Money & Banking

Fraud alert: banks to soon set up an alarm system

K Ram Kumar Mumbai | Updated on January 23, 2018

Move to stop rising instances of cheating

To stop financial frauds, banks are planning to put in place a mechanism to alert each other about dubious borrowers.

For instance, whenever a bank detects that a large borrower has committed a fraud, other banks will examine their position with regards to the borrower. This will then help them take a call on choking off further credit to the deceivers.

Under this fraud mitigation mechanism, even if one of the lenders observes or recognises a borrower as a fraudster, it will report it to the leader of the consortium, or majority lenders of the multiple banking arrangement.

Greater vigil

In consortium lending, a borrower gets finance from two or more banks through a common application. Barring the rate of interest, all the terms and conditions set out in the consortium’s contract are common. Under the multiple banking arrangement, the borrower avails himself of finance from two or more banks directly.

“Once the fraud is reported by a bank, thereafter, all the lenders will collectively evaluate the account reported for possible signs of fraud in their own banks and weigh whether credit facilities to it should be continued,” explained a senior public sector bank official. The lenders will also find a way to help recover the amount lost. According to reports, in 2013-14, there were 2,593 cases of fraud involving ₹7,542 crore.

The figure shot up to ₹11,022 crore from 2,166 cases in the nine-month period ending December 2014. Frauds are classified based on provisions of the Indian Penal Code. They include misappropriation and criminal breach of trust, fraudulent encashment through forged instruments, and manipulation of books of account, among other things.

In cases of fraud, banks often find that borrowers deploy funds for purposes other than those for which the loan was sanctioned.

The fraud mitigation mechanism will be time-bound, where as soon as one of the lenders reports an account as fraud, the meeting of all members of the consortium will take place within a month.

Published on May 04, 2015

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