RBI Suggestion To Banks

Nip NPAs in the bud: RBI to banks-Financial Express-09.05.2015
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.

Under this framework, banks will now have to access and process data from registrar of companies, monitor stock movements, legal disputes and track record of the borrower before sanctioning a loan.

Once loan is sanctioned, bank’s risk management group will have to monitor disbursement and the adherence of the borrower to the terms of the loan contract, RBI said. This framework applies to loans above R50 crore.

“In case of consortium arrangements, individual banks must conduct their own due diligence before taking any credit exposure and also independently monitor the end use of funds rather than depend fully on the consortium leader,” the RBI said in its notification on Thursday.

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, said RBI. All RFAs will have to be reported to the Central Repository of Information on Large Credits (CRILC).
Under consortium lending, banks must share among themselves any major fraud noticed at the time of annual reviews or through the tracking of EWS.
Once an account is termed fraud, banks will have to make full provisioning, irrespective of the value of the collateral.
If any bank is unable to do so at one shot, it can provide over a period of four quarters, the central bank said.

While the decision to label an account as fraud would rest with the bank, the bank will have to immediately report the same to CRILC to alert peers. Thereafter, the bank which has red flagged the account or detected the fraud must ask the consortium leader or the largest lender to convene a meeting of the joint lenders’ forum to discuss the issue.
Such a meeting must be convened within 30 days of the account being labelled as fraud.
A forensic audit must be conducted and concluded within three months from the date of the JLF meeting. The JLF will reconvene and decide on the status of the account, by consensus or majority rule, the RBI said.

Tough talk
* Concept of a Red Flagged Account (RFA) introduced
* An RFA is one where a suspicion of fraudulent activity is thrown up
* Banks to be alert on receiving an early warning signal (EWS)
* Banks must use triggers to launch a detailed probe
* Threshold for EWS and RFA is an exposure of over R50 cr
* Lenders to follow up stock market movements, monitor databases on a continuous basis
* All such accounts must be reported on the CRILC data platform
* A consortium meet to be convened within 30 days of fraud detection
* Forensic audit must be completed within three months
Falling CRAR at PSBs worries RBI

The Reserve Bank of India has raised concern over the falling capital adequacy ratio (CRAR) of public sector banks.

The CRAR for PSBs fell to 11.24% as on March 31, 2015, from 11.4% in the year-ago period.
During a recent speech, RBI deputy governor SS Mundra said that although the banking system was adequately capitalised, challenges were on the horizon for some lenders. “For the system as a whole, the CRAR has been steadily declining and, as at the end of March 2015, it stood at 12.70% against 13.01% a year ago,” Mundra said.
He added: “Our concerns are larger in respect of the PSBs where the CRAR has declined further to 11.24% from 11.40% over the last year.”

Mundra said concerns raised about the ability of banks to raise additional capital were not entirely misplaced, especially for PSBs.
A higher level of capital adequacy is needed due to higher provisioning requirements, resulting from deterioration in asset quality, kicking in of the Basel-III norms and also to sustain and meet the impending growth in credit demand.

According to Mundra, the poor valuations of bank stocks, especially the PSBs, is not helping matters either, as raising equity has become difficult. “When even the best performing PSBs have been hesitant to tap the markets for augmenting their capital levels, it would be difficult for the weaker ones to raise resources from the market. A singular emphasis on profitability ratios (based on RoA and RoE) perhaps fails to capture other aspects of performance of banks and could perhaps encourage a short-term profitability-oriented view by bank management.”

However, with a recapitalisation budget of only Rs 7,940 crore in FY16, smaller public sector banks are likely to miss out if the finance ministry retains its criteria for allocation based on return on assets (RoA) and return on equity (RoE). Data compiled by Capitaline show that among PSBs, United Bank had the lowest return on equity at -29.1% in FY14, followed by Central Bank at -8.57% and Indian Overseas Bank (IOB) at 4.51%. Bank of Maharashtra had an RoE of 6.4% and Corporation Bank’s RoE was 5.7%.

In February, the government announced its plans to recapitalise nine public sector banks based on their last three years’ weighted average RoA and RoE. Under the new criteria, only nine banks – State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, Syndicate Bank, Allahabad Bank, Indian Bank, Dena Bank and Andhra Bank – were selected for a Rs 6,900-crore capital infusion in FY15. The chunk of it — Rs 2,970 crore — was allocated to SBI, followed by BoB at Rs 1,260 crore and PNB at Rs 870 crore

Bankers positive new RBI framework will curb frauds

Lauding RBI’s fraud detection framework, bankers on Friday said it would lead to better information sharing among consortium members and faster resolution through joint lender forums (JLFs).

IDBI Bank executive director RK Bansal said that though banks have fraud detection systems in place, there is no sharing of information among banks. At present, banks can call a borrower wilful defaulter if it detects siphoning of funds. However, every bank in the consortium has to individually declare a company wilful defaulter as there is no platform to share it with others.

“Integrating fraud detection with the central repository of information on large credits (CRILC) repository and JLFs will hasten the process. JLFs – which were earlier used in accounts that have repayment overdue of more than 60 days – can now be used to report fraud and commence a forensic audit,” said Bansal.
Lenders said they have been aggressive in reporting frauds to the Institute of Chartered Accountant of India (ICAI).

“While we report cases to the CBI, we have also started informing ICAI as, in many cases, we have found how chartered accountants have fudged company balance sheets,” said State Bank of Mysore MD Sharad Sharma. Sharma said the bank has recently classified two accounts from oil processing and leasing sectors as wilful defaulters.

In its notification, RBI said a bank can label an account a red-flagged account (RFA) if it is under suspicion of fraudulent activity and such a suspicion is thrown up by an early warning signal (EWS). “Banks must use such triggers to launch a detailed investigation,” said RBI.

Federal Bank MD& CEO Shyam Srinivasan, too, said that banks have early warning signals at various stages of an account. With the detailed guidelines, Srinivasan said, RBI has made it easier for banks to share information and report fraud to other lenders of the consortium within 30 days of the detection.
“Account-specific monitoring and sharing information on CRILC will lead to faster resolution through JLFs,” he added.
Under this framework, banks will now have to access and process data from registrar of companies, monitor stock movements, legal disputes and track record of the borrower before sanctioning a loan.
K V Karthik, senior director, Deloitte India said, “The longer it takes for you to detect a fraud, the recovery becomes difficult.”