As part of efforts to move away from requiring all banks to label a borrowing company and all of its accounts as “fraud” when a lender places such a fraud label, banks plan to approach the Reserve Bank of India (RBI) to request a change in the definition of “fraud”, according to an ET report. Currently, if a business account is reported fraudulent by one bank, all other banks are required to report fraud on that business’s account.
“We should have a system where the whole company is not tarnished because of a little embezzlement and all of its borrowings are reported as ‘fraud’. Such a declaration and an associated procedure like filing an FIR can compound a company’s problems, creating a negative perception and preventing banks from making lending decisions,” according to the report quoting the CEO of Indian Banks. Association, Sunil Mehta.
The current rule requiring all banks to report fraud on a company’s account if another bank harms the approach of creditors, suppliers, investors and other stakeholders to the company.
For example, if after a forensic audit, a fraud of Rs 500 is discovered in a bank by a company. But, the company also has borrowings from other banks bringing its global loans up to Rs 10,000 crore. According to current regulations, all other banks will also classify the company as “fraud” in their accounts, take criminal action and make full provisioning on their books.
“In such a case, the banks want RBI to allow them to restrict the categorization of the fraud to just Rs300 crore, or ‘value at risk’. Today, even banks where the business has not defaulted must classify the business as a fraudulent account,” according to the ET report citing a bank official.
Public sector banks reported a drop of over 51% in the amount involved in fraud to Rs 40,295.25 crore in the financial year ending March 2022, according to a PTI report citing RBI data sourced from RTI. However, the number of fraud cases has not declined at the same rate as a total of 7,940 frauds reported by PSOs in 2021-22, compared to 9,933 incidents reported in FY21.
“We plan to raise the matter with the RBI, but I would not like to discuss it further at this stage,” the ET report quoted Mehta as saying.
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 fraud worth Rs 3,230.18 crore in just 90 cases, showing that the transactions were high value.
From Rs 67,760 crore in 2015-16, the amount of money lost due to fraud fell to Rs 59,966.4 crore in 2016-17. The next two years brought in less than Rs 45,000 crore. In 2019-20, the number dropped further to Rs 27,698.4 crore and then to Rs 10,699.9 crore in 2020-21.
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