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Bank frauds: The procedure & action against the culprits

Views by: Milan Mody & Sandeep Shah, Partners of N A Shah Associates LLP.


Milan Mody & Sandeep Shah, Partners of N A Shah Associates LLP

 1 RBI has issued a master circular Frauds – classification and reporting, dates July 1, 2015. 

This circular covers classification, monitoring, provision and closure of fraud cases

Classification of frauds

In order to have uniformity in reporting, RBI has provided guidelines for classification of frauds.  There are 7 classifications including a residual category.  The classification include (a) Unauthorised credit facilities extended for reward or for illegal gratification and (b) Cheating and forgery

Reporting of frauds to RBI

The circular prescribes norms for reporting of frauds to Reserve bank of India as well to internal management.  It also suggest quarterly and annual reporting and monitoring of outstanding frauds.  Additional information as regards to unscrupulous borrowers is also required to be furnished to Reserve Bank of India. The circular also suggest that a subcommittee of the board should be formed to provide focused attention and to avoid delays in detection, reporting and monitoring of high value frauds.

Provisioning Pertaining to Fraud Accounts

To ensure uniform provisioning norm in respect of all cases of fraud, it is prescribed that The entire amount due to the bank (irrespective of the quantum of security held against such assets), or for which the bank is liable (including in case of deposit accounts), is to be provided for over a period not exceeding four quarters commencing with the quarter in which the fraud has been detected.

  1. Companies Act, 2013 (referred to as Act)

Reporting responsibility on auditor as per section 143 (12) of Act

Auditors has a reason to believe that an offence of fraud involving amount of Rs.1 crore and more, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government / RBI as well as to the Board of Directors / Audit Committee within the prescribed time frame and in the prescribed manner

Penalty under the Act

As per section 447 of the Act, in case the fraud in question involves public interest, the term of imprisonment shall not be less than three years but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud

Serious Fraud Investigation Office (SFIO)

As per section 212 of Act, The Central Government may in public interest order an investigation by SFIO.  All the officers and employees are responsible to provide all the details to the investigating officer.   The investigating office has wide powers in inspecting the matter.

  1. General

The borrowers and all those who have connived would be subject to penalty and criminal prosecution as laid down in the Indian Penal Code


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