Banks to seek change in definition of ‘fraud’

All high-street banks will jointly move the Reserve Bank of India (RBI) to urge a change in the sweeping definition of ‘fraud‘ which cripples businesses, scares away financiers and results in legal tangles.

A rigid regulation requires all banks to label a borrowing company and all its accounts as ‘fraud account (s)’ when one lender puts a fraud tag. It sets off a process where lenders have to file police complaints and take a knock- which is often disproportionately higher than the size of the fraud -on their bottom lines.

The combined action rapidly worsens the fortunes of the borrowing corporate, driving away creditors, suppliers, investors and other stakeholders. And lenders which place all the information in public domain may face legal action – as some of the court battles bear out – when angry borrowers think they were disgraced without being properly heard.

Bank CEOs decided to make a representation to RBI at a meeting held a few weeks ago to discuss certain issues faced by the lenders, two senior bank officials told ET.

When contacted, Sunil Mehta, chief executive of the industry body Indian Banks Association, said, “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.”

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

While fraud is linked to malafide intention and cheating in the criminal law, banks categorise any diversion of funds as fraud. According to existing regulations, if a Rs 300 crore fraud surfaces in a company whose total borrowings from a dozen banks is Rs 15,000 crore, all banks classify the entire borrowing as ‘fraud’, 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,” said a senior bank official.

A borrower account is declared as fraud based on the findings of a forensic report where the loan has become a non-performing asset (where interest or principal payment is overdue for 90 days).

“A forensic audit will always come out with something. Even if it can’t conclusively prove, it would point at certain lapses. Now, if the end-use of the loan is changed, it is a fraud. But a change in end-use may not necessarily mean that funds have been siphoned off to purchase personal assets. Also, fraud is a criminal offence, not a civil recovery action – hypothetically, even if the amount is repaid, the criminal proceedings may continue,” said another banker.

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