NEW DELHI, Jul 17:
Terming financial sector frauds as “lethal parasite” to the economy, Union Minister Jayant Sinha today asked banks to fast-track the process of reporting such instances to help the probe agencies crack these cases.
Sinha, Minister of State for Finance, also said that it is the public sector banks that account for a substantial chunk of the total amount involved in such cases.
“Another glaring issue in this context is the considerable delay in declaration of frauds by various banks in cases of consortium/multiple financing. We have on occasions observed more than 12-15 months lag in declaration of the same cases as fraud by different bank,” Sinha said.
The Minister further said such delays “not only enables the borrower to defraud the banking system to a larger extent, but also allows him considerable time to erase the money trail and queer the pitch for the investigative agencies”.
Referring to the steps taken by the Government and RBI to tackle the issue of frauds in financial sector, “a lethal parasite to economy of the nation”, Sinha said a concept of ‘Red Flagged Account’ is being introduced, which will alert the banks about a possible fraud before it is committed.
Addressing the vigilance officers of banks, Sinha said the banks would need to use the Early Warning Signals under this new concept to launch a detailed investigation into the concerned ‘Red Flagged Account (RFA)’.
He said this new concept would help check a new emerging trend of large value frauds involving consortium of banks.
“These signals in a loan account should immediately put the bank on alert regarding a weakness or wrong doing which may ultimately turn out to be fraudulent,” he said.
Sinha asked the CVOs to complete the internal probe even if the probe in any case has been handed over to the external agency like the CBI or the Enforcement Directorate.
“The completion of internal probe would also assist in prompt investigation by the law enforcement agencies and the perpetrators of fraud can be brought to book.
Stating that financial sector frauds mainly take place on three counts, technology, KYC and loans, Sinha also said presently there is no single database which the lenders can access to get all the important details of previous frauds reported by banks.
“The creation of such database at RBI will make available more information to banks at the time of start of a banking relationship, extension of credit facilities or at any time during the operation of an account.
“RBI is in the process of designing a Central Fraud Registry, a centralised searchable database, which can be accessed by banks,” he said, while adding that the CBI and the Central Economic Intelligence Bureau (CEIB) have expressed interest in sharing their own databases with the banks.
While RBI announced these measures last month to tackle the menace of financial frauds, several cases have come to the fore in recent months, including at various PSU banks.
“Frauds related to the advances portfolio accounts for the largest share of the total amount involved in frauds in the banking sector.
“Increase in the cases of large value fraud (involving amount of Rs 50 crore and above) in accounts financed under consortium or multiple banking arrangements involving even more than 10 banks at times, is a newly emerging, but unwelcome trend in the banking sector,” he said.
“Another point that needs to be highlighted here is that public sector banks account for a substantial chunk of the total amount involved in such cases,” Sinha said.
Sinha said RBI has prescribed a framework to direct the focus of banks on the aspects relating to prevention, early detection, prompt reporting to RBI and probe agencies and timely initiation of the staff accountability proceedings.
This framework also ensures that the normal conduct of business of the banks and their risk taking ability is not adversely impacted and no new and onerous responsibilities are placed on the banks.
On credit related frauds, Sinha said a majority of these cases were on account of deficient appraisal system, poor post disbursement supervision and inadequate follow up and absence of an orderly system of information sharing among the lender banks further exacerbates the problem.
He said the laxity in post-disbursement supervision and inadequacy of follow up of advances portfolio by banks is clearly underlined by the fact that majority of the fraud cases come to light only during the recovery process initiated after the accounts have been classified as Non Performing Assets (NPAs).
Although RBI has advised banks to ensure proper exchange of information between lenders on the borrowers financed under multiple banking arrangements or consortium arrangements, “cases of multiple financing against the same security are still reported to us indicating utter disregard in conforming to the basic safeguards,” he said.
Another area demanding urgent attention of banks is fixing of staff accountability. “An analysis has revealed that this is a neglected area so far as public sector banks are concerned. The general trend in such cases is to include a large number of officials in the probe so that the investigation is both delayed and diluted,” he said.
Sinha said there was a pressing need to probe staff accountability in a fair and objective manner so as to instill a sense of responsibility amongst the officials for complying with the laid down procedures.
However, he cautioned that while probing staff members, there is a need to differentiate between the losses which the bank suffers in its normal course of business and those which might have resulted from fraudulent actions.
“While fixing accountability, there would be a need to categorically establish malafide intention and malfeasance on the part of the erring employee involved in fraud cases so that the other officials do not become wary of sanctioning even good credit proposals,” he said. (PTI)
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