Dear Readers,

The Central Fraud Registry has recently been in the news and could be an important topic for your exams. The Reserve Bank of India (RBI) has set up the CFR to fight the problem of bad loans and to strengthen the protection of banks against unscrupulous borrowers. This article will look at the objectives, background and working of this new organization.

Objectives

· To identify the impact of frauds on the financial records of banks.

· To quicken sharing of info about deceitful borrowers and help banks tackle the problem of bad loans.

· To create a single database and make it accessible to all the lenders so that they can get all the info about previously registered frauds.

· To keep track of all sorts of financial crimes and help put an end to it with the help of a comprehensive database.

· To set in motion a better coordinated and timely action by law enforcement.

Background – what is Central Fraud Registry?

· In May 2015, a new organization, called the Central Fraud Registry, was put in place by the RBI to spot loan frauds and curb them. The first step to do so would be generating Early Warning Signals (EWS).

· CFR is fundamentally a time-bound framework which has been set up in such a way that it does not affect the business or risk taking ability of a bank. The Central Bureau of Investigation (CBI) and the Central Economic Intelligence Bureau (CEIB) will also be sharing their databases with the banks to make it more well-connected.

· The RBI has asked the banks to make their employees more alert to the risks of fraud and detect EWS more efficiently. These signs have to be quickly reported to the Fraud Monitoring Group or any other similar entity created by the bank for the same purpose.

· The RBI said that in the period before the loan sanction is authorized, the risk management group or any other similar body may gather independent information on the potential borrower(s) as it would be very useful as an input.

· According to the RBI, the penal provisions that are applicable to wilful defaulter will also apply to the fraudulent borrower(s) as well as the promoter director(s) as far as raising funds from the banking system is concerned.

How will it work?

· The list of these EWS includes signs like unpaid loans to a multitude of banks, bouncing cheques, tax or excise raids and continuous change in the range of the project to be undertaken. Electronic payments of high value to unrelated parties has also been made part of EWS.

· Another feature would be the Red Flagged Account (RFA), which would also be an important step in fraud risk control.

· An RFA is essentially an account where the suspicion of any fraudulent activity is detected by showing one or multiple EWS. The presence of these signs in any loan account would immediately alert the bank about a malicious activity which might eventually turn out to be fraudulent.

· As a precaution, all accounts with loans of more than INR 50 crore and labeled as RFAs will be reported back to the central repository of information of RBI on large amounts of credits, and will also be reported to the chief of the bank.

· To make sure that the protocols of this regime are followed properly, officials who fail to report these EWS or report late will be held responsible.

· If a loan account gets red flagged, no additional facility will be given to the applicant and the account will be closely monitored. In case the borrower defaults, s/he can be blacklisted and debarred from availing any loan for any bank or NBFC.

· Once the whole system and the guidelines are put in place, new loan borrowers will be investigated according to credit reports as well as their listing on the CFR.

· Once a loan is approved, the bank will continuously monitor it for any possible EWS.

This topic is particularly very important for the questions pertaining to the RBI and its policies, and therefore it is crucial to understand the basic idea behind the Central Fraud Registry. If you are able to grasp these elementary points, you will be able to attempt questions on this topic with greater ease.

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