The Chairmen & Chief
Executive Officers of all
Scheduled Commercial Banks (excluding RRBs)
and All India Select Financial Institutions
Master Directions on Frauds –
Classification and Reporting by commercial banks and select FIs
Please refer to our letter DBS.CO.CFMC.BC.No.1/23.04.001/2015-16 dated July 01,
2015 forwarding the Master Circular on 'Frauds – Classification
and Reporting'. These Master Directions,
being issued under Section 35 A of the Banking Regulation Act, 1949,
consolidate and update all the instructions issued on the subject up to
June 30, 2016, and have been placed on the web-site of the Reserve Bank of
Chief General Manager
1.1 Short title and
2. 2 Classification
3.1. Reporting of
frauds to Reserve Bank of India
3.3. DELAYS IN
REPORTING OF FRAUDS
4.1 REPORTS TO THE
Review of Frauds
4.3 Annual Review
committee of the Board
4.5 Cases Of
6. GUIDELINES FOR
REPORTING FRAUDS TO POLICE/CBI
7. CHEQUE RELATED
FRAUDS, PRECAUTIONS TO BE TAKEN AND REPORTING TO RBI AND THE POLICE
8.1. LOAN FRAUDS -
8.2 Objective of
8.3 Early Warning
Signals (EWS) and Red Flagged Accounts (RFA)
8.4 Early Detection
8.6 Role of
8.7 Incentive for
8.8 Bank as a sole
8.9 Lending under
Consortium or Multiple Banking Arrangements
Complaints with Law Enforcement Agencies
8.12 Penal measures
for fraudulent borrowers
9.1 Legal Audit of
Title Documents in respect of Large Value Loan Accounts
9.2 Sale of
Financial Assets of Doubtful Standard / Fraudulent Origin to
Securitization Company (SC)/ Reconstruction Company (RC)
Reporting Cases Of
Theft, Burglary, Dacoity And Bank Robberies
FRAUD MONITORING RETURNS
in respect of submission of fraud cases.
List of the
circulars repealed, as the contents of the same have been incorporated in
the Master Direction
In exercise of the powers
conferred by section 35 A of the Banking Regulation Act, 1949 the Reserve
Bank of India being satisfied that it is necessary and expedient in the
public interest so to do, hereby, issues the directions hereinafter
1.1 Short title and commencement
1.1.1 These directions shall be
called the Reserve Bank of India (Frauds classification and reporting by
commercial banks and select FIs) directions 2016.
1.1.2 These directions shall
come into effect on the day they are placed on the official website of the
Reserve Bank of India (RBI).
The provisions of these
Directions shall apply to scheduled commercial banks (excluding RRBs) and
select FIs operating in India
These directions are issued with
a view to providing a framework to banks enabling them to detect and report
frauds early and taking timely consequent actions like reporting to the
Investigative agencies so that fraudsters are brought to book early,
examining staff accountability and do effective fraud risk management.
These directions also aim to enable faster dissemination of information by
the Reserve Bank of India (RBI) to banks on the details of frauds,
unscrupulous borrowers and related parties, based on banks’ reporting so that
necessary safeguards / preventive measures by way of appropriate procedures
and internal checks may be introduced and caution exercised while dealing
with such parties by banks.
2.1 General Guidelines
2.1.1 The Chairmen and Managing
Directors/Chief Executive Officers (CMD/CEOs) of banks must provide focus
on the "Fraud Prevention and Management Function" to enable,
among others, effective investigation of fraud cases and prompt as well as
accurate reporting to appropriate regulatory and law enforcement
authorities including Reserve Bank of India.
2.1.2 The fraud risk management,
fraud monitoring and fraud investigation function must be owned by the
bank's CEO, Audit Committee of the Board and the Special Committee of the
2.1.3 Banks with the approval of
their respective Boards, shall frame internal policy for fraud risk
management and fraud investigation function, based on the governance
standards relating to the ownership of the function and accountability
resting on defined and dedicated organizational set up and operating
2.1.4 Banks shall send the Fraud
Monitoring Returns (FMR) and data, based on the Frauds Reporting and
Monitoring System (FRMS) supplied to banks, as detailed in para 3 below.
Banks should specifically nominate an official of the rank of General
Manager who will be responsible for submitting all the returns referred to
in this circular.
2.2 Classification of Frauds
2.2.1 In order to have
uniformity in reporting, frauds have been classified as under, based mainly
on the provisions of the Indian Penal Code:
and criminal breach of trust.
encashment through forged instruments, manipulation of books of account or
through fictitious accounts and conversion of property.
credit facilities extended for reward or for illegal gratification.
transactions involving foreign exchange
other type of fraud not coming under the specific heads as above.
2.2.2 As regards cases under d)
and f) above cash shortages resulting from negligence and fraudulent forex
transactions involving irregularities / violation of regulations have also
to be reported as fraud if the intention to cheat/defraud is suspected or
proved. Notwithstanding the above, the following cases shall be treated as
fraud and reported accordingly:
of cash shortage more than ? 10,000/-, (including at ATMs) and
of cash shortage more than ? 5,000/- if detected by management / auditor/
inspecting officer and not reported on the day of occurrence by the persons
3.1. Reporting of frauds to
Reserve Bank of India
3.1.1 Banks need not furnish FMR
1 return in fraud cases involving amount below ? 0.1 million to RBI in
either hard or soft copy. However, banks at their end should make the data
entry in respect of such cases through the FRMS package individually in FMR
1 format (less than ? 0.1 million) which will get automatically captured in
FMR 2 return and will form part of the consolidated database relating to
frauds for the respective bank. In respect of frauds above ? 0.1 million
the following procedure may be adopted.
of the return
involved in the fraud
in which to be reported
whom it should be reported
Report on actual or suspected
A format of the return is
given in Annex II
Frauds involving ? 0.1 million
Central Fraud Monitoring Cell
Within three weeks of
A monthly certificate, as per
Annex –III, (mentioning that soft copy of all the FMRs-1 have been
submitted to RBI) is to be submitted by the bank to CFMC, Bengaluru with
a copy to the respective Regional Office of RBI under whose jurisdiction
the Head Office of the bank falls /SSM of the bank, within seven days
from the end of the month.
Flash report for frauds involving
amounts of ? 50 million and above.
For frauds involving ? 50
million and above
Through a DO letter addressed
to the PCGM / CGM-in-Charge, DBS, RBI, Central Office, Mumbai with a copy
to CFMC, Bengaluru.
Within a week of such frauds
coming to the notice of the bank’s head office.
Should include amount
involved, nature of fraud, modus operandi in brief, name of the branch/
office, names of parties involved, their constitution names of
proprietors / partners and directors, names of officials involved and
lodging of complaint with police/CBI.
A format of the return is
given in Annex II
Quarterly report on frauds
Soft copy only
Within 15 days of the end of
the quarter to which it relates
Nil report to be submitted if
no fraud is outstanding.
A format of the return is
given in Annex II
Case-wise quarterly progress
reports on frauds involving ? 0.1 million and above
Soft copy only
Within 15 days of the end of
the quarter to which they relate.
Nil report to be submitted if
there are no frauds above ? 0.1 million outstanding.
3.1.2 In respect of frauds in
borrowal accounts, additional information as prescribed under Part B of FMR
1 should also be furnished. It is observed while scrutinizing FMR 1 returns
from the banks, that certain vital fields in the returns are left blank. As
the complete particulars on frauds perpetrated in the banks are vital for
monitoring and supervisory purposes and dissemination of information
through caution advices / Central Fraud Registry (CFR), banks should ensure
that the data furnished are complete/accurate and up-to-date. Incidentally,
if no data is to be provided in respect of any of the items, or if details
of any of the items are not available at the time of reporting of FMR 1
return, the bank may indicate as “no particulars to be reported” or “details
not available at present” etc. In such a situation, the banks have to
collect the data and report the details invariably through FMR 3 return on
3.1.3 Fraud reports should also
be submitted in cases where central investigating agencies have initiated
criminal proceedings suo moto and/or where the Reserve Bank has directed
that such cases be reported as frauds.
3.1.4. Banks may also report
frauds perpetrated in their subsidiaries and affiliates/joint ventures in
FMR 1 format in hard copy only. Such frauds should, however, not be
included in the report on outstanding frauds and the quarterly progress
reports referred to in paragraph 4 below. Such frauds should not be entered
in the FRMS package at any stage. In case the subsidiary/ affiliate/joint
venture of the bank is an entity which is regulated by Reserve Bank of
India and is independently required to report the cases of fraud to RBI in
terms of guidelines applicable to that subsidiary/affiliate/joint venture,
the parent bank need not furnish the hard copy of the FMR 1 statement in
respect of fraud cases detected at such subsidiary/affiliate/joint venture.
3.1.5 Banks (other than foreign
banks) having overseas branches/offices should report all frauds
perpetrated at such branches/offices also to RBI.
3.1.6 Central Fraud Monitoring
Cell (CFMC), Department of Banking Supervision, Central Office located at
Bengaluru will disseminate a directory of officers of all banks/Financial
Institutions (FI) responsible for reporting of Frauds etc. All
banks/Financial Institutions should furnish to Department of Banking
Supervision, Central Fraud Monitoring Cell, Bengaluru any changes in the
names of officials that will be necessary for inclusion in the directory on
priority basis as and when called for.
3.2. QUARTERLY RETURNS
3.2.1 Report on Frauds
Outstanding - FMR 2
3.2.2 The total number and
amount of fraud cases reported during the quarter as shown in Parts B and C
of the return should tally with the totals of columns 4 and 5 in Part - A
of the report.
3.2.3 Banks should furnish a
certificate, as part of the above report, to the effect that all individual
fraud cases of ? 0.1 million and above reported to the Reserve Bank in FMR
1 during the quarter have also been put up to the bank’s Board and have
been incorporated in Part - A (columns 4 and 5) and Parts B and C of FMR 2.
A ‘Nil’ report should be submitted if there are no frauds outstanding at
the end of a quarter.
3.2.4 Progress Report on Frauds
- FMR 3.
3.2.5. A list of cases of frauds
where there are no developments during a quarter with a brief description
including name of branch and date of reporting may be furnished in Part - B
of FMR 3. A ‘Nil’ report should be submitted if there are no frauds above ?
0.1 million outstanding.
3.3. DELAYS IN REPORTING OF
3.3.1 Banks should ensure that
the reporting system is suitably streamlined so that delays in reporting of
frauds, submission of delayed and incomplete fraud reports are avoided.
Banks must fix staff accountability in respect of delays in reporting fraud
cases to RBI.
3.3.2 Delay in reporting of
frauds and the consequent delay in alerting other banks about the modus
operandi and dissemination of information through caution advices / CFR
against unscrupulous borrowers could result in similar frauds being perpetrated
elsewhere. Banks should therefore, strictly adhere to the timeframe fixed
in this circular for reporting of fraud cases to RBI failing which they
would be liable for penal action prescribed under Section 47(A) of the
Banking Regulation Act, 1949.
4.1 REPORTS TO THE BOARD
Banks should ensure that all
frauds of ? 0.1 million and above are reported to their Boards promptly on
their detection. Such reports should, among other things, take note of the
failure on the part of the concerned branch officials and controlling
authorities, and give details of action initiated against the officials
responsible for the fraud.
4.2 Quarterly Review of Frauds
4.2.1 Information relating to
frauds for the quarters ending June, September and December shall be placed
before the Audit Committee of the Board of Directors during the month
following the quarter to which it pertains.
4.2.2 These should be
accompanied by supplementary material analysing statistical information and
details of each fraud so that the Audit Committee of the Board would have
adequate material to contribute effectively in regard to the punitive or
preventive aspects of frauds.
A separate review for the
quarter ending March is not required in view of the Annual Review for the
year-ending March prescribed at para 6.3 below.
4.3 Annual Review of Frauds
4.3.1 Banks should conduct an
annual review of the frauds and place a note before the Board of
Directors/Local Advisory Board for information. The reviews for the
year-ended March shall be put up to the Board before the end of the next
quarter i.e. quarter ended June 30th. Such reviews need not be sent to RBI
but may be preserved for verification by the Reserve Bank’s inspecting
4.3.2 The main aspects to be
taken into account while making such a review shall, inter alia, include
the systems in the bank are adequate to detect frauds, once they have taken
place, within the shortest possible time.
frauds are examined from staff angle and, wherever necessary, the cases are
reported to the Vigilance Cell for further action in the case of public
deterrent punishment is meted out, wherever warranted, to the persons found
frauds have taken place because of laxity in following the systems and
procedures and, if so, whether effective action has been taken to ensure
that the systems and procedures are scrupulously followed by the staff
frauds are reported to local Police or CBI, as the case may be, for
investigation, as per the guidelines issued in this regard to public sector
banks by Government of India.
4.3.3 The annual reviews should
also, among other things, include the following details:
number of frauds detected during the year and the amount involved as
compared to the previous two years.
of frauds according to different categories detailed in Paragraph 2.1 and
also the different business areas indicated in the Quarterly Report on
Frauds Outstanding (vide FMR 2).
operandi of major frauds reported during the year along with their present
analysis of frauds of ? 0.1 million and above.
loss to the bank during the year on account of frauds, amount recovered and
of cases (with amounts) where staff are involved and the action taken
break-up of frauds and amount involved.
taken to detect frauds (number of cases detected within three months, six
months and one year of their taking place).
with regard to frauds reported to CBI/Police.
of frauds where final action has been taken by the bank and cases disposed
steps taken by the bank during the year to reduce/minimise the incidence of
4.3.4 Banks shall place the copy
of the circular on modus-operandi of fraud issued by them for alerting
their branches/controlling offices etc., on specific frauds before the
Audit Committee of Board (ACB) in its periodical meetings.
4.4 Special committee of the
4.4.1 While Audit Committee of
the Board (ACB) shall monitor all the cases of frauds in general, banks are
required to constitute a Special Committee of the Board for monitoring and
follow up of cases of frauds (SCBF) involving amounts of ? 10 million and
above exclusively. The Special Committee is to be constituted with five
members of the Board of Directors, consisting of MD & CEO in case of
public sector banks and MD in case of SBI, its Associates and private
sector banks, two members from ACB and two other members from the Board
excluding RBI nominee. The periodicity of the meetings of the Special
Committee may be decided according to the number of cases involved. In
addition, the Committee should meet and review as and when a fraud
involving an amount of ? 10 million and above comes to light.
4.4.2 The major functions of the
Special Committee would be to monitor and review all the frauds of ? 10
million and above so as to:
the systemic lacunae if any that facilitated perpetration of the fraud and
put in place measures to plug the same.
the reasons for delay in detection, if any, reporting to top management of
the bank and RBI.
progress of CBI/Police investigation and recovery position.
that staff accountability is examined at all levels in all the cases of
frauds and staff side action, if required, is completed quickly without
loss of time.
the efficacy of the remedial action taken to prevent recurrence of frauds,
such as strengthening of internal controls.
4.4.3 The banks shall delineate
in a policy document the processes for implementation of the Committee's
directions and enable a dedicated outfit of the bank to implement the
directions in this regard.
4.4.4 To align the vigilance
function in Private sector and Foreign Banks to that of the Public Sector
Banks the existing vigilance functions of a few private sector and foreign
banks were mapped with the existing guidelines in the matter and it was
observed that the practices vary widely among the banks. The detailed
guidelines for private sector and foreign banks were issued on May 26, 2011
to address all issues arising out of lapses in the functioning of the
private sector and foreign banks especially relating to corruption,
malpractices, frauds etc. for timely and appropriate action. The detailed
guidelines are aimed at bringing uniformity and rationalization in the
function of internal vigilance. Private sector banks (including foreign
banks operating in India) were advised to put in place a system of internal
vigilance machinery as per the guidelines.
4.5 Cases Of Attempted Fraud
4.5.1 Banks need not report
cases of attempted frauds of ? 10 million and above to Reserve Bank of
India. However, banks should continue to place the report on individual
cases of attempted fraud involving an amount of ? 10 million and above before
the Audit Committee of its Board. The report should cover the following
modus operandi of the attempted fraud.
the attempt did not materialize into fraud or how the attempt failed/ was
measures taken by the bank to strengthen the existing systems and controls.
systems and controls put in place in the area where fraud was attempted.
4.5.2 Further, a consolidated
review of such cases detected during the year containing information such
as area of operations where such attempts were made, effectiveness of new
processes and procedures put in place during the year, trend of such cases
during the last three years, need for further change in processes and
procedures, if any, etc. as on March 31 every year should be put up to the
ACB within three months of the end of the relative year.
5.1. Closure Of Fraud Cases
5.1 Banks shall report to CFMC,
RBI and the respective Regional offices of the DBS/SSM, the details of
fraud cases of ? 0.1 million and above closed along with reasons for the
closure after completing the process as given below.
5.2 Fraud cases closed during
the quarter are required to be reported quarterly through FMR 3 return and
cross checked with relevant column in FMR 2 return before sending to RBI.
5.3 Banks should report only
such cases as closed where the actions as stated below are complete and prior
approval is obtained from the respective Regional Offices of DBS/SSM/SBMD.
fraud cases pending with CBI/Police/Court are finally disposed of.
examination of staff accountability has been completed
amount of fraud has been recovered or written off.
claim wherever applicable has been settled.
bank has reviewed the systems and procedures, identified as the causative
factors and plugged the lacunae and the fact of which has been certified by
the appropriate authority (Board / Audit Committee of the Board)
5.4 Banks should also pursue
vigorously with CBI for final disposal of pending fraud cases especially
where the banks have completed staff side action. Similarly, banks may
vigorously follow up with the police authorities and/or court for final
disposal of fraud cases.
5.5 Banks are allowed, for
limited statistical / reporting purposes, to close those fraud cases
involving amounts up to ? 2.5 million, where:
investigation is on or challan/ charge sheet has not been filed in the Court
for more than three years from the date of filing of First Information
Report (FIR) by the CBI/Police or
trial in the courts, after filing of charge sheet/challan by CBI / Police,
has not started or is in progress.
5.6 The banks are required to follow
the guidelines relating to seeking prior approval for closure of such cases
from the RO of DBS under whose jurisdiction the Head Office of the bank is
located or the SSM and follow up of such cases after closure as mentioned
5.7 The banks shall have to
submit their proposals, case wise, for closure to the Regional Office of
RBI under whose jurisdiction their Head Offices are situated / SSM of the
bank. The cases may be closed after getting the approval of the respective
Regional Offices/SSM of RBI. The banks should maintain the record of
details of such cases in a separate ledger. Even after closure of the fraud
cases for limited statistical purposes, banks should vigorously follow up
with the investigating agencies (CBI / Police) to ensure that the
investigation process is taken to its logical conclusion. Similarly, the
banks should continue to ensure that they are regularly and appropriately
represented in the court proceedings as and when required. All the relevant
records pertaining to such cases must be preserved till the cases are
finally disposed of by CBI / Police or Courts, as the case may be.
5.8 The banks shall, with the
approval of their respective Boards, frame their own internal policy for
closure of fraud cases, incorporating the above norms and other internal
procedures / controls as deemed necessary.
5.9 Notwithstanding the fact
that banks may close cases of fraud even when Police / CBI investigation is
in progress or cases are pending in the court of law, they should complete,
within the prescribed time frame, the process of examination of staff
accountability or conclude staff side actions.
6. GUIDELINES FOR REPORTING
FRAUDS TO POLICE/CBI
6.1 In dealing with cases of
fraud/embezzlement, banks should not merely be actuated by the necessity of
recovering expeditiously the amount involved, but should also be motivated
by public interest and the need for ensuring that the guilty persons do not
go unpunished. Therefore, as a general rule, the following cases should
invariably be referred to the State Police or to the CBI as detailed below:
involved in the fraud
to whom complaint should be lodged
Private Sector/ Foreign Banks
? 10000 and above
If committed by staff
? 0.1 million and above
If committed by outsiders on
their own and/or with the connivance of bank staff/officers.
? 10 million and above
In addition to State Police,
SFIO, Ministry of Corporate Affairs, Government of India. Second Floor,
Paryavaran Bhavan, CGO Complex, Lodhi Road, New Delhi 110 003.
Details of the fraud are to be
reported to SFIO in FMR 1 Format.
Public Sector Banks
Below ? 30 million
1.Above ? 10,000/- but below ? 0.1 million
To the local police station
To be lodged by the bank
2. ? 0.1 million and above
involving outsiders and bank staff
To the State CID/Economic
Offences Wing of the State concerned
To be lodged by the Regional
Head of the bank concerned
? 30 million and above and up
to ? 250 million
To be lodged with Anti
Corruption Branch of CBI (where staff involvement is prima facie evident)
Economic Offences Wing of CBI (where staff involvement is prima facie not
More than ? 250 million and up
to ? 500 million
To be lodged with Banking
Security and Fraud Cell (BSFC) of CBI (irrespective of the involvement of
a public servant)
More than ? 500 million
To be lodged with the Joint
Director (Policy) CBI, HQ New Delhi
6.2 All fraud cases of value
below ? 10,000/- involving bank officials, should be referred to the
Regional Head of the bank, who would scrutinize each case and direct the
bank branch concerned on whether it should be reported to the local police
station for further legal action.
7. CHEQUE RELATED FRAUDS,
PRECAUTIONS TO BE TAKEN AND REPORTING TO RBI AND THE POLICE
7.1 In view of the rise in the
number of cheque related fraud cases banks were advised to review and
strengthen the controls in the cheque presenting/passing and account
monitoring processes and to ensure that all procedural guidelines including
preventive measures are followed meticulously by the dealing
2014-15 dated November 5, 2014). Banks were also given an
illustrative list of some of the preventive measures they may follow in
this regard viz.
the use of 100% CTS - 2010 compliant cheques.
the infrastructure at the cheque handling Service Branches and bestowing
special attention on the quality of equipment and personnel posted for CTS
based clearing, so that it is not merely a mechanical process.
that the beneficiary is KYC compliant so that the bank has recourse to
him/her as long as he/she remains a customer of the bank.
under UV lamp for all cheques beyond a threshold of say, ? 0.2 million.
at multiple levels, of cheques above a threshold of say, ? 0.5 million.
monitoring of credits and debits in newly opened transaction accounts based
on risk categorization.
an SMS alert to payer/drawer when cheques are received in clearing.
Banks shall reduce or increase
the threshold limits mentioned above with the approval of the Board
depending on the volume of cheques handled by the bank or it's risk
7.2 Banks may also consider the
following preventive measures for dealing with suspicious or large value
cheques (in relation to an account’s normal level of operations):
the customer by a phone call and getting the confirmation from the
base branch in case of non-home cheques.
The above may be resorted to
selectively if not found feasible to be implemented systematically.
7.3 It has been reported that in
some cases even though the original cheques were in the custody of the
customer, cheques with the same series had been presented and encashed by
fraudsters. In this connection, banks are advised to take appropriate
precautionary measures to ensure that the confidential information viz.,
customer name / account number / signature, cheque serial numbers and other
related information are neither compromised nor misused either from the
bank or from the vendors’ (printers, couriers etc.) side. Due care and
secure handling is also to be exercised in the movement of cheques from the
time they are tendered over the counters or dropped in the collection boxes
7.4 To ensure uniformity and to
avoid duplication, reporting of frauds involving forged instruments
including fake/forged instruments sent in clearing in respect of truncated
instruments will continue to be done by the paying banker and not by the
collecting banker. In such cases the presenting bank shall immediately hand
over the underlying instrument to drawee/paying bank as and when demanded
to enable it to file an FIR with the police authorities and report the
fraud to RBI. It is the paying banker who has to file the police complaint
and not the collecting banker.
7.5 However, in the case of
collection of an instrument which is genuine but the amount is collected fraudulently
by a person who is not the true owner or where the amount has been credited
before realisation and subsequently the instrument is found to be
fake/forged and returned by the paying bank, the collecting bank, which is
defrauded or is at loss by paying the amount before realisation of the
instrument, shall file both the fraud report with the RBI and complaint
with the police.
7.6 In case of collection of
altered/fake cheque involving two or more branches of the same bank, the
branch where the altered/fake cheque has been encashed, should report the
fraud to its Head Office. Similarly in the event of an altered/fake cheque
having been paid / encashed involving two or more branches of a bank under
Core Banking Solution (CBS), the branch which has released the payment
should report the fraud to the Head Office. Thereafter, Head Office of the
bank will file the fraud report with RBI and also file the Police
8.1. LOAN FRAUDS - NEW FRAMEWORK
Based on the recommendations of
an Internal Working Group constituted by the Bank , a framework for dealing
with loan frauds was put in place vide circular
DBS.CO.CFMC.BC.No.007/23.04.001/2014-15 dated May 7, 2015.
8.2 Objective of the framework
The objective of the framework
is to direct the focus of banks on the aspects relating to prevention,
early detection, prompt reporting to the RBI (for system level aggregation,
monitoring & dissemination) and the investigative agencies (for
instituting criminal proceedings against the fraudulent borrowers) and
timely initiation of the staff accountability proceedings (for determining
negligence or connivance, if any) while ensuring that the normal conduct of
business of the banks and their risk taking ability is not adversely
impacted and no new and onerous responsibilities are placed on the banks.
In order to achieve this objective, the framework has stipulated time lines
with the action incumbent on a bank. The time lines / stage wise actions in
the loan life-cycle are expected to compress the total time taken by a bank
to identify a fraud and aid more effective action by the law enforcement
agencies. 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.
8.3 Early Warning Signals (EWS)
and Red Flagged Accounts (RFA)
8.3.1 A Red Flagged Account
(RFA) is one where a suspicion of fraudulent activity is thrown up by the
presence of one or more Early Warning Signals (EWS). These signals in a
loan account should immediately put the bank on alert regarding a weakness
or wrong doing which may ultimately turn out to be fraudulent. A bank
cannot afford to ignore such EWS but must instead use them as a trigger to
launch a detailed investigation into a RFA.
8.3.2 An illustrative list
of some EWS is given for the guidance of banks in Annex I to this circular.
Banks may choose to adopt or adapt the relevant signals from this list and
also include other alerts/signals based on their experience, client profile
and business models. The EWS so compiled by a bank would form the basis for
classifying an account as a RFA.
8.3.3 The threshold for EWS and
RFA is an exposure of ? 500 million or more at the level of a bank
irrespective of the lending arrangement (whether solo banking, multiple
banking or consortium). All accounts beyond ? 500 million classified as RFA
or ‘Frauds’ must also be reported on the CRILC data platform together with
the dates on which the accounts were classified as such. As of now, this
requirement is in addition to the extant requirements of reporting to RBI
as mentioned in Para 3 above.
8.3.4 The modalities for
monitoring of loan frauds below ? 500 million threshold is left to the
discretion of banks. However, banks shall continue to report all identified
accounts to CFMC, RBI as per the existing cut-offs.
8.3.5 The tracking of EWS in
loan accounts should not be seen as an additional task but must be
integrated with the credit monitoring process in the bank so that it
becomes a continuous activity and also acts as a trigger for any possible
credit impairment in the loan accounts, given the interplay between credit
risks and fraud risks. In respect of large accounts it is necessary that
banks undertake a detailed study of the Annual Report as a whole and not
merely of the financial statements, noting particularly the Board Report
and the Managements’ Discussion and Analysis Statement as also the details
of related party transactions in the notes to accounts. The officer
responsible for the operations in the account, by whatever designation
called, should be sensitised to observe and report any manifestation of the
EWS promptly to the Fraud Monitoring Group (FMG) or any other group
constituted by the bank for the purpose immediately. To ensure that the
exercise remains meaningful, such officers may be held responsible for
non-reporting or delays in reporting.
8.3.6 The FMG or any such
designated committee shall classify the account as RFA and the details of
RFA accounts shall be put up to the CMD/CEO every month.
8.3.7 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.
8.4 Early Detection and
8.4.1 At present the detection
of frauds takes an unusually long time. Banks tend to report an account as
fraud only when they exhaust the chances of further recovery. Among other
things, delays in reporting of frauds also delays the alerting of other
banks about the modus operandi through caution advices / CFR by RBI that
may result in similar frauds being perpetrated elsewhere. More importantly,
it delays action against the unscrupulous borrowers by the law enforcement
agencies which impact the recoverability aspects to a great degree and also
increases the loss arising out of the fraud.
8.4.2 The most effective way of
preventing frauds in loan accounts is for banks to have a robust appraisal
and an effective credit monitoring mechanism during the entire life-cycle
of the loan account. Any weakness that may have escaped attention at the
appraisal stage can often be mitigated in case the post disbursement
monitoring remains effective. In order to strengthen the monitoring
processes, based on an analysis of the collective experience of the banks,
inclusion of the following checks / investigations during the different
stages of the loan life-cycle should be carried out:
Pre-sanction: As part of the credit process, the checks being
applied during the stage of pre-sanction may consist of the Risk Management
Group (RMG) or any other appropriate group of the bank collecting
independent information and market intelligence on the potential borrowers
from the public domain on their track record, involvement in legal
disputes, raids conducted on their businesses, if any, strictures passed
against them by Government agencies, validation of submitted information/data
from other sources like the ROC, gleaning from the defaulters list of
RBI/other Government agencies, etc., which could be used as an input by the
sanctioning authority. Banks shall keep the record of such pre-sanction
checks as part of the sanction documentation.
Disbursement: Checks by RMG during the disbursement stage, shall
among others, focus on the adherence to the terms and conditions of
sanction, rationale for allowing dilution of these terms and conditions,
level at which such dilutions were allowed, etc. The dilutions should
strictly conform to the broad framework laid down by the Board in this
regard. As a matter of good practice, the sanctioning authority may specify
certain terms and conditions as ‘core’ which should not be diluted. The RMG
may immediately flag the non-adherence of core stipulations to the
review: While the continuous
monitoring of an account through the tracking of EWS is important, banks
also need to be vigilant from the fraud perspective at the time of annual
review of accounts. Among other things, the aspects of diversion of funds
in an account, adequacy of stock vis-a-vis stock statements, stress in
group accounts, etc., must also be commented upon at the time of review.
Besides, the RMG should have capability to track market developments
relating to the major clients of the bank and provide inputs to the credit
officers. This would involve collecting 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.
8.5 Staff empowerment
Employees should be encouraged
to report fraudulent activity in an account, along with the reasons in
support of their views, to the appropriately constituted authority, under
the Whistle Blower Policy of the bank, who may institute a scrutiny through
the FMG. The FMG may ‘hear’ the concerned employee in order to obtain
necessary clarifications. Protection should be available to such employees
under the whistle blower policy of the bank so that the fear of
victimisation does not act as a deterrent.
8.6 Role of Auditors
During the course of the audit,
auditors may come across instances where the transactions in the account or
the documents point to the possibility of fraudulent transactions in the
account. In such a situation, the auditor should immediately bring it to
the notice of the top management and if necessary to the Audit Committee of
the Board (ACB) for appropriate action.
8.7 Incentive for Prompt
In case of accounts classified
as ‘fraud’, banks are required to make provisions to the full extent
immediately, irrespective of the value of security. However, in case a bank
is unable to make the entire provision in one go, it may now do so over
four quarters provided there is no delay in reporting (cf. Circular DBR.No.BP.BC.83/21.04.048/2014-15 dated April
01, 2015). In case of delays, the banks under Multiple Banking
Arrangements (MBA) or member banks in the consortium are required to make
the provision in one go in terms of the said circular. Delay, for the
purpose of this circular, would mean that the fraud was not flashed to
CFMC, RBI or reported on the CRILC platform, RBI within a period of one
week from its (i) classification as a fraud through the RFA route which has
a maximum time line of six months or (ii) detection/declaration as a fraud
ab initio by the bank as hitherto.
8.8 Bank as a sole lender
8.8.1 In cases where the bank is
the sole lender, the FMG will take a call on whether an account in which
EWS are observed should be classified as RFA or not. This exercise should
be completed as soon as possible and in any case within a month of the EWS
being noticed. In case the account is classified as RFA, the FMG will
stipulate the nature and level of further investigations or remedial
measures necessary to protect the bank’s interest within a stipulated time
which cannot exceed six months.
8.8.2 The bank may use external
auditors, including forensic experts or an internal team for investigations
before taking a final view on the RFA. At the end of this time line, which
cannot be more than six months, banks should either lift the RFA status or
classify the account as a fraud.
8.8.3 A report on the RFA
accounts should be put up to the SCBF with the observations/decision of the
FMG. The report should list the EWS/ irregularities observed in the account
and provide a synopsis of the investigations ordered / remedial action
proposed by the FMG together with their current status.
8.9 Lending under Consortium or
Multiple Banking Arrangements
8.9.1 Certain unscrupulous
borrowers enjoying credit facilities under "multiple banking
arrangement” after defrauding one of the financing banks, continue to enjoy
the facilities with other financing banks and in some cases avail even
higher limits at those banks. In certain cases the borrowers use the
accounts maintained at other financing banks to siphon off funds by diverting
from the bank on which the fraud is being perpetrated. This is due to lack
of a formal arrangement for exchange of information among various lending
banks/FIs. In some of the fraud cases, the securities offered by the
borrowers to different banks are the same.
8.9.2 In view of this, all the
banks which have financed a borrower under 'multiple banking' arrangement
should take co-ordinated action, based on commonly agreed strategy, for
legal / criminal actions, follow up for recovery, exchange of details on
modus operandi, achieving consistency in data / information on frauds
reported to Reserve Bank of India. Therefore, the bank which detects a
fraud is required to immediately share the details with all other banks in
the multiple banking arrangements.
8.9.3 In case of consortium
arrangements, individual banks must conduct their own due diligence before
taking any credit exposure and also independently monitor the end use of
funds rather than depend fully on the consortium leader. However, as
regards monitoring of Escrow Accounts, the details may be worked out by the
consortium and duly documented so that accountability can be fixed easily
at a later stage. Besides, 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 as hitherto. While some of the due diligence measures
have been illustrated in paragraph 8.4.2 above, due diligence broadly
encompasses all measures to be taken by a bank to understand the nature of
business of the borrower, identifying and assessing any risks associated in
the financial, commercial, legal and operational aspects of the business
and also the measures taken to mitigate the risks found after such exercise
. Due diligence also includes but is not limited to developing Standard
Operating Procedures, with checklists to be followed by the operating
functionaries, updating any manual that has been written and sensitizing
staff for strict adherence to such procedures.
8.9.4 The initial decision to
classify any standard or NPA account as RFA or Fraud will be at the
individual bank level and it would be the responsibility of this bank to
report the RFA or Fraud status of the account on the CRILC platform so that
other banks are alerted. In case it is decided at the individual bank level
to classify the account as fraud straightaway at this stage itself, the
bank shall then report the fraud to RBI within 21 days of detection and
also report the case to CBI/Police, as is being done hitherto. Further
within 15 days of RFA/Fraud classification, the bank which has red flagged
the account or detected the fraud would ask the consortium leader or the
largest lender under MBA to convene a meeting of the JLF to discuss the
issue. The meeting of the JLF so requisitioned must be convened within 15
days of such a 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 MBA. All banks, as part of the consortium or
multiple banking arrangement, shall share the costs and provide the
necessary support for such an investigation.
8.9.5 The forensic audit must be
completed within a maximum period of three months from the date of the JLF
meeting authorizing the audit. Within 15 days of the completion of the
forensic audit, the JLF shall reconvene and decide on the status of the
account, either by consensus or the majority rule as specified above. In
case the decision is to classify the account as a fraud, the RFA status
shall be changed to Fraud in all banks and reported to RBI and on the CRILC
platform within a week of the said decision. Besides, within 30 days of the
RBI reporting, the bank commissioning/ initiating the forensic audit should
lodge a complaint with the CBI on behalf of all banks in the
consortium/MBA. For this purpose, if the bank initiating the forensic audit
is a private sector bank, the complaint shall be lodged with the CBI by the
PSU bank with the largest exposure to the account in the consortium/MBA. If
there is no PSU bank in the consortium / MBA or it is a solo bank lending
by a private sector bank/foreign bank, the private bank/foreign bank shall
report to the Police as per extant instructions. This would be in addition
to the complaint already lodged by the first bank which had detected the
fraud and informed the consortium/MBA.
8.9.6 It may be noted that the
overall time allowed for the entire exercise to be completed is six months
from the date when the first member bank reported the account as RFA or
Fraud on the CRILC platform.
8.10 Staff Accountability
8.10.1 As in the case of
accounts categorised as NPAs, banks must initiate and complete a staff
accountability exercise within six months from the date of classification
as a Fraud. Wherever felt necessary or warranted, the role of sanctioning
official(s) may also be covered under this exercise. The completion of the
staff accountability exercise for frauds and the action taken shall be
placed before the SCBF and intimated to the RBI at quarterly intervals as
8.10.2 Banks may bifurcate all
fraud cases into vigilance and non-vigilance. Only vigilance cases should
be referred to the investigative authorities. Non-vigilance cases may be
investigated and dealt with at the bank level within a period of six
months. It is emphasised that banks should strive to complete the staff
accountability exercise within six months as clearing the air on the staff
members concerned in a shorter time frame is appropriate and desirable.
8.10.3 In cases involving very
senior executives of the bank, the Board / ACB/ SCBF may initiate the
process of fixing staff accountability. It is clarified that very senior
executives include the EDs and MD & CEOs of banks.
8.10.4 Staff accountability should
not be held up on account of the case being filed with law enforcement
agencies. Both the criminal and domestic enquiry should be conducted
Filing Complaints with Law Enforcement Agencies
8.11.1 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.
8.11.2 It is observed that banks
do not have a focal point for filing CBI / Police complaints. This results
in a non-uniform approach to complaint filing by banks and the
investigative agency has to deal with dispersed levels of authorities in
banks. This is among the most important reasons for delay in conversion of
complaints to FIRs. It is, therefore, enjoined on banks to establish a
nodal point / officer for filing all complaints with the CBI on behalf of
the bank and serve as the single point for coordination and redressal of
infirmities in the complaints.
8.11.3 The complaint lodged by
the bank with the law enforcement agencies should be drafted properly and
invariably be vetted by a legal officer. It is also observed that banks
sometimes file complaints with CBI / Police on the grounds of cheating,
misappropriation of funds, diversion of funds etc., by borrowers without
classifying the accounts as fraud and/or reporting the accounts as fraud to
RBI. Since such grounds automatically constitute the basis for classifying
an account as a fraudulent one, banks should invariably classify such
accounts as frauds and report the same to RBI.
8.12 Penal measures for
8.12.1 In general, the penal
provisions as applicable to wilful defaulters would apply to the fraudulent
borrower including the promoter director(s) and other whole time directors
of the company insofar as raising of funds from the banking system or from
the capital markets by companies with which they are associated is
concerned, etc. In particular, borrowers who have defaulted and have also
committed a fraud in the account would be debarred from availing bank
finance from Scheduled Commercial Banks, Development Financial
Institutions, Government owned NBFCs, Investment Institutions, etc., for a
period of five years from the date of full payment of the defrauded amount.
After this period, it is for individual institutions to take a call on
whether to lend to such a borrower. The penal provisions would apply to
non-whole time directors (like nominee directors and independent directors)
only in rarest of cases based on conclusive proof of their complicity.
8.12.2 No restructuring or grant
of additional facilities may be made in the case of RFA or fraud accounts.
However, in cases of fraud/malfeasance where the existing promoters are
replaced by new promoters and the borrower company is totally delinked from
such erstwhile promoters/management, banks and JLF may take a view on
restructuring of such accounts based on their viability, without prejudice
to the continuance of criminal action against the erstwhile
8.12.3 No compromise settlement
involving a fraudulent borrower is allowed unless the conditions stipulate
that the criminal complaint will be continued.
8.12.4 In addition to above
borrower- fraudsters, third parties such as builders, warehouse/cold
storage owners, motor vehicle/tractor dealers, travel agents, etc. and
professionals such as architects, valuers, chartered accountants,
advocates, etc. are also to be held accountable if they have played a vital
role in credit sanction/disbursement or facilitated the perpetration of
frauds. Banks are advised to report to Indian Banks Association (IBA) the
details of such third parties involved in frauds.
8.12.5 Before reporting to IBA,
banks have to satisfy themselves of the involvement of third parties
concerned and also provide them with an opportunity of being heard. In this
regard the banks should follow normal procedures and the processes followed
should be suitably recorded. On the basis of such information, IBA would,
in turn, prepare caution lists of such third parties for circulation among
9.1 Legal Audit of Title
Documents in respect of Large Value Loan Accounts
9.1.1 Banks should subject the
title deeds and other documents in respect of all credit exposures of ? 5
crore and above to periodic legal audit and re-verification of title deeds
with relevant authorities as part of regular audit exercise till the loan
stands fully repaid.
9.1.2 Banks shall furnish a
review note to their Board / Audit Committee of the Board at quarterly
intervals on an ongoing basis giving therein the information in respect of
such legal audits which should cover aspects, inter alia, like number of
loan accounts due for legal audit for the quarter, how many accounts
covered, list of deficiencies observed by the auditors, steps taken to
rectify the deficiencies, number of accounts in which the rectification
could not take place, course of action to safeguard the interest of bank in
such cases, action taken on issues pending from earlier quarters.
9.2 Sale of Financial Assets of
Doubtful Standard / Fraudulent Origin to Securitization Company (SC)/
Reconstruction Company (RC)
9.2.1 It is noticed that certain
non-performing or performing loans of questionable standards had been
packaged by some banks and sold to Securitization Companies /
Reconstruction Companies (SC / RC). These loans were subsequently found to
have been originated fraudulently.
9.2.2 It is therefore advised
that banks should ensure that while packaging and selling performing or
non-performing assets, it is properly ascertained that the pool of assets
being sold does not contain any loan originated fraudulently or has been
classified as fraud as on the date of sale.
Reporting Cases Of Theft,
Burglary, Dacoity And Bank Robberies
10.1 Banks should arrange to
report by fax / e-mail instances of bank robberies, dacoities, thefts and
burglaries to the following authorities immediately on their occurrence.
DBS/SSM under whose jurisdiction the Head Office of the bank falls.
DBS under whose jurisdiction the affected bank branch is located to enable
the Regional Office to take up the issues regarding security arrangements
in affected branch/es during the State Level Security Meetings with the
Security Adviser, Central Security Cell, Reserve Bank of India, Central
Office Building, Mumbai - 400 001.
of Finance, Department of Financial Services Government of India, Jeevan
Deep, Parliament Street, New Delhi-110 001.
The report should include
details of modus operandi and other information as at columns 1 to 11 of
10.2 Banks should also submit to
CFMC, Bengaluru a quarterly consolidated statement in the format given in
FMR 4 (soft copy) covering all cases pertaining to the quarter. This may be
submitted within 15 days of the end of the quarter to which it relates.
10.3 Banks which do not have any
instances of theft, burglary, dacoity and / or robbery to report during the
quarter, may submit a nil report.
A list of circulars that stand
repealed with the issue of these Directions is given in Annex IV
Warning Signals (EWS)
Early Warning Signals (EWS) which should alert the bank officials about
some wrongdoings in the loan accounts which may turn out to be fraudulent
1 a) Default in undisputed
payment to the statutory bodies as declared in the Annual report.
b) Bouncing of high value
2 Frequent change in the scope
of the project to be undertaken by the borrower
3 Foreign bills remaining
outstanding with the bank for a long time and tendency for bills to remain overdue.
4 Delay observed in payment of
5 Frequent invocation of BGs and
devolvement of LCs.
6 Under insured or over insured
7 Invoices devoid of TAN and
8 Dispute on title of collateral
9 Funds coming from other banks
to liquidate the outstanding loan amount unless in normal course.
10 In merchanting trade, import
leg not revealed to the bank.
11 Request received from the
borrower to postpone the inspection of the godown for flimsy reasons.
12 Funding of the interest by
sanctioning additional facilities.
13 Exclusive collateral charged
to a number of lenders without NOC of existing charge holders.
14 Concealment of certain vital
documents like master agreement, insurance coverage.
15 Floating front / associate
companies by investing borrowed money
16 Critical issues highlighted
in the stock audit report.
17 Liabilities appearing in ROC
search report, not reported by the borrower in its annual report
18 Frequent request for general
19 Frequent ad hoc sanctions.
20 Not routing of sales proceeds
through consortium I member bank/ lenders to the company.
21 LCs issued for local trade I
related party transactions without underlying trade transaction
22 High value RTGS payment to
23 Heavy cash withdrawal in loan
24 Non production of original
bills for verification upon request.
25 Significant movements in
inventory, disproportionately differing vis-a-vis change in the turnover.
26 Significant movements in
receivables, disproportionately differing vis-à-vis change in the turnover
and/or increase in ageing of the receivables
27 Disproportionate change in
other current assets
28 Significant increase in
working capital borrowing as percentage of turnover
29 Increase in Fixed Assets,
without corresponding increase in long term sources (when project is
30 Increase in borrowings,
despite huge cash and cash equivalents in the borrower's balance sheet
31 Frequent change in accounting
period and/or accounting policies
32 Costing of the project which
is in wide variance with standard cost of installation of the project
33 Claims not acknowledged as
34 Substantial increase in
unbilled revenue year after year.
35 Large number of transactions
with inter-connected companies and large outstanding from such companies
36 Substantial related party
37 Material discrepancies in the
38 Significant inconsistencies
within the annual report (between various sections)
39 Poor disclosure of materially
adverse information and no qualification by the statutory auditors
40 Raid by Income tax /sales
tax/ central excise duty officials
41 Significant reduction in the
stake of promoter /director or increase in the encumbered shares of
42 Resignation of the key
personnel and frequent changes in the management
of the circulars repealed, as the contents of the same have been
incorporated in the Master Direction
May 7, 2015
Framework for dealing with
June 7, 2013
Legal Audit of Title Documents
in Respect of Large Value Loan Accounts
April 5, 2011
Sale of Financial Assets of
Doubtful Standard/Fraudulent Origin to Securitization Company (SC)/
Reconstruction Company (RC) - Reporting Requirements
June 05, 2009
Closure of fraud cases -
relaxation in the existing norms
November 15, 2012
Frauds - Classification and
November 5, 2014
Cheque related fraud cases -