RBI mandates 100% provisioning for fraud cases

Alarmed by the growing number of fraud cases in the banking system, the Reserve Bank of India has told lenders to make 100 per cent provisioning for such accounts if a wrongdoing is detected.

The entire amount due to the bank (irrespective of the amount of security held against such assets) or for which the bank is liable (including cases of deposit accounts), is to be provided for over a period not exceeding four quarters, commencing with the quarter in which the fraud has been detected, the central bank directed.

If a delay in reporting the fraud, the entire provisioning is required to be made at once.

“In addition, RBI may also initiate appropriate supervisory action where there has been a delay by the bank in reporting a fraud or provisioning,” the notification added.

Based on the Indian Penal Code provisions, RBI norms classify fraud in seven categories -- misappropriation and criminal breach of trust, fraudulent encashment through forged instruments/manipulation of books of account or through fictitious accounts and conversion of property, unauthorised credit facilities extended for reward or for illegal gratification, negligence and cash shortages, cheating and forgery, and irregularities in foreign exchange transactions.

Recently, the Central Bureau of Investigation arrested T Venkatram Reddy, chairman of Deccan Chronicle Holdings Ltd, and his brother and company vice-chairman and managing director, Vinayak Ravi Reddy, for alleged involvement in a Rs 350-crore (Rs 3.5 billion) fraud pertaining to Canara Bank. Various other corporate houses have also been under the CBI glare for loan fraud.