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Bank Fraud: Lenders to Approach RBI to Seek Change in Definition; Here’s Why


As part of efforts to move away from the requirement of all banks to label a borrowing company and all its accounts as ‘fraud’ when one lender puts such a fraud tag, banks are planning to approach the Reserve Bank of India (RBI) to seek a change in the definition of ‘fraud’, according to an ET report. Currently, if an account of a company is declared fraud by any bank, all other banks are required to declare that company’s account fraud.

“We should have a system where the entire company is not tarnished because of a small diversion of funds and its entire borrowing is declared as ‘fraud’. Such a declaration and associated procedure like filing of FIR can deepen the problems for a company, creating a negative perception and holding back banks from taking lending decisions,” according to the report quoting Indian Banks Association CEO Sunil Mehta as saying.

The current rule of requiring all banks to declare a company account fraud if any other bank adversely affects the approach of creditors, suppliers, investors and other stakeholders towards the company.

For example, if after a forensic audit, a fraud of Rs 500 is surfaced in a bank by a company. But, the company also has borrowings from other banks taking its overall loans to the tune of Rs 10,000 crore. According to existing regulations, all other banks will also classify the company as ‘fraud’ in their accounts, initiate criminal proceedings, and make full provisioning on their books.

“In such a case, banks want RBI to allow them to restrict the categorisation of fraud to only the Rs300 crore, or the ‘value-at-risk’. Today, even banks to whom the company has not defaulted have to grade the company as a fraud account,” according to the ET report quoting a bank official.

Public sector banks reported over a 51 per cent dip in the amount involved in frauds to Rs 40,295.25 crore during the financial year ended March 2022, according to a PTI report quoting the RBI data sourced through RTI. However, the number of fraud cases did not fall at the same pace as a total of 7,940 frauds reported by the PSBs in 2021-22, against 9,933 incidents reported in FY21.

“We plan to take up the matter with the RBI, but I would not like to discuss the matter further at this point,” the ET report said quoting Mehta.

Bank of India reported frauds worth Rs 5,923.99 crore (209 incidents), followed by Bank of Baroda at Rs 3,989.36 crore (280); Union Bank of India Rs 3,939 crore (627), while Canara Bank reported frauds worth Rs 3,230.18 crore in just 90 cases — showing that the transactions were of high-value frauds.

From Rs 67,760 crore in 2015-16, the amount of money lost to fraud dipped to Rs 59,966.4 crore in 2016-17. The two years that followed reported under Rs 45,000 crore. In 2019-20, the number further dropped to Rs 27,698.4 crore and then to Rs 10,699.9 crore in 2020-21.

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