In criminal law, fraud is associated with deception and trickery; nonetheless, banks consider any diversion of funds to be fraud. In consideration of this, there is an ongoing discussion about a change in definition of ‘fraud.’
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All high-street banks will band together to lobby the Reserve Bank of India (RBI) for a revision in the definition of “fraud.” When one lender places a fraud tag on a borrowing company, all banks must designate the company and all of its accounts as ‘fraud account (s)’.
This type of legislation also sets in motion a process in which lenders are forced to file police reports and suffer disproportionately more losses than the fraud itself. Furthermore, the acts harm the borrowing company’s fortunes by driving away creditors, suppliers, investors, and other stakeholders, reports TimesNow.
In light of the worries, high-street bank CEOs opted to submit a proposal to the central bank for modifying the definition of “fraud” during a recent meeting. According to two senior bank officials mentioned by Economic Times, the conference was held to discuss key difficulties facing the lenders.
Industry body Indian Banks Association CEO Sunil Mehta stated, “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.”
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The former banker stated that the matter would be taken up with the RBI.
In criminal law, fraud is associated with deception and trickery; nonetheless, banks consider any diversion of funds to be fraud. According to current standards, if a Rs 300 crore scam is discovered in a firm with total borrowings of Rs 15,000 crore from a dozen banks, all banks label the whole borrowing as ‘fraud,’ and criminal procedures are initiated.
“In such a case, banks want RBI to allow them to restrict the categorisation of fraud to only the Rs 300 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.
How is fraud declared?
It is announced when a loan has become a non-performing asset as a result of the findings of a forensic report (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,” explains another banker.
It is a fraud if the loan’s end-use is changed. However, a shift in end-use does not always imply that funds have been diverted to buy personal property. Also, because fraud is a criminal offense rather than a civil recovery action, the banker added that even if the money is repaid, the criminal procedures could persist.