RBI gives banks provisioning leeway for reporting frauds on time

Rising number of frauds especially on high value corporate loans has forced the Reserve Bank of India (RBI) to dangle a carrot to banks in order to report diversion of funds on time.

If banks report frauds on time, they can stagger the provisioning in four quarters, providing 25% each quarter. When the account is declared as fraud, banks have to immediately set aside money as buffer equivalent to the loans extended to the borrower. But if not reported on time, then banks will have to provision 100% at one shot.

For instance, if a bank has lent Rs 100 crore to a borrower who is declared fraud, then the bank has to set aside Rs 100 crore as provision immediately, and if it is reported on time, they can stagger the repayment over four quarters, that is in this case Rs 25 crore a quarter.

A senior RBI official said, "We are incentivising banks to report frauds so that they will be encouraged to report fraudulent cases faster rather than brushing it under the carpet. We were forced to declare REI Agro a fraud case as some banks were classifying it as non-performing asset (NPA) standard while some banks declared as an NPA account."

Some of the bank loans to REI Agro (Rs 4,000 crore), Winsome Diamonds (Rs 3,500 crore), Electrotherm India Ltd (Rs 434 crore) have already been listed as frauds.

The central bank has meanwhile asked banks to undertake a forensic audit on Winsome Diamonds. Last year, the company was referred to the special corporate debt restructuring cell but failed to get special package from banks as some of the banks were not convinced with the submission of the management that receivables from customers for the diamonds exported failed to come through, resulting in the company defaulting on payments.

A senior banker with a public sector bank said, "The problem for bankers is that once the case gets handed over to the investigating agency, the needle of suspicion begins from the bank. They will first come up with a conspiracy theory saying that they may have been a connivance with the bank officials. So bankers desist from reporting the frauds. Often bankers are caught and the promoters would be absconding."

The Kolkata-based REI Agro, which specialised in Basmati rice exports, was declared fraud by the central bank after some banks classified it as a fraud. Bankers allege that the company may have diverted the money overseas.

Just last year, 20 banks lent REI working capital finance of Rs 4,000 crore under the Joint Lenders Forum (JLF) to work out a corrective action plan for the financially-stressed company. The company defaulted on its payment to certain lenders, which even led to a winding-up petition filed by the United Bank of India in the Calcutta High Court.

A senior RBI official confirmed that the account has been declared a fraud for alleged diversion of funds, and the Central Bureau of Investigation (CBI) is investigating after some banks handed over the case to CBI. This is the only bank loan that has been declared as a fraud by RBI and have asked all lenders to classify it as a non-performing asset even if the promoters are repaying the money.

Central Bank of India handed over its exposure to the Ahmedabad-based Electrotherm for an alleged fraud. CBI came out with a report in August last year that it had registered a case against the directors of Electrotherm for entering into a criminal conspiracy and cheating the bank to the tune of Rs 438 crore.