State-Run Banks Told To Examine Bad Loans Above Rs 50 Crore For Fraud

The Finance Ministry has asked public sector banks to examine all bad loans above Rs 50 crore for possible fraud.

The lenders have been asked to involve investigating agencies if they detect any violations, Rajeev Kumar, secretary in the Department of Financial Services, tweeted. The government also directed public sector bank MDs to detect bank frauds and wilful defaults in time, and refer cases to the CBI.

Banks will seek a borrower status report from Central Economic Intelligence Bureau on accounts that turn into a non-performing asset. The nodal agency for economic intelligence will have to revert in a week, Kumar tweeted.

Until now, banks would refer bad loan accounts for forensic audit if they saw early warnings signals suggesting fraud. Not all bad loan accounts above Rs 50 crore were scrutinized for fraud and wilful default, said a person familiar with the matter. The RBI has prescribed a list of early warning signals as part of its fraud detection and reporting guidelines. These signals include indicators like frequent and ad-hoc loan sanction requests, lack of adequate documents, large transactions among others.

Earlier in the day, the ministry gave state-owned banks a 15-day deadline to develop a blueprint to deal with operational challenges and technological risks. The lenders will constitute a group of executive directors and chief technology officers to draw up the blueprint, Kumar tweeted.

The group’s responsibilities will include:

1. Identifying weakness in existing systems
2. Doing comparitive assessment of their bank's operational risk management practices to best practices in the industry
3. Identifying gaps and areas for improvement
4. Suggesting action points including technological solutions
   

The group of EDs and CTOs will also prepare a report based on best practices and minimum acceptable standards, Kumar tweeted. Based on the report, the board of public sector banks must assign clear accountability to senior officials for implementation and compliance.

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The Department of Financial Services’ directions come at a time when Punjab National Bank has disclosed that fraudulent transactions by billionaire jeweller Nirav Modi and related entities could be Rs 1,300 crore more than the initial estimate of about Rs 11,400 crore. Finance Minister Arun Jaitley had blamed inadequate oversight by regulators and auditors as well as sloppy bank management for the fraud at India’s second-biggest state-owned lender and said if needed, the law would be tightened to punish fraudsters.

Since the PNB fraud came to light, a consortium of seven state-owned banks filed a complaint against Rotomac Global Pvt. for alleged loan default of Rs 3,695 crore, and the Central Bureau of Investigation registered a case against Simbhaoli Sugars Ltd., its Chairman Gurmit Singh Mann, Deputy Managing Director Gurpal Singh and others in connection with an alleged bank loan fraud of Rs 97.85 crore.