How inoperative bank accounts are misused for scams: Experts explain

Can inoperative banks be the target of financial frauds? On Saturday, the State Bank of India (SBI), India’s largest lender, announced a nationwide campaign to promote the activation of inoperative bank accounts.

 

A bank account is classified as inoperative when there are no customer-initiated transactions for over two years, according to SBI.

 

Why is reactivating dormant accounts important?

 

SBI chairman C S Setty stressed the need to complete the re-KYC process for accounts under the Pradhan Mantri Jan Dhan Yojana (PMJDY). “This effort will help ensure these accounts remain active, allowing customers to transact seamlessly,” he said in a statement.

 

Haryana Chief Secretary Vivek Joshi also recently urged banks to run a special drive to reactivate inactive PMJDY accounts.

 

How dormant accounts increase the risk of fraud

 

The Reserve Bank of India (RBI) earlier this year mandated banks to annually review accounts without customer activity for over a year. It also prohibited banks from imposing penalties for maintaining a minimum balance or reactivating dormant accounts.

 

“To reduce the risk of fraud, banks must monitor recently reactivated accounts for at least six months, ensuring unauthorised transactions are detected early,” the RBI said in its guidelines.

 

Ketan Mukhija, senior partner at Burgeon Law, explained the risks associated with inactive accounts. “These accounts are often targeted for scams and identity theft due to reduced monitoring. Reactivating them helps not only financial inclusion but also safeguards deposits.”

 

Natasha Treasurywala, partner at Desai & Diwanji, added, “While fraud is a concern for all inoperative accounts, the drive to reactivate PMJDY accounts aligns more with fostering financial inclusion.”

 

How inactive accounts can be exploited

 

Fraud risks aren’t limited to external threats. “Internal bank employees with access to inactive accounts could misuse them for unauthorised transactions. These accounts also serve as potential mule accounts in money laundering schemes,” said Vikram Babbar, partner at EY Forensic & Integrity Services.

 

Babbar further elaborated on how dormant accounts might facilitate illegal activities. “Money could be moved into these accounts and withdrawn immediately to obscure transaction trails, making them ideal conduits for illicit operations.”

 

Consequences of keeping accounts dormant

 

Inactive accounts are not just vulnerable to fraud; they also come with other challenges. Ashwin R Anneppanavar, partner at IndiaLaw LLP, explained the potential drawbacks:

 

< Dormant accounts may incur fees, such as maintenance or inactivity charges.

< Account holders lose access to services like online banking or new debit card requests.

< Interest may stop accruing on such accounts.

< Unclaimed deposits are transferred to the Depositor Education and Awareness Fund managed by the RBI.

 

“Account holders often overlook dormant accounts, and banks may not monitor them rigorously, making them more susceptible to fraudulent activities,” Anneppanavar noted.

 

Cost of financial frauds

 

India incurred losses of Rs 11,333 crore due to cyber fraud during the first nine months of 2024, according to data from the Indian Cyber Crime Coordination Centre (I4C) under the Ministry of Home Affairs (MHA).

 

Jan Dhan accounts

 

The Pradhan Mantri Jan Dhan Yojana (PMJDY) was launched on August 28, 2014, by the government to promote financial inclusion. The aim was to provide basic banking services to individuals without access to formal banking systems.

 

Public and private sector banks were directed to ensure the availability of accounts and services, even in rural and remote areas. On the day of the launch, over 15 million bank accounts were opened, setting a global record for the most accounts opened in a single day. The scheme also earned a place in the Guinness World Records for opening the highest number of bank accounts in a week.

 

However, according to a statement by the Minister of State for Finance Bhagwat K Karad, about 20% of Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts were still inoperative in December 2023. This means that out of the total 510 million PMJDY accounts, about 103 million accounts were inoperative. The latest data is not known yet.