Red-flagging exposures: Banks may classify DHFL as fraud account

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Mumbai | Published: November 14, 2019 3:00:29 AM

State Bank of India (SBI), Bank of Baroda (BoB) and Union Bank of India are understood to be among those contemplating the move to red-flag the account.

The Reserve Bank of India (RBI) allows banks to classify an exposure as a fraud account which could either be a standard account or a non-performing asset (NPA).

With bankers are not very hopeful of the resolution plan for Dewan Housing Finance Corporation (DHFL) going through, they are planning to treat their exposure to the troubled firm as a fraud account. The Reserve Bank of India (RBI) allows banks to classify an exposure as a fraud account which could either be a standard account or a non-performing asset (NPA).

Sources told FE three banks are on track to red-flag their exposures to the mortgage financier, which is the first step towards recognising it as a fraud account. State Bank of India (SBI), Bank of Baroda (BoB) and Union Bank of India are understood to be among those contemplating the move to red-flag the account. One of them has already red-flagged the DHFL account, sources told FE. In the next one month, bankers must arrive at a consensus on classifying DHFL a fraud account.

Bankers are not very hopeful of the resolution plan going through, as the draft forensic audit report from KPMG suggests that funds could have been diverted by DHFL and the Serious Fraud Investigation Office (SFIO) carrying on a parallel investigation. “After the draft audit report, banks have started red-flagging the DHFL account. They (banks) will anyway not be okay with the resolution plan, unless there is a change in management,” one of the people said.

The RBI introduced the concept of red-flagged accounts (RFAs) in a circular dated May 7, 2015. “The concept of a RFA is being introduced in the current framework as an important step in fraud risk control. A RFA is one where a suspicion of fraudulent activity is thrown up by the presence of one or more early warning signals (EWS). These signals in a loan account should immediately put the bank on alert regarding a weakness or wrongdoing, which may ultimately turn out to be fraudulent. A bank cannot afford to ignore such EWS but must instead use them as a trigger to launch a detailed investigation into a RFA,” the central bank had said in the notification.

Once a bank has identified an account as an RFA, within 15 days it must ask the consortium leader or the largest lender under a multiple banking arrangement to convene a meeting of the joint lenders’ forum (JLF) to discuss the issue.The meeting of the JLF must be convened within 15 days of such a request being received. “In case there is a broad agreement, the account would be classified as a fraud; else based on the majority rule of an agreement among banks with at least 60% share in the total lending, the account would be red-flagged by all the banks and subjected to a forensic audit commissioned or initiated by the consortium leader or the largest lender under MBA,” the 2015 notification said.

The threshold for EWS and RFA is an exposure of Rs. 50 crore or more at the bank’s level, irrespective of the lending arrangement. All accounts of over Rs. 50 crore classified RFA must also be reported on the Central Repository of Information on Large Credits data platform with the dates on which the accounts were classified as such.

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