imperative.
[Major General Dr. Dilawar Singh, IAV, is a distinguished strategist having held senior positions in technology, defence, and corporate governance. He serves on global boards and advises on leadership, emerging technologies, and strategic affairs, with a focus on aligning India's interests in the evolving global technological order.]
