RBI Mulls Tightening Fraud Reporting Norms For Lenders
A delay in tagging a loan account as fraudulent often leads to lower provisioning being made against the exposure by lenders.
The Reserve Bank of India is working on setting a trigger system to ensure that the gap between banks declaring a loan account as fraud is reduced drastically from years to just six to eight months, according to two people who are familiar with the development.
According to the first person mentioned above, the RBI has seen a gap of up to five to six years between the first bank declaring the loan (account) as fraud and the last one, which is unacceptable. To rectify this, the RBI is ready with a time-bound tracking system that forces banks to take a view on an account once any institution tags a loan as fraud, the first person said.
In the revised reporting system, once a lender declares a loan account as fraudulent, a unique number will be assigned to this borrower, and all the institutions that have exposure to them will get an alert with this number.
The intent behind this is to create single-point tracking of a borrower for fraud reporting. Once this number is generated, each institution will have a maximum of about six months to come back to the RBI and say whether they think this borrower should be tagged as a fraud or not.
The RBI is not asking that the account be declared fraudulent; it is simply insisting that banks take a decision and provide reasons for that decision, the first person quoted above said. This will reduce the timeline for fraud detection and reporting drastically to a maximum of 6–8 months, the person said.
According to the RBI's last annual report, loan fraud worth Rs 60,414 crore was reported in 2021–22. But, of this, Rs 10,930 crore worth of frauds were perpetrated before 2012–13. Only Rs 3,785 crore worth of frauds occurred in FY22, and Rs 3,719 crore occurred in FY21.
This shows an almost decade-long delay in the reporting of frauds by banks and financial institutions.
A delay in tagging a loan account as fraudulent often leads to lower provisioning being made against the exposure by lenders. A fraud loan account has to be fully provided for in just four quarters, while a non-performing asset must be fully provided for in eight quarters, according to RBI norms.
The delay in fraud reporting also means that the bank’s profit and loss accounts reflect an inaccurate picture of the bank’s finances, especially when the fraud is from a vintage loan.
Additionally, delay in declaring a loan as fraudulent slows down legal proceedings against the errant parties, including bank staff. It also delays the process of initiating recovery proceedings, which leads to attrition in the company and erosion of the underlying assets and capital.
In many cases, promoters have fled Indian shores because there are no legal proceedings initiated yet that can be used to prevent them from escaping.
According to the second person quoted above, the present fraud reporting system for banks clearly lays out timelines for banks to declare accounts as fraud and also reporting to the RBI when this decision is taken.
But, despite the timelines provided, this system remains plagued with delays in detection, reporting, and other banks and institutions taking a view on their own exposure to the same company or group.
Fraud detection and tracking will thus move from a pull system of reporting to a push system with a time-based mechanism in place to ensure banks and non-bank lenders are accurately detecting and providing for such accounts on their books, the second person quoted above said.