Framework for dealing with loan frauds by RBI for Banks

RBI/2014–15/590 DBS.CO.CFMC.BC.No.007/23.04.001/2014–15

May 7, 2015

The ris­ing trend in loan relat­ed frauds in the finan­cial sec­tor is a mat­ter of seri­ous con­cern. Equal­ly dis­qui­et­ing is the delay in detec­tion and report­ing of such frauds by banks. The issues relat­ing to pre­ven­tion, ear­ly detec­tion and report­ing of frauds has been looked into by an Inter­nal Work­ing Group (IWG) of the RBI which also held wide rang­ing con­sul­ta­tions with var­i­ous banks and oth­er stake­hold­ers. Based on the rec­om­men­da­tions of this IWG, a frame­work for fraud risk man­age­ment in banks is detailed in the Annex to this cir­cu­lar. These rec­om­men­da­tions may be read along with our instruc­tions con­tained in the Mas­ter Cir­cu­lar DBS.CO.CFMC.BC.No.1 /23.04.001 /2014–15 dat­ed July 01, 2014 on Frauds — Clas­si­fi­ca­tion and Report­ing. The guide­lines con­tained in the Annex come into force with imme­di­ate effect.

Yours faith­ful­ly,

(Manoj Shar­ma)
Chief Gen­er­al Manager

---

Annex

Frame­work for deal­ing with loan frauds

1.0 Objec­tive of the framework

In the con­text of increas­ing inci­dence of frauds in gen­er­al and in loan port­fo­lios in par­tic­u­lar, objec­tive of this 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 also seeks to stip­u­late 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. The gov­ern­ment is sep­a­rate­ly look­ing into the issue of more time­ly and coor­di­nat­ed action by the law enforce­ment agencies.

2.0 Ear­ly Warn­ing Sig­nals (EWS) and Red Flagged Accounts (RFA)

2.1 The con­cept of a Red Flagged Account (RFA) is being intro­duced in the cur­rent frame­work as an impor­tant step in fraud risk con­trol. A 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.

2.2 An illus­tra­tive list of some EWS is giv­en for the guid­ance of banks in Appen­dix 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.

2.3 The thresh­old for EWS and RFA is an expo­sure of Rs.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 Rs.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. The CRILC data plat­form is being enhanced to pro­vide this capa­bil­i­ty by June 1, 2015. As of now, this require­ment is in addi­tion to the extant require­ments of report­ing to RBI.

2.4 The modal­i­ties for mon­i­tor­ing of loan frauds below Rs.500 mil­lion thresh­old is left to the dis­cre­tion of banks. How­ev­er, banks may con­tin­ue to report all iden­ti­fied accounts to CFMC, RBI as per the exist­ing cut-offs.

2.5 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.

2.6 The FMG should report the details of loan accounts of Rs.500 mil­lion and above in which EWS are observed, togeth­er with the deci­sion to clas­si­fy them as RFAs or oth­er­wise to the CMD/CEO every month.

2.7 A report on the RFA accounts may 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.

3.0 Ear­ly Detec­tion and Reporting

3.1 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 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.

3.2 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 may be car­ried out:

3.2.1 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 may keep the record of such pre-sanc­tion checks as part of the sanc­tion documentation.

3.2.2 Dis­burse­ment: Checks by RMG dur­ing the dis­burse­ment stage may 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 sanc­tion­ing authority.

3.2.3 Annu­al 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.

3.3 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.

3.4 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 may imme­di­ate­ly bring it to the notice of the top man­age­ment and if nec­es­sary to the Audit Com­mit­tee of the Board (ACB) for appro­pri­ate action.

3.5 Incen­tive for Prompt Report­ing: 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 (cf. Mas­ter Cir­cu­lar DBS.CO.CFMC.BC.No.1/23.04.001/2014–15 dat­ed July 01, 2014 on Frauds — Clas­si­fi­ca­tion and Report­ing). As men­tioned ear­li­er, the CRILC plat­form is being enabled to accept the RFA and Fraud cat­e­gories shortly.

4.0 Bank as a sole lender

4.1 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 a 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 a 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.

4.2 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 would either lift the RFA sta­tus or clas­si­fy the account as a fraud.

4.3 A report on the RFA accounts may be put up to the SCBF with the observations/decision of the FMG. The report may 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.

5.0 Lend­ing under Con­sor­tium or Mul­ti­ple Bank­ing Arrangements

5.1 RBI Mas­ter Cir­cu­lar DBS.CO.CFMC.BC.No.1/23.04.001/2014–15 dat­ed July 01, 2014 on Frauds — Clas­si­fi­ca­tion and Report­ing (Para 3.2.4) pro­vides that all the banks which have financed a bor­row­er under MBA should take co-ordi­nat­ed action, based on a com­mon­ly agreed strat­e­gy, for legal / crim­i­nal actions and the bank which clas­si­fies or declares a fraud should report the same to CFMC, RBI with­in the dead­lines spec­i­fied in the Mas­ter Cir­cu­lar on Frauds — Clas­si­fi­ca­tion and Report­ing cit­ed above.

5.2 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.

5.3 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. There­after, with­in 15 days, 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 would be clas­si­fied as a fraud; else based on the major­i­ty rule of agree­ment amongst banks with atleast 60% share in the total lend­ing, the account would 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, would share the costs and pro­vide the nec­es­sary sup­port for such an investigation.

5.4 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 will 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 would change to Fraud in all banks and report­ed to RBI and on the CRILC plat­form with­in a week of the said deci­sion. Besides, with­in 15 days of the RBI report­ing, the bank commissioning/ ini­ti­at­ing the foren­sic audit would lodge a com­plaint with the CBI on behalf of all banks in the consortium/MBA.

5.5 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.

6.0 Staff Accountability

6.1 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 may be placed before the SCBF and inti­mat­ed to the RBI at quar­ter­ly inter­vals as hitherto.

6.2 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.

6.3 In cas­es involv­ing very senior exec­u­tives of the bank, the Board / ACB/ SCBF may ini­ti­ate the process of fix­ing staff accountability.

6.4 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 simultaneously.

7.0 Fil­ing Com­plaints with Law Enforce­ment Agencies

7.1 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.

7.2 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. The Gov­ern­ment is also con­sid­er­ing a cen­tral point for receiv­ing complaints/FIRs from banks in the CBI.

7.3 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 may invari­ably clas­si­fy such accounts as frauds and report the same to RBI.

7.4 The cur­rent struc­ture for fil­ing of com­plaints with the police and CBI is detailed in Appen­dix II.

8.0 Penal mea­sures for fraud­u­lent borrowers

8.1 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.

8.2 No restruc­tur­ing or grant of addi­tion­al facil­i­ties may be made in the case of RFA or fraud accounts.

8.3 No com­pro­mise set­tle­ment involv­ing a fraud­u­lent bor­row­er is allowed unless the con­di­tions stip­u­late that the crim­i­nal com­plaint will be continued.

9.0 Cen­tral Fraud Registry

9.1 Present­ly there is no sin­gle data­base which the lenders can access to get all the impor­tant details of pre­vi­ous frauds report­ed by banks. The cre­ation of such data­base at RBI will make avail­able more infor­ma­tion to banks at the time of start of a bank­ing rela­tion­ship, exten­sion of cred­it facil­i­ties or at any time dur­ing the oper­a­tion of an account. The Reserve Bank is in the process of design­ing a Cen­tral Fraud Reg­istry, a cen­tralised search­able data­base, which can be accessed by banks. The CBI and the Cen­tral Eco­nom­ic Intel­li­gence Bureau (CEIB) have also expressed inter­est in shar­ing their own data­bas­es with the banks. More infor­ma­tion in this regard would fol­low once the struc­ture is finalised.

---

Appen­dix I

Some Ear­ly Warn­ing sig­nals which should alert the bank offi­cials about some wrong­do­ings in the loan accounts which may turn out to be fraudulent

1. Default in pay­ment to the banks/ sundry debtors and oth­er statu­to­ry bod­ies, etc., bounc­ing of the high val­ue cheques
2. Raid by Income tax /sales tax/ cen­tral excise duty officials
3. Fre­quent change in the scope of the project to be under­tak­en by the borrower
4. Under insured or over insured inventory
5. Invoic­es devoid of TAN and oth­er details
6. Dis­pute on title of the col­lat­er­al securities
7. Cost­ing of the project which is in wide vari­ance with stan­dard cost of instal­la­tion of the project
8. Funds com­ing from oth­er banks to liq­ui­date the out­stand­ing loan amount
9. For­eign bills remain­ing out­stand­ing for a long time and ten­den­cy for bills to remain overdue
10. Oner­ous clause in issue of BG/LC/standby let­ters of credit
11. In mer­chant­i­ng trade, import leg not revealed to the bank
12. Request received from the bor­row­er to post­pone the inspec­tion of the godown for flim­sy reasons
13. Delay observed in pay­ment of out­stand­ing dues
14. Financ­ing the unit far away from the branch
15. Claims not acknowl­edged as debt high
16. Fre­quent invo­ca­tion of BGs and devolve­ment of LCs
17. Fund­ing of the inter­est by sanc­tion­ing addi­tion­al facilities
18. Same col­lat­er­al charged to a num­ber of lenders
19. Con­ceal­ment of cer­tain vital doc­u­ments like mas­ter agree­ment, insur­ance coverage
20. Float­ing front / asso­ciate com­pa­nies by invest­ing bor­rowed money
21. Reduc­tion in the stake of pro­mot­er / director
22. Res­ig­na­tion of the key per­son­nel and fre­quent changes in the management
23. Sub­stan­tial increase in unbilled rev­enue year after year.
24. Large num­ber of trans­ac­tions with inter-con­nect­ed com­pa­nies and large out­stand­ing from such companies.
25. Sig­nif­i­cant move­ments in inven­to­ry, dis­pro­por­tion­ate­ly high­er than the growth in turnover.
26. Sig­nif­i­cant move­ments in receiv­ables, dis­pro­por­tion­ate­ly high­er than the growth in turnover and/or increase in age­ing of the receivables.
27. Dis­pro­por­tion­ate increase in oth­er cur­rent assets.
28. Sig­nif­i­cant increase in work­ing cap­i­tal bor­row­ing as per­cent­age of turnover.
29. Crit­i­cal issues high­light­ed in the stock audit report.
30. Increase in Fixed Assets, with­out cor­re­spond­ing increase in turnover (when project is implemented).
31. Increase in bor­row­ings, despite huge cash and cash equiv­a­lents in the borrower’s bal­ance sheet.
32. Lia­bil­i­ties appear­ing in ROC search report, not report­ed by the bor­row­er in its annu­al report.
33. Sub­stan­tial relat­ed par­ty transactions.
34. Mate­r­i­al dis­crep­an­cies in the annu­al report.
35. Sig­nif­i­cant incon­sis­ten­cies with­in the annu­al report (between var­i­ous sections).
36. Poor dis­clo­sure of mate­ri­al­ly adverse infor­ma­tion and no qual­i­fi­ca­tion by the statu­to­ry auditors.
37. Fre­quent change in account­ing peri­od and/or account­ing policies.
38. Fre­quent request for gen­er­al pur­pose loans.
39. Move­ment of an account from one bank to another.
40. Fre­quent ad hoc sanctions.
41. Not rout­ing of sales pro­ceeds through bank
42. LCs issued for local trade / relat­ed par­ty transactions
43. High val­ue RTGS pay­ment to unre­lat­ed parties.
44. Heavy cash with­draw­al in loan accounts.
45. Non sub­mis­sion of orig­i­nal bills.

---

Appen­dix II

Cur­rent Struc­ture for fil­ing Police/CBI complaints

Cat­e­go­ry of bank	Amount involved in the fraud	Agency to whom com­plaint should be lodged	Remarks
Pri­vate Sector/ For­eign Banks	Rs.1 lakh and above	State Police
	Rs.10000 and above if com­mit­ted by staff	State Police
	Rs.1 crore and above	SFIO	In addi­tion to State Police
Pub­lic Sec­tor Banks	Below Rs.3 crore	State Police
	Rs.3 crore and above and up to Rs.25 crore	CBI	Anti Cor­rup­tion Branch of CBI (where staff involve­ment is pri­ma facie evident) Eco­nom­ic Offences Wing of CBI (Where staff involve­ment is pri­ma facie not evident)
	More than Rs.25 crore	CBI	Bank­ing Secu­ri­ty and Fraud Cell (BSFC) of CBI (irre­spec­tive of the involve­ment of a pub­lic servant)