New mechanism to check bank loan frauds

MUMBAI (TIP): The RBI on Thursday put in place a new framework to check loan frauds including by way of early warning signals at banks and red flagging of accounts, while swindlers will have no access to further banking finance.

Besides, the central bank will set up a Central Fraud Registry that can be accessed by all banks to identify borrowers having committed frauds with any bank in the past.

The CBI and the Central Economic Intelligence Bureau (CEIB) will also share their databases with banks.

The concept of a Red Flagged Account (RFA) is being introduced in the current framework as an important step in fraud risk control, RBI said in guidelines for banks to deal with loan frauds.

“An 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 wrong doing which may ultimately turn out to be fraudulent,” it said.

No restructuring or grant of additional facilities may be made in the case of RFA or fraud accounts, it said.

Making penal provision stricter, the RBI said the provisions as applicable to willful defaulters would apply to the fraudulent borrowers including the promoter director and other whole time directors of the company insofar as raising of funds from the banking system or from the capital markets by companies with which they are associated is concerned, etc.

“In particular, borrowers who have defaulted and have also committed a fraud in the account would be debarred from availing bank finance from banks and financial institutions for for a period of five years from the date of full payment of the defrauded amount,” it said.

After this period, it is for individual institutions to take a call on whether to lend to such a borrower, it said, adding, the penal provisions would apply to non-whole time directors (like nominee directors and independent directors) only in rarest of cases based on conclusive proof of their complicity.

“No compromise settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued,” it said.

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