India Tells State-Run Bank Chiefs To Check Bad Loan-Related Frauds Or Face Action

In a stern warning to bankers, the Finance Ministry asked chief executives of public-sector lenders to check all bad-loan accounts exceeding Rs 50 crore for fraud or they could face criminal conspiracy charges, according to official sources.

This missive comes in the light of arrest of Bhushan Steel Ltd.'s erstwhile promoter Neeraj Singal by the Serious Fraud Investigation Office for allegedly siphoning funds.

The sources said bankers could be held accountable under Section 120B of Indian Penal Code if they fail to report fraud in an account which is later unearthed by investigating agencies, sources said. If the agencies find diversion of funds in those defaulting accounts, bankers may be liable to face criminal proceedings, the sources said, adding that this advisory is like an extra precaution to keep bankers from getting into legal tangles.

More than a dozen companies undergoing bankruptcy resolution are being reviewed by banks and investigators for fraudulent activities including diversion of funds.

Indian banks are facing mounting non-performing assets or bad loans, especially at public-secutor lenders. In addition, several banking frauds have been unearthed, including the Rs 14,000 crore scam at the Punjab National Bank, carried out allegedly by diamond jeweller Nirav Modi and his associates.

A senior government official confirmed the development and said that some discrepancies have been pointed out in the case of a steelmaker and a real estate firm among 10-12 companies. “There were some inputs and lenders who have been asked to provide transaction details of last five years. If required, banks will also undertake forensic audit,” he said.

The SFIO is also looking into the books of companies which are currently undergoing debt resolution, he said, adding that this has been done on the basis of specific inputs provided by the ministry of corporate affairs. The extensive audit of bankrupt companies has thrown up financial irregularities in several cases during the resolution process.

The Reserve Bank of India had identified 12 stressed accounts in June 2017, each having more than Rs 5,000 crore of outstanding loans and accounting for 25 percent of total non-performing assets of banks, for immediate referral under the Insolvency and Bankruptcy Code. During the resolution process, the RBI, in August, had sent a list of 28 more firms to lenders for resolution by Dec. 2017.

“These accounts also have some firms from the second list and those where later banks filed cases in NCLT,” said a bank executive aware of the developments.

The NCLT benches handle banks' bad debt resolution under Insolvency and Bankruptcy Code. Banks have to undertake a two-year transaction audit when they start the resolution process through IBC. In case there are any issues or specific information, banks also conduct a forensic audit.

The SFIO was given powers to arrest people for company law violations in August 2017. It's a multidisciplinary organisation having experts for prosecution of white-collar crimes and frauds under the company law.

NCLT has so far taken decision on 655 cases under IBC that include more than 200 that have been admitted to various benches.