Banks reject proposal by corporates to club ‘fraud’ A/Cs & ‘wilful defaulters’

Banks have come together to reject a proposal by corporate lobbies to club borrowers tagged as ‘fraud’ accounts with ‘wilful defaulters’. Senior bankers, who had discussed the suggestion over the last few weeks, arrived at the decision while preparing a standard operating procedure (SOP) for dealing with borrowers before declaring an account as a fraudulent one.

The suggestion, made by chambers of commerce to the Reserve Bank of India, was referred to the banking industry body by the regulator. Borrowers, including a few bankers, felt that it could make sense to combine the two sets of accounts, which are often legally challenged and sometimes difficult to segregate due to overlaps in some of the definitions, under a single category.

“But most are of the view that the two should be kept separate. One results in an FIR, the other may not always lead to proceedings under the criminal law. While a fraudulent borrower in all probability is a wilful defaulter, every wilful defaulter may not technically be a fraud. Also, there may not be default in a fraud account,” a senior banker told ET.

According to the draft SOP on fraud accounts, which was deliberated by bankers at a meeting on Monday, borrowers would be given the opportunity to respond and explain why the account should not be classified as a fraudulent account but there would be no personal or physical hearing. After this, the lender would pass a ‘reasoned order’. The draft SOP, which would have to be approved by the banking regulator, follows the Supreme Court ruling that since declaring an account as fraud can lead to a credit freeze, such a borrower should be given an opportunity of being heard under the principles of natural justice.

However, in the event of a ‘wilful default’, the bank, as per RBI’s existing regulations, must give an opportunity to the borrower, promoter, wholetime director of the company for a personal hearing if a committee (headed by an executive director of the bank and two senior officials) feels such an opportunity is necessary. If the committee finds a case to be one of wilful default), the matter is examined by a review committee comprising the bank CEO and some of its board members.

“I feel borrowers marked as fraud would also insist on personal. While marking an account as fraud sets off criminal proceedings, both categories (fraud and wilful default) attach a stigma to such accounts and significantly lowers access of such borrowers to institutional credit. A bank has to reverse the fraud tag if the borrower gets a clean chit later, but by then it has suffered reputational damage. I feel against this background, corporate bodies were pushing for bringing the two categories under a single and different nomenclature,” said an industry person.

Cases of frauds include misappropriation and criminal breach of trust, fraudulent encashment through forged accounts, manipulation of books of accounts, unauthorised credit facilities for illegal gratification, forgery, and fraudulent foreign exchange deals. Compared to this, a wilful default means non-payment to the lender even when the borrower has the capacity to honour the said obligations – where the borrower has siphoned off funds, or disposed of movable assets or properties, or did not use the borrowed money for the purpose for which it was lent. “Thus, often the nature of the offenses are similar in the two kinds of borrowers. Also, RBI had directed banks to initiate criminal action against wilful defaulters wherever considered necessary,” said another person.