What do Zoom Developers Pvt Ltd, Sterling Biotech Ltd, Kingfisher Airlines Ltd, Dewan Housing Finance Corp Ltd, Reliance Communications Ltd and Srei Infrastructure Finance Ltd have in common? They are a few among thousands of fraud accounts on the books of Indian banks.<\/p>\n
Different banks have attached the fraud tag to these accounts between FY2012 and FY2023. The amount varies but the money involved in each case is at least Rs 100 crore.<\/p>\n
The banking industry reported 9,102 frauds involving an amount of Rs 60,389\u00a0crore\u00a0in FY2022 against 7,358 frauds and Rs 1.37 trillion in FY2021 and 8,702 frauds and Rs 1.85 trillion in FY2020. In 2019, the value of\u00a0money involved in bank frauds was Rs 1.9 trillion and the number 8,700.\u00a0About 86 per cent of these cases were large-value corporate frauds worth over Rs 50 crore each.<\/p>\n
For the first time, the June 2017\u00a0t<\/strong>he\u00a0<\/strong>Financial Stability Report of the Reserve Bank of India (RBI) spoke about the growing volume and value of bank frauds and described it as \u201cone of the emerging risks to the financial sector\u201d. It highlighted the \u201cgeneral credit governance issues\u201d and referred to serious gaps in credit underwriting, alongside the lack of continuous monitoring of cash flows and cash profits, the diversion of funds and double financing.<\/p>\n Two years later, the June 2019\u00a0the\u00a0<\/strong>Financial Stability Report blamed delayed detection for the rise in frauds and pointed out that 90.6 per cent of the frauds reported in FY2019 were related to cases that happened between 2000 and 2018.<\/p>\n And\u00a0in\u00a0December 2018, the RBI flagged frauds as the \u201cmost serious concern\u201d in managing risk in the Indian banking system.<\/p>\n Even my aunt is aware of this. Why are we talking about bank frauds? What\u2019s new about them?<\/p>\n In the last week of March, India\u2019s highest court\u00a0held that the borrowers must be given a hearing before classifying an account as fraud.<\/p>\n The Supreme Court verdict relates to the RBI\u2019s 2016 circular, which allowed banks to declare wilful defaulters as fraud.\u00a0A wilful defaulter is one who has the capacity to service bank loans but does not do so. Fund diversion also makes one a wilful defaulter.<\/p>\n <\/p>\n While it upholds a 2020 high court judgment,\u00a0the apex court is against a unilateral declaration of fraud by banks without a hearing. As a precondition to classify a bank defaulter as fraud, a hearing is a must to record the reasons for declaring an account as fraud.<\/p>\n <\/p>\n Declaration of fraud has severe penal and civil consequences, including \u201cblacklisting\u201d the borrower from accessing institutional finance. Clearly, the objective of the judgment is to prevent banks from exercising powers arbitrarily.<\/p>\n This master circular, issued in 2016 under Section 35 A of the Banking Regulation Act, 1949, allowed banks to unilaterally classify accounts of wilful defaulters as fraudulent. The point to note is that\u00a0all fraud accounts are wilful defaulters but not all wilful defaulters are fraudsters.<\/p>\n The circular was updated a year later in July 2017.\u00a0Rajesh Agarwal, promoter of B S Ltd, engaged in power transmission and distribution, passive telecom infrastructure, renewable energy and mineral resources, challenged\u00a0this in the Telangana High Court. The RBI and India\u2019s largest lender, the State Bank of India (SBI), moved the Supreme Court against the high court order.<\/p>\n <\/p>\n Apart from hurting the borrowers\u2019 ability to raise fresh credit if banks use the right to declare them frauds arbitrarily (the declaration \u201cis tantamount to blacklisting of borrowers from accessing institutional finance\u201d),\u00a0the circular violates the principles of natural justice. This seems to be the basis of the Supreme Court judgment even though the lenders find the circular handy for\u00a0early detection of fraud.<\/p>\n Will this judgment dramatically change the credit landscape? Let\u2019s first take a look at the current procedure of fraud detection.<\/p>\n # Going by Section 447 of the Companies Act 2013, fraud includes any act of omission and commission and concealment of facts to gain undue advantage.<\/p>\n # The date of branding an account as a fraud account is the date on which the fraud is committed.<\/p>\n # The date of detection of all frauds of at least Rs 100 crore in a bank\u2019s book refers to the date of approval by the managing director or executive director of a bank after a committee of executives places it before the top management.<\/p>\n # The fraud monitoring group of a bank is deeply involved in the process. The red-flagged accounts, or RFAs, are immediately uploaded on the\u00a0RBI\u2019s\u00a0Central Repository of Information on Large Credits, or CRILC,\u00a0platform.<\/p>\n The banks supply data in real time for all loans of\u00a0Rs 5 crore and above to CRILC, which was set up in June 2014. For accounts turning bad, the data is weekly, while standard accounts are reported monthly.<\/p>\n # Six months after red-flagging the account, if there is no change in status, the fraud declaration takes place.<\/p>\n # Typically, banks use forensic experts as well as external auditors besides internal auditors in the process. The forensic audit is completed in three months.<\/p>\n (Incidentally, a Department of Financial\u00a0\u00a0<\/strong>Services\u00a0[DFS]\u00a0letter\u00a0of the finance ministry,\u00a0dated February 27, 2018, to public sector bank [PSB] chiefs says that \u201call accounts exceeding Rs 50 crore, if classified as NPAs, shall simultaneously be examined by banks from the angle of possible fraud\u201d.<\/p>\n The letter, carrying the subject line \u201cFramework for timely detection, reporting, investigation, etc. relating to large value bank frauds\u201d, says, \u201cIn case, an account turns NPA, banks shall be required to seek a report on the borrower from CEIB (Central Economic Intelligence Bureau) and such report would be furnished by CEIB within one week of receipt of request from the bank.\u201d<\/p>\n This particular letter refers to an earlier DFS letter, written on May 13, 2015, which put the \u201coverall responsibility for ensuring compliance\u201d on all these criteria with the chief of a PSB.)<\/p>\n # Banks do file FIR against frauds. Also, they move the central investigative agency (CBI) for such cases.<\/p>\n # Finally, incidents of frauds are not restricted to plain-vanilla borrowing accounts \u2014 be it retail and corporate loans. They also include cyber frauds.<\/p>\n The dynamics of bank fraud is changing. The number of frauds related to advances has been on a decline, while cybercrime\u00a0\u2014\u00a0card- or internet-based transactions\u00a0\u2014\u00a0is on the rise. Of course, in terms of size, they cannot compete with corporate frauds such as the Rs 22,842 crore fraud of\u00a0ABG Shipyard Ltd\u00a0<\/strong>involving SBI and 27 other lenders and the Rs 11,400 crore fraud that has hit the Punjab National Bank.<\/p>\n At the moment, banks give the opportunity of hearing to the wilful defaulters but not to fraudsters. Once the system of giving the fraudsters a hearing (this means, issuing a show-cause notice) is in place, things are unlikely to change. Who will admit to committing a fraud? Banks do extensive investigation before declaring an account fraud; they owe it to us as they deal with our money. Why would they try to fix an innocent borrower?<\/p>\n Barring a few exceptions,\u00a0<\/strong>the new system will, at best, delay the process, and the court cases after declaring an account fraud will continue. Incidentally, the\u00a0Supreme Court has said that a borrower need not be given an opportunity of being heard before registering an FIR.<\/p>\n","protected":false},"excerpt":{"rendered":" What do Zoom Developers Pvt Ltd, Sterling Biotech Ltd, Kingfisher Airlines Ltd, Dewan Housing Finance Corp Ltd, Reliance Communications Ltd and Srei Infrastructure Finance Ltd…<\/p>\n","protected":false},"author":1,"featured_media":3409,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-3408","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles"],"acf":[],"_links":{"self":[{"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts\/3408","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/comments?post=3408"}],"version-history":[{"count":1,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts\/3408\/revisions"}],"predecessor-version":[{"id":3410,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts\/3408\/revisions\/3410"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/media\/3409"}],"wp:attachment":[{"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/media?parent=3408"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/categories?post=3408"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/tags?post=3408"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}