Please change the definition of 'fraud', bankers to urge RBI: Report

Indian banks will jointly move the Reserve Bank of India (RBI) asking to change the definition of the word "fraud" which crushes companies, leads to legalities even after the amount is repaid and petrify financiers, a media report said on Monday.

According to the Economic Times report, all the high-street bank CEOs decided to make a representation to RBI at a meeting to discuss issues faced by the lenders.

Under the RBI, the regulation requires all banks to mark a lending company and all its accounts as "fraud account" when one lender puts a fraud tag. This leads to a process where lenders have to file police complaints and take a beating, which is often disproportionately higher than the size of the fraud.

All these actions combined impedes in the profits of the borrowing corporate and drives away creditors, investors and other stakeholders.

"We should have a system where the entire company is not tarnished because of a small diversion of funds and its entire borrowing is declared as 'fraud'. Such a declaration and associated procedure like filing of FIR can deepen the problems for a company, creating a negative perception and holding back banks from taking lending decisions," the Economic Times quoted Sunil Mehta, chief executive of the industry body Indian Banks Association, as saying.

According to existing banking regulations, the total borrowing of Rs 15,000 crore will come under the scrutiny and be classified fraud even if it's Rs 300 crore fraud that has surfaced. This leads to initiation of criminal proceedings and full provisioning on their book. The banks, in this case, want RBI to restrict the categorisation of fraud to only Rs 300 and not the whole amount.