Bank Fraud & Non-Performing Assets (NPAs)
Indian Economy
- PYQs8
- Articles1
Background
Understanding the causes, consequences, and measures to combat bank fraud and NPAs is vital for assessing the health of the Indian economy, banking sector reforms, and financial stability.
Bank fraud refers to the illegal acts committed by individuals or entities to illegally obtain money or assets from banks, often through misrepresentation or misuse of loan funds. Non-Performing Assets (NPAs) are loans or advances for which the principal or interest payment remained overdue for a period of 90 days.
Facts & tables
- Impact
- Leads to significant financial losses for banks, impacting their profitability and lending capacity.
- Causes
- Often involves misrepresentation, misuse of funds, and sometimes collusion between borrowers and bank officials.
- Consequence
- Contributes to the accumulation of NPAs, a major challenge for the Indian banking sector.
- Mitigation
- Addressed through regulatory measures by RBI and investigations by agencies like CBI/ED.
| Type | Reference |
|---|---|
| Conceptual area | Indian Economy |
| Body | Role |
|---|---|
| Reserve Bank of India | Regulates |
| Public Sector Banks | Affected party |
Prelims angle
Prelims angle: Multi-statement analysis
Prelims angle: Institutional roles and functions
- Illegal acts to obtain funds from banks.
- Often results in Non-Performing Assets (NPAs).
- NPAs: loans overdue for >90 days.
- Impacts bank profitability and economic stability.
- Addressed by RBI regulations and investigative agencies.
Ministry sets policy; regulator often has quasi-judicial powers.
| Year | Framing tags |
|---|---|
| 2024 | Factual recall, Multi-statement analysis |
| 2021 | Multi-statement analysis, Institutional roles and functions |
| 2020 | Multi-statement analysis, Factual recall |
| 2019 | Conceptual understanding, Terminology-based question |
| 2019 | Purpose or function of a policy tool, Conceptual understanding |
| 2018 | Factual recall, Multi-statement analysis |
| 2016 | Multi-statement analysis, Factual recall |
| 2013 | Factual recall, Institutional roles and functions |
Timeline
-
Indian Economy
Conceptual area
-
Prelims 2013
Factual recall, Institutional roles and functions
-
Prelims 2016
Multi-statement analysis, Factual recall
-
Prelims 2018
Factual recall, Multi-statement analysis
-
Prelims 2019
Conceptual understanding, Terminology-based question
-
Prelims 2019
Purpose or function of a policy tool, Conceptual understanding
-
Prelims 2020
Multi-statement analysis, Factual recall
-
Prelims 2021
Multi-statement analysis, Institutional roles and functions
-
Prelims 2024
Factual recall, Multi-statement analysis
-
Court allows CBI to arrest former Reliance ADAG executive Jhunjhunwala in bank fraud case
Bank fraud involves illegal acquisition of funds from banks, often leading to NPAs (loans overdue >90 days), impacting banking sector health and requiring strong regulatory and investigative action.
See also
Past papers
2013–2024 · 8 questions
In the news
Court allows CBI to arrest former Reliance ADAG executive Jhunjhunwala in bank fraud case
Bank fraud involves illegal acquisition of funds from banks, often leading to NPAs (loans overdue >90 days), impacting banking sector health and requiring strong regulatory and investigative action.
Try these PYQs
In India, the central bank’s function as the ‘lender of last resort’ usually refers to which of the following?
1. Lending to trade and industry bodies when they fail to borrow from other sources.
2. Providing liquidity to the banks having a temporary crisis.
3. Lending to governments to finance budgetary deficits.
Select the correct answer using the code given below:
Statement 1 is incorrect. The ‘lender of last resort’ (LoLR) function of the central bank primarily applies to commercial banks and financial institutions, not trade and industry bodies. Businesses and industries generally rely on commercial banks, financial institutions, and capital markets for funds. The Reserve Bank of India (RBI) does not directly lend to trade and industry bodies under its LoLR function. Statement 2 is correct. The central bank (RBI) acts as the ‘lender of last resort’ for commercial banks facing liquidity shortages. This helps prevent bank failures and maintains financial stability. RBI provides liquidity through mechanisms like repo operations, open market operations (OMO), and special liquidity facilities. Statement 3 is incorrect. The RBI does not directly lend to the government to cover budgetary deficits under the 'lender of last resort' function. The government primarily finances deficits through market borrowings, treasury bills, and bonds. However, RBI can indirectly support the government by purchasing government securities in the open market (OMO) or monetizing debt in special situations (historically, through ways and means advances - WMA).
With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements:
1. There is no minimum capital requirement for wholly owned banking subsidiaries in India.
2. For wholly owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals.
Which of the statements given above is/are correct?
Statement 1 is incorrect: Under the RBI’s 2013 Scheme for Setting up of Wholly Owned Subsidiaries (WOS), a foreign bank must have a minimum paid-up voting equity capital of ₹500 crore (₹5 billion). The claim that there is "no minimum capital" is factually false. Statement 2 is incorrect: This is the high-nuance part. The actual RBI rule states that not less than 50% of the directors should be Indian nationals/NRIs/PIOs. Because the statement in the question restricted the 50% requirement only to "Indian nationals," it excluded NRIs and PIOs, making the statement legally inaccurate. Furthermore, there is a separate sub-condition that at least one-third of the directors must be Indian nationals who are specifically resident in India.
Which of the following grants/ grant direct credit assistance to rural households?
1. Regional Rural Banks
2. National Bank for Agriculture and Rural Development
3. Land Development Banks
Select the correct answer using the codes given below:
1. Regional Rural Banks (RRBs): RRBs are established to provide credit and banking facilities to rural areas, especially to small and marginal farmers, agricultural laborers, and rural artisans. They grant direct credit assistance to rural households. 2. National Bank for Agriculture and Rural Development (NABARD): NABARD primarily provides refinance facilities to banks and financial institutions for lending to rural sectors. It does not directly lend to rural households, except in very limited cases through pilot schemes. 3. Land Development Banks (LDBs): LDBs provide long-term credit to farmers for land development and agricultural improvements. They grant direct loans to rural households.
With reference to the governance of public sector banking in India, consider the following statements
1. Capital infusion into public sector banks by the Government of India has steadily increased in the last decade.
2. To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected.
Which of the statements given above is/are correct?
Statement 1 is incorrect. The govt has been infusing large amounts in seven public sector banks through recapitalisation bonds but this has not been steady as statement 1 says. Statement 2 is correct. To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected. For example, the merger of SBI associate banks will result in the creation of a stronger merger entity. Hence, option C is the correct answer.
What was the purpose of Inter-Creditor Agreement signed by Indian banks and financial institutions recently?
The Inter-Creditor Agreement (ICA) signed by Indian banks and financial institutions is a mechanism to expedite the resolution of stressed assets, particularly in cases of consortium lending involving loans of Rs. 50 crore or more.
Show 3 more PYQs
With reference of the Indian economy, consider the following statements:
1. ‘Commercial Paper’ is a short-term unsecured promissory note.
2. ‘Certificate of Deposit’ is a long-term instrument issued by the Reserve Bank of India to a corporation.
3. ‘Call Money’ is a short-term finance used for interbank transitions.
4. ‘Zero-Coupon Bonds’ are the interest bearing short-term bonds issued by the Scheduled Commercial Banks to corporations.
Which of the statements given above is/are correct?
The following statements are correct concerning the Indian economy: - Commercial Paper is a short-term unsecured promissory note. It's a money market instrument issued by companies to raise short-term funds.
- Call Money is a short-term finance used for interbank transactions. Banks borrow or lend money from each other for overnight periods to meet their liquidity requirements. Incorrect statements: - Certificate of Deposit is not issued by the Reserve Bank of India. It's a negotiable instrument issued by commercial banks to depositors for a fixed maturity period at a predetermined interest rate.
- Zero-Coupon Bonds can be long-term or short-term, but they are not issued by Scheduled Commercial Banks. These bonds don't pay periodic interest, but are sold at a discount to their face value. The difference between the purchase price and the maturity value represents the return on investment. Therefore, the correct codes are 1 and 3 only.
The establishment of “Payment Banks’ is being allowed in India to promote Financial Inclusion. Which of the following statements is/are correct in this context?
1. Mobile telephone companies and supermarket chains that are owned and controlled by residents are eligible to be promoters of Payment Banks.
2. Payment Banks can issue both credit cards and debit cards.
3. Payment Banks cannot undertake lending activities.
Select the correct answer using the code given below:
Statement 1 is Correct. Mobile telephone companies and supermarket chains owned and controlled by residents can be promoters of Payment Banks. This allows entities with a wide reach to expand financial services to unbanked populations. Statement 2 is Incorrect. Payment Banks cannot issue credit cards. They can only issue debit cards linked to a pre-existing bank account. Statement 3 is Correct. Payment Banks are not allowed to undertake lending activities. Their focus is on facilitating basic banking services like deposits, payments, and money transfers.
Which of the following is not included in the assets of a commercial bank in India?
Assets represent the resources a bank owns. For a commercial bank, these resources include: - Advances (loans): Money lent to businesses, individuals, and other borrowers.
- Investments Securities like government bonds, treasury bills, or shares in other companies.
- Money at call and short notice: Funds are lent to other banks for a very short period, usually overnight.
- Deposits are liabilities for a bank. They represent the money that customers entrust to the bank, which the bank is obligated to repay.