I. Statutory Framework

1. Bharatiya Nyaya Sanhita, 2023 [Old IPC]

• Sec 316 BNS / Sec 409 IPC - Criminal Breach of Trust by banker/public servant: Punishment up to life imprisonment. This is the most used section in bank frauds.
• Sec 318 BNS / Sec 420 IPC - Cheating and dishonestly inducing delivery of property
• Sec 336-340 BNS / Sec 467,468,471 IPC - Forgery and use of forged documents
• Sec 61 BNS / Sec 120B IPC - Criminal Conspiracy

2. Special Laws

• Prevention of Corruption Act, 1988 - Sec 13(2) r/w 13(1)(d): For public sector bank officers who abuse position to obtain pecuniary advantage. Almost all PSB frauds invoke this along with 409/420.
• Prevention of Money Laundering Act (PMLA), 2002: For layering of fraud proceeds.
• Negotiable Instruments Act, 1881 - Sec 138, 141: Criminal liability for dishonor of cheque and for directors/company.
• Banking Regulation Act, 1949 - Sec 46: Penalty for false statements, failure to produce books.
• Information Technology Act, 2000 - Sec 66C, 66D: For digital banking frauds.

II. Essential Ingredients to Attract Criminal Liability

For Sec 409 IPC / 316(5) BNS, Supreme Court has laid down a 2-part test, clarified in Ashok Kumar vs State of Punjab (P&H HC 2023):

In order to attract Section 409 of IPC, the person to whom the property is entrusted should be in the capacity of public servant or in the way of his business as a banker, merchant, factor, broker, attorney or agent, who commits criminal breach of trust

So prosecution must prove:

1. Entrustment or dominion over property in capacity of banker/public servant
2. Dishonest misappropriation or conversion

If there is no dominion, Sec 409 fails. In Suresh Pal vs State (Delhi HC):

Section 409 IPC would not be attracted if the accused did not have any dominion or control over the property and was merely acting as an employee without any authority to handle or deal with the property

III. Who Can Be Held Liable?

1. Bank Officials / Branch Managers

A. UCO Bank Fraud Case - CBI vs K. Margabanthu
Complex fraud of Rs 50 crore by discounting of bills of exchange. Principal accused, high ranking officials of UCO Bank were convicted of criminal breach of trust and conspiracy under Sections 409 and 120-B

B. PNB Scam - Nirav Modi & Mehul Choksi Case
CBI added Sec 409 against Gokulnath Shetty, then Dy Manager, for issuing fraudulent LoUs. The court noted:

punishment for the offence under section 409 (criminal breach of trust by public servant, or by banker, merchant or agent) of the IPC is life imprisonment

C. ICICI - Videocon Case - Chanda Kochhar Case (2023)

Industrial Credit and Investment Corporation of India Bank's former MD Chanda Kochhar was charged with an aggravated form of Criminal Breach of Trust under Section 409... accused of defrauding the ICICI bank of 1730 crores by approving loans to Videocon in violation of its regulations

This is now the leading case on Sec 409 against private bank CEO - showing that even private bank MD can be treated as entrusted with bank's assets.

2. Borrowers / Customers

Borrowers are booked under Sec 420, 468, 471 read with 120B and PC Act. Creation of fake stock statements, diversion of funds, forgery of title deeds.

3. Corporate Successor Liability - The DBS Bank vs LVB Case (SC 2023)

Most important latest Supreme Court ruling on banking criminal liability.

Facts: Lakshmi Vilas Bank (LVB) directors committed fraud before amalgamation. After RBI forced amalgamation with DBS Bank India Ltd, prosecution tried to continue criminal case against DBS and its new directors.

Supreme Court held:

Therefore, criminal liability cannot be attributed to DBS or its directors who came in after the amalgamation and were approved by the RBI

In the ordinary sense, criminal liability can neither be attributed to DBS nor its directors brought in after amalgamation and whose appointments were approved by RBI

Principle: Criminal liability is personal. It does not transfer to transferee bank in a non-voluntary amalgamation under Sec 45 of Banking Regulation Act. Individual accountability of LVB directors remains, but DBS is protected to ensure depositors and banking stability.

4. Vicarious Liability of Bank for Employee Fraud

Supreme Court Holds Banks Liable for Employee Misconduct

The Supreme Court recently held that recipients of a fixed deposit cannot suffer at the cost of the criminal conduct of the Bank officials and that, in such an event the Bank would be held vicariously liable for the conduct of their employees

So for civil compensation, bank is vicariously liable, even though criminal jail goes to employee.

IV. What Is NOT Criminal Liability?

Courts are quashing misuse of criminal law in pure banking disputes.

1. Security Cheque Presentation is Not Criminal Breach of Trust
Delhi High Court in China Trust Commercial Bank case:

The Delhi High Court has held that presentation of a security cheque by a bank upon default of loan repayment does not constitute the offence of criminal breach of trust under Section 409 IPC

2. Bank Manager Not Authorized Officer Under SARFAESI Cannot Be Criminally Liable
SC in SARFAESI case:

Since the appellant was neither the authorized officer at the relevant time nor responsible for the auction process or issuance of the sale certificate, the allegations against him are baseless and do not attract criminal liability

3. SC/ST Act Cannot Be Used for Loan Disputes
SC quashed proceedings against bank officers where borrower tried to convert NPA recovery dispute into atrocity case. Held RBI guideline violation does not amount to caste atrocity without specific allegation of caste-based abuse.

V. Effect of One-Time Settlement (OTS) on Criminal Liability

This is crucial.

General Rule: Civil settlement does not automatically quash criminal case if offence is serious fraud against public funds.

Exception Created by Supreme Court:

1. SC 2023-24 Ruling - Criminal cases on loan defaulters must end after settlement

Supreme Court has held that criminal proceedings should not be allowed to go on against a loan defaulter if the bank and the debtor reached a compromise for settlement of the loan account

1. SC Half Yearly Digest 2025 - Bank Fraud OTS

Supreme Court quashed criminal proceedings against appellants involving allegations of ₹25.89 lakh bank fraud under Sections 120B, 420, 468, and 471 of IPC and Sections 13(2) r/w 13(1)(d) of Prevention of Corruption Act, following a full settlement of dues with the Bank via OTS of ₹52,79,000

So if fraud is private in nature, amount repaid fully with interest, and bank gives No Dues + no objection, SC will quash under Sec 482 CrPC / 528 BNSS to prevent abuse of process.

VI. Punishments

Practical Defence Points Courts Consider

1. Was there actual entrustment/dominion?
2. Was accused the authorized officer at relevant time?
3. Is there civil dispute being given criminal colour?
4. Has there been full OTS with bank's consent?
5. Is successor entity being wrongly roped in?