United Bank of India has topped the list of banks having high level of stressed assets at 21.50%. It is not that other banks are far behind- Central Bank of India (21.30%), Indian Overseas Bank(19.40%), Punjab & Sind Bank (18.74%) and Punjab National Bank (17.94%), are closely following UBI. Stressed assets comprise of bad loans (non performing assets) and restructured loans. In Non Performing Assets, banks cease to earn revenues whereas in restructured loans various concessions are given with the hope that unit may revive back and banks do not have to declare it NPA. In short, practically 20% of the credit portfolio of the bank stops earning revenues and if funds had been diverted by the promoters of the borrowing company and securities are not sufficient to recover dues, it is further hit on the balance sheet of the bank.
It is not that the entire 20% stressed assets are due to the external factors beyond the control of the promoters. Looking towards the increasing incidence of frauds in loan portfolios, Reserve Bank of India has come out with a framework which covers aspects relating to prevention, early detection, prompt reporting to RBI and investigativeagencies, and timely initiation of staff accountability proceedings.
As a sequel to the framework, RBI has introduced the concept of Red Flagged Accounts (RFA). RFA is one where any of the 45 Early Warning Signals(EWS), illustratively given by RBI, throws up suspicion of fraudulent activity. The eligible accounts where exposure is above Rs 50 cr are to be mandatorily covered under RFA and EWS and once categorised as RFA or 'Frauds', these are to be reported on the CRILC data platform.
RBI has suggested banks to set us 'Fraud Monitoring Group' to whom appearance of Early Warning Signals in any account is to be reported. The Group is required to report such accounts with their decision to classify them as Red Flagged Accounts or otherwise to the top management of the bank.
An account cannot remain in RFA for more than six months within which period the RFA status has to be lifted or account is to be declared as FRAUD.
Penal measures have also been mooted for the fraudulent borrowers, such as, they would be treated at par with wilful defaulters, would be barred from availing bank finance for a period of five years from the date of full payment of defrauded amount, no restructuring, no compromise settlement unless conditions stipulate that criminal complaint will continue.
The Reserve Bank is also in the process of designing a Central Fraud Registry, a centralised searchable database, which can be assessed by banks.
A good initiative by the Reserve Bank, since it will inculcate fear among the big borrowers who take it granted that they can go scot free playing and misappropriating the hard earned money of the small depositors.
All said and done, there is an apprehension that after all banks are listed companies and they are answerable to all the stake holders, be it depositors, borrowers, staff or the investors. If a bank, after having nurtured a company in its good time, declare it a fraud, even if the company has diverted the funds, it will be reflected in the balance sheet of the bank. Once big chunk of fraud is declared in any financial institution's balance sheet , all the stake holders become apprehensive. Depositors will withdraw, good borrowers will refrain, capable staff will start searching other avenues and share price of the bank will nosedive. Recently, HDFC Bank has sold its asset of a very big company to Asset Reconstruction Company at 40% discount whereas the company's accounts with other consortium banks are still performing. It may be because HDFC Bank had visualised the early warning signals and opted to move out. It is better to shun than to keep in one's coffer the assets labelled 'FRAUD'.
(The views expressed in the article are merely for academic purpose and are not subscribed by the organisation where the author is working)
Tilak Gulati is Assistant General Manager at UCO Bank.
Graphics designed by Saurabh Mittal, Manager, UCO Bank.
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United Bank of India has topped the list of banks having high level of stressed assets at 21.50%. It is not that other banks are far behind- Central Bank of India (21.30%), Indian Overseas Bank(19.40%), Punjab & Sind Bank (18.74%) and Punjab National Bank (17.94%), are closely following UBI. Stressed assets comprise of bad loans (non performing assets) and restructured loans. In Non Performing Assets, banks cease to earn revenues whereas in restructured loans various concessions are given with the hope that unit may revive back and banks do not have to declare it NPA. In short, practically 20% of the credit portfolio of the bank stops earning revenues and if funds had been diverted by the promoters of the borrowing company and securities are not sufficient to recover dues, it is further hit on the balance sheet of the bank.
It is not that the entire 20% stressed assets are due to the external factors beyond the control of the promoters. Looking towards the increasing incidence of frauds in loan portfolios, Reserve Bank of India has come out with a framework which covers aspects relating to prevention, early detection, prompt reporting to RBI and investigativeagencies, and timely initiation of staff accountability proceedings.
As a sequel to the framework, RBI has introduced the concept of Red Flagged Accounts (RFA). RFA is one where any of the 45 Early Warning Signals(EWS), illustratively given by RBI, throws up suspicion of fraudulent activity. The eligible accounts where exposure is above Rs 50 cr are to be mandatorily covered under RFA and EWS and once categorised as RFA or 'Frauds', these are to be reported on the CRILC data platform.
RBI has suggested banks to set us 'Fraud Monitoring Group' to whom appearance of Early Warning Signals in any account is to be reported. The Group is required to report such accounts with their decision to classify them as Red Flagged Accounts or otherwise to the top management of the bank.
An account cannot remain in RFA for more than six months within which period the RFA status has to be lifted or account is to be declared as FRAUD.
Penal measures have also been mooted for the fraudulent borrowers, such as, they would be treated at par with wilful defaulters, would be barred from availing bank finance for a period of five years from the date of full payment of defrauded amount, no restructuring, no compromise settlement unless conditions stipulate that criminal complaint will continue.
The Reserve Bank is also in the process of designing a Central Fraud Registry, a centralised searchable database, which can be assessed by banks.
A good initiative by the Reserve Bank, since it will inculcate fear among the big borrowers who take it granted that they can go scot free playing and misappropriating the hard earned money of the small depositors.
All said and done, there is an apprehension that after all banks are listed companies and they are answerable to all the stake holders, be it depositors, borrowers, staff or the investors. If a bank, after having nurtured a company in its good time, declare it a fraud, even if the company has diverted the funds, it will be reflected in the balance sheet of the bank. Once big chunk of fraud is declared in any financial institution's balance sheet , all the stake holders become apprehensive. Depositors will withdraw, good borrowers will refrain, capable staff will start searching other avenues and share price of the bank will nosedive. Recently, HDFC Bank has sold its asset of a very big company to Asset Reconstruction Company at 40% discount whereas the company's accounts with other consortium banks are still performing. It may be because HDFC Bank had visualised the early warning signals and opted to move out. It is better to shun than to keep in one's coffer the assets labelled 'FRAUD'.
(The views expressed in the article are merely for academic purpose and are not subscribed by the organisation where the author is working)
(The views expressed in the article are merely for academic purpose and are not subscribed by the organisation where the author is working)
Tilak Gulati is Assistant General Manager at UCO Bank.
Graphics designed by Saurabh Mittal, Manager, UCO Bank.
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