1. Economic slowdown across the globe is a concern for world & India is no more an exception. Economic slowdown is hitting the Indian Banking System very hard. As we all are aware that Non-Performing Assets are one of the biggest challenges faced by the Indian Banking System over the ages and numbers goes on increasing from year to year.
2. In a move that could facilitate early detection of fraud and help banks prevent bad loans arising out of fraudulent activities, the RBI has detailed a framework that banks will have to adhere to for detecting and dealing with loan frauds.
3. A bank can label an account a Red Flagged Account (RFA) if the account is under suspicion of fraudulent activity and such a suspicion is thrown up by early warning signal (EWS). Banks must use such triggers to launch a detailed investigation.
4. Checks / Investigations can be done during the different stages of the loan life-cycle which may be carried out either at :
- Pre Sanction
- Annual Review
Some Early Warning signals which should alert the bank officials about some wrongdoings in the loan accounts which may turn out to be fraudulent vide notification RBI/2014-15/590 DBS.CO.CFMC.BC.No.007/23.04.001/2014-15 dated May 7, 2015.
- Default in payment to the banks/ sundry debtors and other statutory bodies, etc., bouncing of the high value cheques
- Raid by Income tax /sales tax/ central excise duty officials
- Frequent change in the scope of the project to be undertaken by the borrower
- Under insured or over insured inventory
- Invoices devoid of TAN and other details
- Dispute on title of the collateral securities
- Costing of the project which is in wide variance with standard cost of installation of the project
- Funds coming from other banks to liquidate the outstanding loan amount
- Foreign bills remaining outstanding for a long time and tendency for bills to remain overdue
- Onerous clause in issue of BG/LC/standby letters of credit
- In merchanting trade, import leg not revealed to the bank
- Request received from the borrower to postpone the inspection of the godown for flimsy reasons
- Delay observed in payment of outstanding dues
- Financing the unit far away from the branch
- Claims not acknowledged as debt high
- Frequent invocation of BGs and devolvement of LCs
- Funding of the interest by sanctioning additional facilities
- Same collateral charged to a number of lenders
- Concealment of certain vital documents like master agreement, insurance coverage
- Floating front / associate companies by investing borrowed money
- Reduction in the stake of promoter / director
- Resignation of the key personnel and frequent changes in the management
- Substantial increase in unbilled revenue year after year.
- Large number of transactions with inter-connected companies and large outstanding from such companies.
- Significant movements in inventory, disproportionately higher than the growth in turnover.
- Significant movements in receivables, disproportionately higher than the growth in turnover and/or increase in ageing of the receivables.
- Disproportionate increase in other current assets.
- Significant increase in working capital borrowing as percentage of turnover.
- Critical issues highlighted in the stock audit report.
- Increase in Fixed Assets, without corresponding increase in turnover (when project is implemented).
- Increase in borrowings, despite huge cash and cash equivalents in the borrower’s balance sheet.
- Liabilities appearing in ROC search report, not reported by the borrower in its annual report.
- Substantial related party transactions.
- Material discrepancies in the annual report.
- Significant inconsistencies within the annual report (between various sections).
- Poor disclosure of materially adverse information and no qualification by the statutory auditors.
- Frequent change in accounting period and/or accounting policies.
- Frequent request for general purpose loans.
- Movement of an account from one bank to another.
- Frequent ad hoc sanctions.
- Not routing of sales proceeds through bank
- LCs issued for local trade / related party transactions
- High value RTGS payment to unrelated parties.
- Heavy cash withdrawal in loan accounts.
- Non submission of original bills.