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Mumbai: A silent tussle is going on between high-street banks and the Central Bureau of Investigation (CBI) over ‘old’ cases of ‘fraud’. The central agency, it is understood, is insisting on what could be a retrospective application of last year’s Supreme Court (SC) ruling that a borrower must be given a hearing before the account is classified as ‘fraud’ and a “reasoned order” must follow if such an action is taken.

However, in several old cases where the accounts were tagged as ‘fraud’ well before the SC ruling, CBI has asked banks whether the borrowers were granted the opportunity to explain their position, a senior industry person told ET.

Bankers are unwilling to go back to these past matters. “We believe banks are not required to do this as the decisions to categorise the accounts (as fraud) were taken before March 2023 (when the apex court spelt out its stand). Banks are of the view that the ruling is not applicable to old matters. But the agency has referred quite a few old cases back to banks, asking them if borrowers were accorded a hearing,” said another person.

Banks fear that pursuing such a course now could hold up investigation, encourage borrowers to contest the matters afresh, delay closures, and may even derail the process in some cases.

“We don’t know why they are doing it. Maybe, because they are saddled with so many cases. The industry may jointly take up the matter with the CBI and other authorities,” said another person.

A week ago, the matter came up for discussion during a routine meeting of the Indian Banks’ Association among some of the bank CEOs. “CBI is probably being cautious. It’s raising the question of natural justice. Also, since it is an SC ruling and such action by a bank has repercussions, they want to make sure due process has been followed,” said a banker. Marking a borrower as ‘fraud’ or ‘wilful defaulter’ lends a stigma that the former may find difficult to shrug off easily. Not only does institutional credit dry up for such a business entity, a ‘fraud’ label may put off investors, suppliers, and other stakeholders.

The stand taken by the apex court may have emanated from such considerations.

More than 95% of the fraud cases relate to loans. Cases between Rs 3 crore and Rs 25 cr are reported by banks to CBI’s anti-corruption bureau; if the amount involved varies from Rs 25 crore to Rs 50 crore, the cases are reported to CBI’s banking cell; and, cases involving irregularities of more than Rs 50 crore are lodged with a CBI joint director.

All banks label a company as a ‘fraud account’ when one lender describes it as a fraud case. In most cases, by the time an account is stamped as ‘fraud’, it has turned into a non-performing asset (NPA) with interest and principal overdue of 90 days or more.

Banks track ‘early warning signals’ — like income tax raids or probe by any law enforcement agency on a borrower, frequent changes in project features, multiple deals with inter-connected entities, exit of key officials, delays and defaults to creditors — to classify a borrower as a ‘red flagged account’ (RFA). After red-flagging an account, a bank usually hires an external auditor or consultant to carry out a forensic audit, the findings of which are placed before a panel comprising directors and managing committee members. Within the next 6 months, the bank has to either remove the ‘RFA’ tag or categorise the account as ‘fraud’.

  • Published On Mar 26, 2024 at 08:33 AM IST

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