Shushant Singhal

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
  • Disbursement
  • 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.

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