Loans: 91 accounts worth 8,587 cr fraudulent? Banks face the music

By: | Published: June 22, 2016 6:30 AM

Loans totalling some R8,500 crore have been red-flagged by banks on the grounds there could be an element of fraud related to them. In some instances, a forensic audit has been initiated.

Reserve Bank of India (RBI) data accessed by FE for the nine months to March showed lenders suspect possible fraud for exposures to the tune of R8,587 crore.(Reuters)Reserve Bank of India (RBI) data accessed by FE for the nine months to March showed lenders suspect possible fraud for exposures to the tune of R8,587 crore.(Reuters)

Loans totalling some R8,500 crore have been red-flagged by banks on the grounds there could be an element of fraud related to them. In some instances, a forensic audit has been initiated.

Reserve Bank of India (RBI) data accessed by FE for the nine months to March showed lenders suspect possible fraud for exposures to the tune of R8,587 crore.

A red-flagged account (RFA) is the first step towards identifying fraud and could be applicable to both a standard loan — where the interest is being paid regularly — or a bad asset — one where the borrower has defaulted.

In the nine-month period between July 2015 and March 2016, banks have drawn the attention of the central bank to 91 accounts where they suspect fraud. Of these, the loans of 38 borrowers, who owe banks Rs 2,595 crore, were red-flagged in Q4FY16.

The central bank had introduced the classification of RFA accounts in May 2015 as a step towards controlling the risk of fraud. The presence of one or more early warning signals alerts lenders to some weakness or malpractice which is then investigated.

Among the 28 banks that have reported RFAs in the July-March period are Bank of India with R1,061 crore loans, Bank of Baroda with R1,432 crore, and Punjab National Bank R310 crore. Private sector banks like HDFC Bank (R177 crore) and ICICI Bank (R240 crore) are also part of the list.

An executive director at a public sector bank observed RFA reporting had increased awareness of fraudulent accounts, especially at branch offices. He pointed out officials scrutinised accounts manually to check for signs of malfeasance.

“Forensic audit is the next stage, but we have noticed that in many such accounts, banks have commissioned a forensic audit even before the RFA reporting,” he explained. In the past, forensic audits have been initiated by lenders for firms such as Deccan Chronicle Holdings, Winsome Diamonds, Kingfisher Airlines and Alok Industries.

An account is typically classified as an RFA if the borrower defaults on payments, if high-value cheques bounce or the company is raided by tax authorities whether from the income tax, sales tax or central excise departments.

Moreover, frequent changes in the scope of the project to be undertaken by the borrower also prompts lenders to red-flag the account. Further, funds coming from other banks to pay off existing dues is also viewed suspiciously.

Within a fortnight of an alert being put out on the Central Repository of Information on Large Credits platform, the bank that has red-flagged the account or detected the fraud asks the consortium leader to convene a meeting of the joint lenders’ forum. In case the lenders agree, the account would be classified as a fraud; else, based on the majority ruling, the account would be red-flagged by all banks and subjected to a forensic audit.

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