1. Statutory Framework

A. Under BNS / IPC - General Fraud Offences:

B. Special Statutes:

1. Prevention of Corruption Act, 1988 - Sec 7, 13
Bank officers of public sector banks and even private banks performing public duty are treated as public servants.

CBI v. Ramesh Gelli & Ors. (2016) 3 SCC 788 - Supreme Court held Chairman/MD and officers of private banks are public servants under PC Act because banking is a public duty under Banking Regulation Act. They can be prosecuted for criminal misconduct - taking illegal gratification for sanctioning loans.

2. Prevention of Money Laundering Act, 2002
Where proceeds of bank fraud are laundered, Sec 3 PMLA attracts 3-7 years + attachment of property.

3. Negotiable Instruments Act, Sec 138
Criminal liability for cheque dishonour - often used in credit facilities.

4. RBI Fraud Classification Framework + Information Technology Act
RBI Master Direction on Frauds 2024 mandates reporting, forensic audit, and filing FIR. IT Act Sec 66C/D for identity theft in cyber banking fraud.

2. Who Can Be Criminally Liable?

1. Bank Officers/Employees:

• For sanctioning loans without due diligence in lieu of bribe
• Misappropriation of deposits
• Not following KYC/AML, facilitating money laundering

But liability requires personal mens rea and active role.

Supreme Court in Bank Manager SARFAESI Case (2024) quashed criminal proceedings against a bank manager, holding - "Since the appellant was neither the authorized officer nor responsible for auction process, allegations do not attract criminal liability. Criminal liability must be based on actual involvement."

SC in SC/ST Atrocity Case against Bank Officers (2024) - Non-compliance with RBI guidelines does not amount to criminal offence under SC/ST Act unless specific caste abuse proved. Banking dispute cannot be converted into criminal case.

2. Borrower / Company Directors:

Principal doctrine - No vicarious criminal liability under BNS/IPC.

Sunil Bharti Mittal v. CBI (2015) 4 SCC 609 - Landmark: "The concept of vicarious liability is unknown to criminal law" for IPC offences. A director can be made accused only if there is sufficient material to prove his active role coupled with criminal intent. Mere position as director is not enough. This is applied repeatedly in bank fraud cases.

3. Bank as Institution:
Bank can be vicariously liable civilly, but criminally company is liable through its directing mind. However:

DBS Bank Ltd. v. CBI (Corporate Successor Liability) - Supreme Court clarified successor criminal liability does not apply in banking mergers approved by RBI. DBS acquired Lakshmi Vilas Bank, criminal acts were by erstwhile LVB officials. SC quashed proceedings against DBS, holding criminal liability cannot be attributed to successor who came after amalgamation.

Supreme Court Holds Banks Vicariously Liable for Employee Misconduct in fixed deposit fraud cases - where employee commits criminal breach of trust, bank is liable to depositor to make good loss, though employee is criminally liable separately.

3. Critical Case Law Divide - Does Settlement Wipe Criminal Liability?

There are two lines:

Line 1 - Settlement does NOT wipe fraud:
CBI v. A. Ravishankar Prasad (2009) and recent SC reaffirmation: "One-Time Settlement with Bank No Ground To Quash Loan Fraud Case; Society At Large Is Impacted." Even if bank recovers Rs. 41 crores, fraud, forgery, corruption offences remain because bank fraud is offence against society.

Fraud committed against banks is offence against society - SC in Central Bureau of Investigation v. N. N. Ranganathan observed courts should not show leniency.

Line 2 - Commercial dispute settled can be quashed:
SC Half Yearly Digest 2025 - Bank Fraud OTS Case: Supreme Court quashed criminal proceedings under Sec 120B, 420, 468, 471 IPC and Sec 13(2) PC Act where Rs. 25.89 lakh fraud was fully settled via OTS of Rs. 52.79 lakhs, holding where dispute is purely commercial, fully settled post-offence, and no continuing public interest, continuation is abuse.

Reconciliation: If case involves only cheating simpliciter and private loss is made good, court may quash under Sec 482 CrPC / Sec 528 BNSS. If forgery, corruption, public money, systemic fraud - no quashing.

4. Essential Ingredients Prosecution Must Prove

1. Mens Rea: Dishonest intention at inception. In Anil Mahajan v. Bhor Industries, SC held mere breach of contract, failure to repay loan does not become cheating unless deception at beginning.
2. Active Role: Specific overt act, as per Sunil Bharti Mittal.
3. Sanction: Under Sec 17A of PC Act (as amended 2018), prior approval of appropriate authority required before inquiry against public servant for acts in discharge of official duties - protection for bonafide lending decisions. Not required for trap cases.
4. RBI Reporting: Under RBI Fraud Risk Management Directions, bank must declare fraud and report to CBI within timeline - failure itself leads to regulatory action.

5. Defences Available to Bankers

• Bonafide commercial decision protected by business judgment rule
• No personal gain - C.K. Jaffer Sharief v. State (2013) - conspiracy requires meeting of minds
• Absence from credit committee / lack of authority
• Due diligence followed as per loan policy
• Sec 17A PC Act sanction not obtained

6. Current Enforcement Trend

RBI now mandates Early Warning Signals, Red Flagging of Accounts, Forensic Audit under Sec 43A BR Act before FIR. ED attaches under PMLA even while IBC process continues - See Vijay Mallya, Nirav Modi, DHFL, Bhushan Steel cases where criminal proceedings run parallel to IBC.

If you are studying for exams, remember this structure:

Cheating of Bank -> Sec 318 BNS + Sec 61 conspiracy
Breach by Banker -> Sec 316 BNS + Sec 13 PC Act
Director Liability -> Prove active role (Sunil Bharti Mittal)
OTS Effect -> Distinguish between private cheating vs public fraud.