RBI directions on fraud in accounts

Tells banks to put in place early warning system, make full provision once identified, fix responsibility on staff

Alarmed over the rise in fraud in the banking system, the Reserve Bank of India (RBI) has asked lenders to ‘red-flag’ any suspicious activity in this regard.

Banks, RBI has said, have to make full provisioning of the amount at stake when a fraud is detected, though if there is no delay in reporting it, they may amortise this over four quarters. They are also to immediately report this to the Central Repository of Information on Large Credits.

RBI has asked banks to develop an early-warning system for any accounts over Rs 50 crore. “The concept of a red-flagged account (RFA) is being introduced in the current framework as an important step in fraud risk control. An RFA is one where a suspicion of fraudulent activity is thrown up by the presence of one or more early warning signals (EWS),” RBI said in a notification on Thursday. “A bank cannot afford to ignore such EWS but must instead use these as a trigger to launch a detailed investigation."

Some of these signs, said the regulator, were bouncing of high-value cheques, a raid by tax officials, a dispute on title of collateral securities or funds coming from other banks to liquidate a loan due, among others.

At present, banks tend to report an account as fraud only when they exhaust chances of further recovery. A delay in reporting also delays the alerting of other banks.

“The most effective way of preventing frauds in loan accounts is for banks to have a robust appraisal and an effective credit monitoring mechanism during the entire life-cycle of the loan account,” RBI said.

Also, banks have been asked to initiate and complete a staff accountability exercise within six months from the date of classification as a fraud. They're required to register a complaint with law enforcement agencies immediately on detection of fraud.

If an account is so identified, the penal provisions as applicable to wilful defaulters would apply to the fraudulent borrower. That is, the promoter directors and other wholetime directors are to be barred from raising funds, from banks or from the capital markets.

“In particular, borrowers who have defaulted and have also committed a fraud in the account would be debarred from availing finance from scheduled commercial banks, development financial institutions, government-owned non-bank finance companies, investment institutions, etc, for a period of five years from the date of full payment of the defrauded amount. After this period, it is for individual institutions to take a call on whether to lend to such a borrower,” RBI said.

Also, no restructuring or grant of additional facilities will be allowed for such accounts.