Indian banks will jointly move the Reserve Bank of India (RBI) demanding to change the definition of the word ‘fraud’ which crushes businesses, leads to legalities even after the amount is refunded and petrifies financiers, a news outlet reported on Monday.
According to Economic period report, all the CEOs of major banks have decided to make a representation to RBI in a meeting to discuss the problems faced by lenders.
Under the RBI, the regulation requires all banks to mark a lending company and all of its accounts as a “fraud account” when a lender puts a fraud label. This leads to a process where lenders have to file complaints with the police and suffer a beating, which is often disproportionate to the size of the fraud.
All of these actions combined hinder the profits of the borrowing company and alienate creditors, investors and other stakeholders.
“We should have a system where the whole business is not tarnished because of a small embezzlement and its entire borrowing is declared as ‘fraud’. Such declaration and associated procedure as filing an FIR can compound a company’s problems, creating a negative perception and preventing banks from making lending decisions,” Economic period quoted Sunil Mehta, chief executive of industry body Indian Banks Association.
According to current banking regulations, the total loan of Rs 15,000 crore will be subject to scrutiny and will be classified as fraud even though it is a fraud of Rs 300 crore that has surfaced. This leads to the initiation of criminal proceedings and full provisioning on their book. The banks, in this case, want RBI to limit the fraud categorization to just Rs 300 and not the full amount.