Club ‘fraud’ accounts and ‘wilful defaulters’ says industry; not ready, say banks

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Banks are turning the pages of semantics these days as they are wading through a debate on whether ‘fraud’ and ‘wilful defaulters’ can be clubbed together. The outcome has been a rejection of the proposal to lump them together of the banking industry. According to a report by The Economic Times, the proposal to club the two terms together was put forward by chambers of commerce to the Reserve Bank of India.

The meeting took place on July 7 where the two terms, their implications and contradictions were discussed threadbare before the bankers decided not to erase the dividing line between them.

The meeting has produced a draft standard operating procedure that would now need to be cleared by the RBI.

The RBI had forwarded the proposal to combine the two to the banking industry body that was trying to put together a standard operating procedure on how to deal with defaulting debtors before proceeding to declare the accounts as fraudulent ones.

Some bankers were of the opinion that it would make sense to lump the two terms together since once accounts/borrowers are labelled ‘fraud’ or ‘wilful defaulters’, the matter certainly ends up in the courts where distinctions could blur due to overlapping of definitions.

Despite this view of the minority bankers, most though otherwise. “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 be technically a fraud. Also, there may not be default in a fraud account,” remarked a senior banker.

The draft of the SoP on fraud accounts stipulated that debtors should be asked to explain why the account shouldn’t be labelled as a fraudulent one. However, it should be a written document without meeting or going into a physical hearing with the borrower. Once this stage is over, the creditor bank would issue a “reasoned order”.

The entire exercise followed a Supreme Court verdict that a ‘fraud’ account can be penalised with a freeze of credit on the accused and, therefore, it is the accused, in all fairness, should be given an opportunity to present his case.

But if there is an incident of wilful default, RBI’s extant guidelines say the borrower/promoter/wholetime director of the debtor entity must get an opportunity for a personal hearing if the banking authorities feel it necessary. A committee of the bank headed by an executive director and two senior officers would conduct the hearing. In the event the case is found to be one of wilful default, it is to be reviewed by a committee featuring the bank’s CEO and some board members.

“I feel borrowers marked as fraud would also insis 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 a senior industry representative.

Cases of frauds often entail misappropriation of funds and criminal breach of trust. Manipulation of account books, fraudulent encashments through forged accounts, unauthorised credit facilities for illegal gratification, forgery, fraudulent foreign exchange dealings are commonly reported in banking circles.

On the other hand, wilful default indicates non-payment of the borrower even when he/she could make the committed payments. It is often found that the borrower siphons off cash, disposed of properties without proper procedure or used the funds for purposes other than those for which they were lent.

Some bankers pointed out some similarities between the two categories of borrowers. The apex court has also said that criminal charges could be slapped against wilful defaulters whenever warranted.