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RBI introduces ‘red flag’ to clamp down on loan frauds

RFA is one where a suspicion of fraudulent activity is thrown up by warnings.

By: ENS Economic Bureau | Allahabad/mumbai, Mumbai |
May 8, 2015 2:47:21 am

With fund diversion by corporates and non-performing assets (NPAs) of banks on the rise, the Reserve Bank of India (RBI) has decided to introduce the concept of a Red Flagged Account (RFA) in a bid to minimise frau risks.

An RFA account 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. “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 RBI said in a circular.

The threshold for EWS and RFA is an exposure of Rs 50 crore or more at the level of a bank irrespective of the lending arrangement (whether solo banking, multiple banking or consortium). 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 wilful 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.

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“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 a period of five years from the date of full payment of the defrauded amount,” it said.

The initial decision to classify any standard or NPA account as RFA or fraud will be at the individual bank level and it would be the responsibility of this bank to report the RFA or fraud status of the account on the CRILC platform so that other banks are alerted. “Thereafter, within 15 days, the bank which has red flagged the account or detected the fraud would ask the consortium leader or the largest lender to convene a meeting of the Joint Lenders Forum (JLF) to discuss the issue,” it said.

The account would be red flagged by all banks and subjected to a forensic audit commissioned or initiated by the consortium leader or the largest lender under multiple banking arrangement. “The forensic audit must be completed within three months from the date of the JLF meeting authorising the audit. Within 15 days of forensic audit, the JLF will reconvene and decide on status of the account,” RBI said. In case the decision is to classify the account as a fraud, the RFA status would change to fraud in all banks and reported to RBI and on the CRILC platform within a week.

RBI plans Central Fraud Registry

The RBI is in the process of designing a Central Fraud Registry, a centralised searchable database, which can be accessed by banks. The CBI and the Central Economic Intelligence Bureau (CEIB) have also expressed interest in sharing their own databases with the banks. More information in this regard would follow once the structure is finalised, the RBI said.  ENS

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First published on: 08-05-2015 at 02:47:21 am

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