Early warning system on defaulters making deals

Sherlock Holmes and Hercule Poirot can seek employment in India if they take some refresher course in financial intelligence gathering. Banks and lenders have initiated discussions with intelligence agencies to construct an intelligence-based early warning system to detect counterparty transactions in loan accounts. The Economic Times has reported that the key objective of such a mechanism will ensure that if any such transaction comes to notice, it should be highlighted immediately, allowing the agencies involved elbow room to act without delay.

An official whom the newspaper spoke to said that the new architecture is being “actively pursued”, indicating it is high on the agenda of the financial policymakers to prevent unfair use of default accounts.

One of the key requirements is that the network should be digital so that lending agencies, typically banks, have real-time information and there is minimal or no delay in transmission of information.

Counterparty transactions help investigative agencies identify fraud or siphoning of funds.

Banks now want the threshold value of suspected counterparty transactions to be fixed at Rs 1 crore. This comes as the system is acting tough on cases of loan defaults and wants to realise assets that have become non-productive. It might be mentioned that one of the reasons for the Indian banks being in the pink of their health is the substantial success in recovering NPAs and cleaning their accounts.

Under the existing norms for large-value frauds, state-run lenders have been instructed by the Union finance ministry to seek reports from the Central Economic Intelligence Bureau on any prospective borrower. The report should be obtained at the pre-approval stage or renewal of an existing loan. It is also applicable in the case of an NPA account for Rs 50 crore and more.
The current move is expected to substantially boost this framework and make it more effective.
It is against this background that banks have urged that alerts be raised on transactions exceeding Rs 1 crore.
A banker told that newspaper that since multiple channels were used for different transactions, the lenders were not in a position to furnish all details of all counterparty transactions.
“Information for a longer period is not available in some cases, so if the agencies seek details on suspected transactions above a threshold value, that will help lenders provide details quickly,” said the banker.
Till March 2023, the number of default borrowers in the country stood around 2,438 with a cumulative amount of Rs 2.66 lakh crore. All of them have a minimum outstanding amount of Rs 20 crore.
The Director of Enforcement, MoS finance Bhagwat Karad revealed in the Upper House of the Parliament, recorded as many as 490 bank frauds each involving NPAs of Rs 20 crore or more. And these frauds were unearthed in the past five years under the provisions of the Prevention of Money Laundering Act 2022.
The drive against defaulters has resulted in recovery of assets worth a humongous Rs 15,113.02 crore that has flown back to the lending institutions.