Loan Moratorium and Loan frauds: Guidelines from RBI
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Loan Moratorium and Loan frauds: Guidelines from RBI
We know how the banking sector in India plays a major role in our financial system, which cannot be ousted from being termed as the backbone of the Indian economy. With such importance and status in place, we ought to have given even more importance than what we have now to make sure that this backbone does not weaken or be disabled by any cheater to cause damages not only to the bank concerned but to the whole economy. This article will be looking into one of the important concerns that we face in recent times in the banking sector, which is Loan fraud. This will also deal give a brief idea of the recent pandemic-driven concept of loan moratorium and the guidelines issued by the Reserve bank of India.
Loan frauds in India:
Before looking into the framework and the guidelines of the authorities concerned, let us understand the current issue of these loan frauds and how fraudsters are involved in these malpractices. One form of loan fraud is loan offer fraud which happens when the fraudsters aim at people who are in need of money and loan and contact them through an offer and false promise of providing loans at very low-interest rates. This, as a layman and a person in need of urgent money, gets influenced to it. Once an interest to avail of their facility is shown, then they request documents such as Identity proofs, PAN card details, and bank and income-related details, including the IT, returns, etc. Since all these activities are done online, there are enough possibilities that the details which are obtained might get misused by the fraudsters.
Few loan frauds in India include Nirav Modi’s PNB scam, where the loan was obtained by producing fake property details etc. Recently, loan fraud news was reported in Chennai, Punjab, Haryana, Delhi, etc.
RBI’s framework on Loan frauds:
Having seen an increase in loan frauds in the recent decade or so, the Reserve bank of India- which has more onerous when it comes to the banking system in India, came up with a framework for the purpose of dealing with this issue in the years 2014and 2015. The former dealt with the classification and reporting of loan frauds by commercial banks, whereas the latter dealt with the framework for dealing with loan frauds in India. Let us look into the latter framework and what it includes.
One of the important guidelines when it comes to 2015 notification is the introduction of a concept called Early Warning Signals (EWS). It is nothing but a series of signals carried out and sent by the concerned bank to any bank account if it anticipates that there is a threat of fraudulent activity conducted by such a bank account. Once it is detected, then such will be considered a Red Flagged Account (RFA).
This 2015 direction provides for risk management at various stages of the loan accounts, which means that the loan account will be monitored at every stage by the committee or the group constituted for the same.
The first stage in this monitoring process consists of the Risk management and the market intelligence report, which will provide a clear idea of the background of every account holder, including his credit history and legal issues attached.
The above will be followed by monitoring during the disbursement of the loan amount, which includes making core terms and some dilutions depending on the borrower.
Another important stage in this monitoring stage is the annual review by the bank every year, which has also been insisted on by RBI’s direction in 2017.
In the year 2017, the Reserve Bank of India issued another direction by exercising its power under section 35A of the Banking regulations act of 1949 as a general guideline to prevent the fraud practices that happen in all the commercial banks in India. As per this direction, all the banks should ensure that they submit reports on both a quarterly and on the annual basis. This 2017 report also specifically refers to the issuance of the 2015 direction and that shall be applicable only in loan fraud cases in India.
Loan Moratorium:
Firstly, let us look into the moratorium and how it works in loan-related transactions. Going back to the Banking regulations act of 1949, section 45 talks about the power of the reserve bank of India to apply to the union government asking for suspension of business of a commercial bank that has either failed to comply with its obligations under the act of 1949 or for any purposes as mentioned by the RBI. One of such reasons where the RBI could apply to the government under section 45 is when a bank becomes insolvent. Through an application before the High court, such shall be made. As per section 45, a moratorium period with a maximum of 6 months can be imposed by the union government on the application by the RBI.
Recently in 2020, we heard the term ‘loan moratorium’, which is nothing but the suspension of interest on the loan amount borrowed by a borrower from a bank. So, as per RBI’s guideline on March 27th, 2020, which is referred to as COVID regulatory package by RBI, dealt with the procedure and manner in which the interest amount was temporarily suspended for a period of 6 months.
It was also clarified that this rescheduling of payments with interest was not considered a default from the side of the borrower during this period by any banking company or any lending institution.
SC’s advice on the recent moratorium:
A writ petition was filed before the Supreme Court of India in 2020, which basically challenged the policy of various lending institutions that collected compound interest or penal interest from the borrowers, including the MSMEs sectors. This affected the said sectors. The issue was whether the lending institutions could get penal or compound interest from the borrowers or not during the moratorium period of 6 months. The Apex Court, in this case, held that the compound interest or penal interest should not be recovered from the borrowers during the moratorium period.
