Banks Ask RBI To Change The Definition Of ‘Fraud’ In Banks As It Sends Wrong Signal To Stakeholders

All the high-street banks are coming together to request the Reserve Bank of India to change the definition of ‘fraud’ as it has ruined many businesses and scared away financiers and ended in long drawn out legal battles. 

An inflexible regulation makes it necessary for all banks to tag a borrowing company and all of its accounts as ‘fraud account(s)’ It starts a process where the lenders have no choice but to make a police complaint and take a hit. The whole process is very toll-taking on businesses and is very out of proportion to the size of the fraud. 

The regulation is driving away stakeholders

This regulation is driving away investors, creditors, suppliers and other stakeholders as well as draining the wealth of the borrowing corporations. The lenders who give out all the information in the public domain might even face legal and angry borrowers which may lead to them feeling like they are being disgraced without being heard. 

Bank CEOs decided to make a representation to RBI at a meeting held a few weeks ago to discuss some issues that the lenders have to deal with, two senior bank officials told ET.

Any diversion is flagged as fraud

Frauds are linked to malafide intention and cheating in the criminal law, however, the bank categorises any diversion of funds as ‘fraud’. As per the existing regulation, if a Rs 300 crore fraud surfaces in a company whose total borrowings from a dozen banks is Rs 15,000 crore, all banks have to tag the whole borrowing as ‘fraud’, start a criminal proceedings, and make full provision 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,” stated a senior bank official.

A borrower account is tagged as fraud on the basis of a forensic report where the loan becomes a non-performing asset – where the interest or principal payment in overdue for over 90 days.