Government Takes Measures to Curb Fraudulent Incidents in Banks

According to a press release by the Ministry of Finance on Tuesday, the financial year (FY) 2019-20 saw 79 cases of fraud involving an amount of Rs.500 crore or more. FY 2020-21 had 73 cases, and there have been 13 cases reported this financial year as of 30th June 2021. The release stated that this data was given by Dr Bhagwat Kisnrao Karad, the Union Minister of State for Finance, in reply to a question at the Rajya Sabha.

The Minister also stated that unscrupulous borrowers commit frauds through fund diversion methods, fraudulent disposal of hypothecated stocks, the fraudulent discount of instruments, and criminal neglect and managerial failure by the borrowers. He said that the RBI circular has also observed frauds taking place through forged instruments, fictitious accounts, manipulated account books, and fraudulent foreign exchange transactions, among others.

Hence, the government has now taken certain measures to curb the incidence of frauds in banks, such as-

1. The government has issued a ‘Framework for the timely detection, reporting, investigation, etc., relating to large value bank frauds’ to Public Sector Banks (PSBs). This is for the systemic and comprehensive checking of the legacy stock of their non-performing assets (NPAs).

This provides, inter-alia, that-

• All accounts that exceed Rs.50 crore, if classified as NPAs, are examined by banks from the angle of possible fraud. Further, a report should be placed before the bank’s Committee for Review of NPAs on the findings of this investigation.
• An examination should be initiated for the wilful default immediately on reporting the fraud to the RBI.
• A report on the borrower should be sought from the Central Economic Intelligence Bureau if their account turns into an NPA.

2. The Fugitive Economic Offenders Act, 2018, has been enacted to deter any economic offenders from evading the process of Indian laws by remaining outside the jurisdiction of Indian courts. This act provides for the attachment of property of a fugitive economic offender. Further, it provides for the confiscation of such an offender’s property and the disentitlement of the offender from defending a civil claim.

3. PSBs have been advised to obtain certified copies of the passport of the promoters/directors and other authorised signatories of companies that avail loans of more than Rs.50 crore. The PSBs can decide to publish photographs of wilful defaulters in terms of the RBI’s instructions and their board-approved policy. They also need to ensure the rotational transfer of their officials and employees strictly. The heads of PSBs have further been empowered to issue requests for the issue of Look Out Circulars.

4. The government has established the National Financial Reporting Authority as an independent regulator to enforce the auditing standards and ensure the quality of audits.

For any clarifications/feedback on the topic, please contact the writer at athena.rebello@cleartax.in