Non Performing Assets and the provisions for the losses arising out of the non performing assets is taking toll on the share prices of all the major nationalized banks in 2017. Certified Bank Forensic Accountants are in the best position to take the advantage of the situation.

Certified Bank Forensic Accountants are trained on identifying the banking frauds in India. Growing Non Performing assets helped Bank Forensic Audit profession to grow. Forensic Auditors are typically asked to look at the nature of loss to the bank and comment on whether the loss is willful default caused by the borrower or it is a genuine business problem.

What is Willful Default ?

Though not defined anywhere willful default is when a borrower intentionally deceives a lender by providing false information, or by omitting important information during the loan application process or during the currency of such loan. Over a period of a decade the number of willful defaulters have grown up and Reserve Bank of India was forced to announce the repository of the willful defaulters also termed as fraud borrowers.

In order to tackle the growing problem of willful defaulters and the loan frauds, Reserve Bank of India laid down the framework to deal with the borrowers who delay the payments or avoid paying the money on the due date.

The core objective of this framework is early detection of problem in the borrower account. RBI has given a timeline with stage-wise action in the loan life cycle which would help early resolution of bad loans. It has also defined certain steps to be followed once fraud is detected. The early detection of Fraud and the necessary corrective action are important to reduce the quantum of loss which the continuance of the Fraud may entail.

Early Warning Signals (EWS) and Red Flagged Account (RFA)

Early warning signals are those triggers based on which the Core Banking System (CBS) identifies that specific account which needs special attention. RBI has given a illustrative list of EWS for the which the banks may configure their CBS. Although, each bank can form their own EWS list based upon their experience, client profile and business models

Red Flag generally in Forensic Audit means an indication, which entails a probability of something being out of generic nature. As per the Framework of RBI, when fraudulent activity is identified due to one or more EWS. These warning signals in a loan account should immediately put the bank on alert It indicates a weakness or wrong doing which may ultimately turn out to be fraudulent. As soon as an EWS is triggered for an account then it must be used to launch a detailed investigation into that specific loan account.

As per the latest master circular of RBI, threshold for EWS and RFA is ₹ 50 Crores or more. This limit of ₹ 50 Crores has to be considered for irrespective of the lending agreement. i.e. Solo Banking or Consortium. As soon as EWS is triggered in any such account the same has to be immediately reported to (Central Repository of Information on Large Credits) CRILIC platform.

Each and every bank must form a Fraud Monitoring Group (FMG) or a similar committee to monitor such accounts and all of those accounts must be reported to CEO/CMD at the end of each month for review. Additionally, a report on the RFA accounts shall be put up to the Special Committee of the Board for monitoring and follow-up of Frauds (SCBF) providing, inter alia, a synopsis of the remedial action taken together with their current status.

Early Detection and Reporting – RBI Circular on Forensic Audit

For the purpose of early detection and reporting of Fraud RBI has given following checks to be applied during the different stages of loan life-cycle.

• Pre-Sanction: All the banks must conduct a thorough Background Check on the promoters of the company and the also collect relevant data from the industry before sanction of any loan. It should also keep a complete record of all such searches conducted.
• Disbursement: It should be ensured that before disbursement of loan, all the terms of sanctions must be adhered to and also the sanctioning authority may specify certain specific terms and conditions which should not be diluted.
• Annual Review: Over and above the regular credit monitoring process banks should also collect information from the grapevine, following up stock market movements, subscribing to a press clipping service, monitoring databases on a continuous basis and not confining the exercise only to the borrowing entity but to the group as a whole.

In current banking scenario, the exposure to the borrowers is divided when the loan requirement exceeds certain limits. In such cases the loans are provided on consortium basis, in cases where the bank is able to absorb the risk, bank is a sole lender.

Where Bank is the Sole Lender

In a case where Early Warning Signals are identified, it is left to the discretion of Fraud Monitoring Group to classify the account as Red Flaaged or not. Once it is classified as Red Flagged, opportunity is generated for the bank forensic audits.

Where Bank is the Consortium Lender

Certain fraudulent borrowers continue enjoying credit facilities under consortium banking even after defrauding one of the financing banks by  siphoning off funds by operating account in banks other than the one on which fraud is being perpetrated. Also at certain times same security is offered to different banks and credit is obtained on the same.

Any major concerns from the fraud perspective noticed at the time of annual reviews or through the tracking of early warning signals should be shared with other consortium / multiple banking lenders immediately.  The initial decision to classify any loan account as Red Flagged or Fraud will be at the individual bank level and it would be the responsibility of this bank to report the Red Flagged or Fraud status of the account on the CRILC platform so that other banks are alerted, after which the banks must report such fraud to RBI within 21 days of such detection.

RFA in Banking

Additionally, within 15 days of RFA classification the bank would ask the consortium leader to convene a Joint Lender’s Forum. The same must be convened within the 15 days of the request being received.  In case there is a broad agreement, the account should be classified as a fraud; else based on the majority rule of agreement amongst banks with at least 60% share in the total lending, the account should be red flagged by all the banks and subjected to a forensic audit commissioned or initiated by the consortium leader or the largest lender under Multiple Banking Arrangements. All banks, as part of the consortium or multiple banking arrangement, shall share the costs and provide the necessary support for such an investigation.

The Forensic Audit must be completed within a maximum period of 3 months from the date of Joint Lending Forum meeting authorizing the audit. Within 15 Days of the completion of Bank Forensic Audit, Joint Lender’s Forum shall decide on the status of the account. The decision can be either by consensus or the majority rule.

In case the decision is to classify the account as fraud, the Red Flagged Account status shall be changed to Fraud. Same should be reported to RBI through CRILC platform within a week of from the date of decision. Additionally, within 30 days of the RBI reporting, the bank commissioning/ initiating the forensic audit should lodge a complaint with the Central Bureau of Investigation on behalf of all banks in the consortium.

The overall time allowed for this complete exercise is six months from the date when the first member bank reported the account as Red Flagged/Fraud on the CRILC platform.

Banks are required to lodge the complaint with the law enforcement agencies immediately on detection of fraud. There should ideally not be any delay in filing of the complaints with the law enforcement agencies since delays may result in the loss of relevant ‘relied upon’ documents, non-availability of witnesses, absconding of borrowers and also the money trail getting cold in addition to asset stripping by the fraudulent borrower.

Summarizing RBI Circular on Forensic Audit

• A proper whistleblower policy must be defined in each bank so that Employees are easily to report their grievances without having any fear.
• During the course of audit also if any major discrepancies are found then they should be immediately reported to the appropriate authority.
• Providing various incentives for early detection and reporting of Loan Frauds.
• RBI has also provided certain measures to be taken to make officials of the bank accountable in case there involvement is found.
• Stringent penal measures for the Fraudulent Borrowers to discourage the loan frauds.

Even though RBI has tried to implement a robust framework for the loan frauds, every now and then one would hear the news of a company facing liquidity crunch and due to which all the major PSU facing huge losses. For a detailed study of the framework kindly refer the RBI Master Directions on Frauds – Classification and Reporting by commercial banks and select FIs.

In recent years, India has witnessed a sharp increase in the number of fraudulent activities involving equitable mortgages. Equitable mortgages are a form of secured loan where the lender obtains an interest in the borrower’s property as collateral. The rise in the number of fraudulent equitable mortgage cases has highlighted the need for stronger measures to prevent such fraudulent activities.

This post will explore the concept of an equitable mortgage, how it works, and the different types of fraudulent activities associated with them. Additionally, we will discuss the impact of these fraudulent activities on the Indian banking system and measures that can be taken to prevent them.

What is Equitable Mortgage?

An equitable mortgage is a type of mortgage that is used to secure a loan where the borrower offers their property as collateral. Unlike a legal mortgage, in which the lender’s interest in the property is registered with the government, an equitable mortgage does not require registration.

In other words, the lender’s interest in the property is not publicly recorded, and the borrower retains legal ownership of the property. However, the lender does have a right to the property in the event that the borrower defaults on the loan.

Equitable mortgages let lenders hold property as collateral. However, their rights aren’t enforceable against third parties. These mortgages are popular in India due to their speed and lack of paperwork.

Equitable mortgages are commonly used in India, particularly in cases where the borrower does not have a clear title to the property or where the property is not eligible for a legal mortgage. Equitable mortgages are also used in cases where the borrower needs to obtain a loan quickly, as the process of registering a legal mortgage can be time-consuming.

Types of Equitable Mortgage Frauds

1. Fictitious Property

One of the most common types of equitable mortgage fraud is the creation of fictitious property. In this scenario, the borrower provides false information about the property and creates fake documents to show ownership. The lender approves the loan and obtains an equitable mortgage on the property, only to realize later that the property does not exist.

2. Overvalued Property

In cases of overvalued property, the borrower inflates the value of the property to obtain a larger loan. The lender approves the loan and obtains an equitable mortgage on the property, only to realize later that the property is worth much less than what was claimed.

3. Double Mortgage

In cases of double mortgage fraud, the borrower obtains a loan from multiple lenders using the same property as collateral. The borrower may use different sets of documents to obtain loans from different lenders. In such cases, the lenders may not be aware that the property has already been mortgaged to another lender.

4. Fabricated Documents

The rise in equitable mortgage fraud has had a significant impact on the Indian banking system. Banks have lost billions of rupees due to fraudulent activities, and the number of such cases continues to rise. The impact of these frauds goes beyond the financial loss to banks. It undermines the confidence of the public in the banking system and reduces the availability of credit to legitimate borrowers.

Preventive Measures

The Indian banking system has taken several steps to prevent equitable mortgage fraud. Some of these measures are:

1. Verification of Property Ownership

Lenders have started to verify the ownership of the property before approving loans. The lenders check the ownership documents and conduct site visits to ensure that the borrower owns the property and it exists.

2. Independent Valuation

Lenders are hiring independent valuers to assess the value of the property. This reduces the risk of overvalued property and ensures that the loan amount is commensurate with the value of the property.

3. Credit Bureaus

Lenders are checking the credit history of borrowers before approving loans. This reduces the risk of lending to borrowers.

Recent headlines around rising Non Performing Assets (NPAs) in India have brought a myriad of challenges faced by banks and financial institutions into the spotlight. Banking and finance sector is struggling with the constant issue of inadequate due diligence about the borrowers.

The first thought a common Indian gets seeing BCSBI words are? Is this some new subsidiary or part of the SBI group? Sadly, this tells the story. There is little or perhaps no awareness on BCBSI in India, especially amongst customers for whose benefit it is formed.

Ministry of Finance ordered the forensic audits in cases of the fixed deposit fraud in Dena Bank and Oriental Bank of Commerce. Apart from the forensic audit firms, CBI is doing the investigations. The fraud investigation started due to the complaint from SIES. Read here “SIES Duped Over Fixed Deposits“

Dena Bank Fraud

Dena Bank Malabar Hill Branch received bulk term deposits from various entities and government organizations between January 30, 2014, and May 5, 2014. Subsequently, term deposits amounting to Rs 256.69 crore were pledged to the bank by the same signatories who placed the fixed deposits and the pledge was used to obtain overdraft facilities of Rs 223.25 crore. The funds were then transferred out of the bank.

Fraud in Oriental Bank of Commerce (OBC)

The modus operandi was similar in the case of OBC too. The Jawaharlal Nehru Port Trust (JNPT) had opened a fixed deposit with the bank by remitting Rs 110 crore through an electronic transfer in February this year. The deposit was followed by a faxed request to transfer the funds to the current account of a third-party — Padmavati International. The bank then received a second transfer of Rs 70 crore from JNPT followed by another request to transfer funds to the current account of Padmavati International.

The bank subsequently received enquiries from the port trust about non-receipt of the term deposit certificate. Investigations by the bank showed later that the branch had transferred funds received to the third-party account directly based on the fax request. Upon detecting the fraud, the bank took measures to recover the money from the third-party account and seized Rs 110 crore lying with other banks even as Rs 64 crore remained untraced.