In a move that could faciliate early detection of fraud and help banks prevent bad loans arising out of fraudulent activities, the RBI has detailed a framework that banks will have to adhere to for detecting and dealing with loan frauds.
Under this framework, banks will now have to access and process data from registrar of companies, monitor stock movements, legal disputes and track record of the borrower before sanctioning a loan.
Once loan is sanctioned, bank’s risk management group will have to monitor disbursement and the adherence of the borrower to the terms of the loan contract, RBI said. This framework applies to loans above R50 crore.
“In case of consortium arrangements, individual banks must conduct their own due diligence before taking any credit exposure and also independently monitor the end use of funds rather than depend fully on the consortium leader,” the RBI said in its notification on Thursday.
A bank can label an account a Red Flagged Account (RFA) if the account is under suspicion of fraudulent activity and such a suspicion is thrown up by early warning signal (EWS). Banks must use such triggers to launch a detailed investigation, said RBI. All RFAs will have to be reported to the Central Repository of Information on Large Credits (CRILC).
Under consortium lending, banks must share among themselves any major fraud noticed at the time of annual reviews or through the tracking of EWS.
Once an account is termed fraud, banks will have to make full provisioning, irrespective of the value of the collateral.
If any bank is unable to do so at one shot, it can provide over a period of four quarters, the central bank said.
While the decision to label an account as fraud would rest with the bank, the bank will have to immediately report the same to CRILC to alert peers. Thereafter, the bank which has red flagged the account or detected the fraud must ask the consortium leader or the largest lender to convene a meeting of the joint lenders’ forum to discuss the issue.
Such a meeting must be convened within 30 days of the account being labelled as fraud.
A forensic audit must be conducted and concluded within three months from the date of the JLF meeting. The JLF will reconvene and decide on the status of the account, by consensus or majority rule, the RBI said.
Tough talk
* Concept of a Red Flagged Account (RFA) introduced
* An RFA is one where a suspicion of fraudulent activity is thrown up
* Banks to be alert on receiving an early warning signal (EWS)
* Banks must use triggers to launch a detailed probe
* Threshold for EWS and RFA is an exposure of over R50 cr
* Lenders to follow up stock market movements, monitor databases on a continuous basis
* All such accounts must be reported on the CRILC data platform
* A consortium meet to be convened within 30 days of fraud detection
* Forensic audit must be completed within three months
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