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Nifty, Bank Nifty, Sensex turning weak – Monday closing report

Nifty will turn weaker if it closes below 8,320

 

We had mentioned last week that the uptrend might continue as long as NSE’s CNX Nifty stays above 8,400 on a weekly basis. The 50-stock benchmark opened Monday lower and immediately hit the day’s high. This was followed by the index moving in a range upto 12.40pm after which it started moving further lower. An effort to revive after each dip pulled the stock further lower. By the end of the session, Nifty hit a four-day (including today) low and closed near to it.
 
The S&P BSE Sensex opened at 27,893 while Nifty opened at 8,438. After hitting a high at 27,903 and 8,442, both the indices moved lower and hit a low of 27,614 and 8,364, respectively. Sensex closed at 27,644 (down 314 points or 1.12%) while Nifty closed at 8,370 (down 89 points or 1.05%). Bank Nifty, which is more volatile index, fell a bit more. Bank Nifty opened at 18,405 and after hitting a high at 18,476 the index moved lower the level of 18,303 and closed at 18,325 (down 108 pints or 0.59%). NSE recorded a volume of 63.30 crore shares. India VIX fell 0.09% to close at 16.9325.
 
Finance Minister Arun Jaitley Monday asked taxmen to squeeze the parallel economy in a fair manner, without being harsh, and assured that the honest taxpayers have nothing to fear about the new black money law. The government, the minister said, has taken a host of measures to curb the menace of black money. These include passage of the black money law by Parliament and introduction of Benami Transactions (Prohibition) bill to deal with unaccounted domestic wealth.
 
State-owned Indian Oil Corp will invest Rs1,000 crore for raising its stake in Chennai Petroleum Corp Ltd, which will use the money for expanding operations.
 
India Inc has raised Rs11,500 crore through rights issue offering since the beginning of 2015, making it the highest fund mobilisation through the route in seven years. As many as six companies raised about Rs11,500 crore this year so far as against Rs5,224 crore in 2014.
 
Coming back to stock markets, Kailash Auto Finance (9.96%) was the top gainer in ‘A’ group on the BSE. Info Edge (5.22%) was the top loser.
 
ONGC (2.12%) was the top gainer in the Sensex 30 pack while Vedanta (3.59%) was the top loser in the pack.
 
On Friday, US indices closed in the red. The US Labor Department said on Friday that US' consumer price index (CPI) gained 0.1% in April 2015 after increasing 0.2% in March.
Federal Reserve Chairperson Janet Yellen Friday said the central bank is on track to raise interest rates this year but will likely proceed cautiously because the job market hasn't fully healed, inflation is low and growth has again disappointed.
 
The US stock market remains closed Monday for the Memorial Day Holiday.
 
Except for Jakarta Composite (0.50%), SET Composite index of Thailand (1.03%) and KLSE Composite (1.13%) all the other Asian indices which were trading today closed in the green. Shanghai Composite (3.35%) was the top gainer.
 
China's Ministry of Finance Monday announced that it would cut import duties on cosmetics, shoes and clothes by 50% on average, as part of a plan to boost domestic consumption and sustain economic growth.
 
European indices had mixed closing on Friday. Over the weekend, Greece raised doubts that it would have the money it is due to repay to the International Monetary Fund (IMF) next month. This news comes despite months of negotiations between Greece's leftist-led government and creditors—the European Union and the IMF. Greece is scheduled to repay euro 1.6 billion ($1.76 billion) to the IMF between June 5-19.
 

User

Will RBI’s fraud reporting framework detect frauds?
The framework will certainly pose many hassles even for the business houses, as some of the items mentioned in the list are only early warning signals, which cannot be treated as fraudulent in nature, unless proved
 
The Reserve Bank of India (RBI) vide a notification dated 7 May 2015 had set up a framework for dealing with loan frauds for banks and for fraud risk management in banks. The framework has come into immediate effect.
 
The framework, which requires banks to red flag accounts showing early warning signals, might be a welcome change for the lenders, but not sure how far will it be welcomed by the India Inc. The framework will certainly pose many hassles even for the business houses, as some of the items mentioned in the list of Early Warning Signals (EWS) cannot be treated as fraudulent in nature, unless the same is proved.
 
The penal provisions under the framework will be as that under the wilful defaulter. The borrowers who have defaulted in making payments and have committed fraud will be debarred from raising institutional finance from scheduled commercial banks, Development Financial Institutions; Government owned NBFCs, and investment institutions for five years.
 
The pretext to the framework is that in the present day, detection of frauds takes time and frauds are reported after all mechanisms of recovery are exhausted, eventually delaying the actions that banks can take against unscrupulous borrowers. The delay in detection and reporting of frauds also delays the process of cautioning other banks which result in frauds perpetrating elsewhere as well. 
 
The framework thus states that the presence of EWS should be sensed early for prompt detection, reporting and prevention. Presence of EWS should lead to banks ear-marking an account as Red Flag Account (RFA) which would mean that there is suspicion of fraudulent activity. A EWS is a trigger for launching investigation into an RFA. The threshold for EWS is set at Rs500 million or more at the level of the bank irrespective of solo lending or consortium lending arrangement. This means, all accounts beyond Rs. 500 million will be monitored by banks for EWS. Once an account is classified as RFA or Fraud, the banks are required to report the same to CRILC (Central Repository of Information on Large Credits) along with the dates on which the account was classified as RFA or Fraud. 
 
RBI has provided for illustrative list of EWS, which are indicative of fraudulent activities. A quick scan through the list indicates some items on the list, which cannot be comprehended to be fraudulent in nature. For instance, reduction in stake of promoters or directors, resignation in key management personnel (KMPs) and frequent change in management, substantial related party transactions, and frequent request for general purpose loans or change in accounting policies may all be very well a part of business decisions.
 
Banks are required to monitor EWS on an on-going basis and are required to synchronise the fraud monitoring process with the credit monitoring process. Banks are mandated to study the annual report of large accounts in details and not just the financial statement. Special emphasis has been given on reviewing the related party transactions in the notes to accounts. 
 

Fraud reporting hierarchy

Banks are required to set up Fraud Monitoring Group (FMG) and also designate an officer to undertake EWS monitoring on an on-going basis. 
 
The designated officer reports to FMG, the FMG shall report of all accounts classified as EWS, together with the decision to classify them as RFA or otherwise to CMD/ CEO every month.  
 
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.
 
The following structure shows the reporting framework:
Further, the framework requires the Banks to Risk Management Group (RMG) or any other appropriate group of the Bank shall carry out the following, for the purpose of early detection of fraud:
 
a. At the pre-sanction level – The RMG shall be responsible for collecting information on the potential borrower which could be as an input by the sanctioning authority.
 
b. At disbursement stage – The RMG shall ensure that at the disbursement stage there is focus on adherence to terms and conditions of sanction. Where there is a dilution of the terms and conditions, such dilution should be subject to the review of the RMG.
 
c. Annual review – In addition the continuous monitoring of the account, the Banks should also be vigilant from the fraud perspective while reviewing annual accounts. The framework requires the Banks to comment on the aspects of diversion of funds in an account, adequacy of stock vis-a-vis stock statements, stress in group accounts, etc. Besides this, the RMG should also track market developments relating to the major clients of the Banks and report the same to the credit officers.
 
Employees should be motivated to report any kind of fraudulent activity through the whistle blower mechanism of the Bank to the FMG. The FMG may seek necessary clarifications from the concerned employee and accordingly take action.
In the course of audit, the auditors may come across several instances of fraudulent activities in the account. The auditors shall report the same to the top management and if necessary to the Audit Committee of the Board (ACB) for prompt redressal.
 

Incentive for Prompt Reporting

In a situation whereby an account is classified as a fraud account, banks are required to make a provision equivalent to the fraud account irrespective of the value of security. However, in order to propagate fraud reporting, benefit of provisioning split over four quarters shall be given to those banks that adhere to the reporting norms at the earliest. Contrary to this, delaying will cause Multiple Banking Arrangements (MBA) or member banks in the consortium to create provision in one go. 
 
In this context, delay would mean “failure to report 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.”
 
Situations where bank is the sole lender, FMG will detect whether the account in which EWS are observed to be treated as RFA or not. Once classified as RFA, FMG within a period not exceeding six months shall devise remedial measures to protect bank’s interest. In this regard, bank may engage an expert team to reconsider the status of fraud account. Post expert suggestions, a final report on all RFA accounts may be presented before the SCBF.
 

Lending under Consortium or Multiple Banking Arrangements

In case of consortium lending, the lender banks shall individually and collectively be responsible towards reporting of fraud accounts to the Central Fraud Monitoring Cell (CFMC) within the prescribed timelines. 
 
In case an individual bank declares any standard or NPA account as RFA or fraud, it shall also inform CRILC platform of the fraud status. Thereafter, the consortium should convene the meeting of Joint Lender’s Forum (JLF) within a period of 15 days from the declaration of RFA by individual bank. The meeting should be held within 15 days of receipt of notice to convene meeting. In case of broad agreement account will be classified as fraud or in case where banks holding atleast 60% total lending agrees to it, the account would be declared RFA by all the banks in the consortium and shall be subjected to forensic audit.
 
The forensic audit shall be the basis on which the CBI (Central Bureau of Investigation) would take the necessary action on behalf of banks in the consortium.
 
Banks shall put in place staff accountability exercise within six months from the date of classification as a fraud. Any action taken in this regard shall be intimated to RBI at quarterly intervals.
 
Once the fraud is detected, the banks will be required to file complaints to the law enforcement agencies. They shall also establish a nodal point/office for filing complaints on behalf of the banks with the CBI. 
 
Penal measures for fraudulent borrowers
The penal provisions pertaining to wilful defaulters will apply to the holders of fraud account including the promoters and whole time directors of the company. The nominee and independent directors will be liable only when substantial proof is available against them. Further, all those defaulters, who are also fraud account holders will be debarred from accessing any financial assistance from banks for a period of five years from the date of full payment of the defrauded account. 
 
RBI is in the process of establishing a database of defaulters / fraud reported by banks. This will assist the lender banks in prescrutinizing various aspects before advancing credit facilities to the borrowers.
 
(CS Nidhi Bothra is executive vice president at Vinod Kothari Consultants Pvt Ltd and Shruti Agarwal is her colleague at the firm)
 

User

COMMENTS

vswami

2 years ago

Contd.
The points requiring special focus on, in the present context, have been repeatedly highlighted in more than one published article; for instance, HERE > ” INVESTOR ROTECTION- A MYTH” (2005) (3) KLJ 17

For a sum up of the viewpoints urged therein, may look up the personal BLOG @
http://vswaminathan-swamilook.blogspot.i...

vswami

2 years ago

OFFHAND
In framing the so called, nay wrongly dubbed as, signals, intended to identify and minimise the ‘risks’ lending by banks is potent with, certain vital aspects have been unwittingly or otherwise glossed over:
a. At the pre-sanction level – The RMG shall be responsible for collecting information on the potential borrower which could be as an input by the sanctioning authority.
Comment : Information collected must be not only on the ‘potential’ of the intending borrower; but also, rather more importantly and essentially, on the quality and adequacy of the ‘security’ offered, and accepted by bank to fall back upon in the likely event of borrower's failure to due repayment.
b. At disbursement stage – The RMG shall ensure that at the disbursement stage there is focus on adherence to terms and conditions of sanction. Where there is a dilution of the terms and conditions, such dilution should be subject to the review of the RMG..
Comment : In so far as those relate to the factor of ‘security’ referred to under ‘a’ above, the “ terms and conditions of sanction” need not, or ought not, to be diluted in any respect, but must be made rigid and uncompromising, and strictly adhered to, with no scope for a ‘dilution’ or discretion to ‘review’ as implied, Otherwise, the presently obtaining powers of ‘discretion’ in sanctioning of loan will continue to play havoc as hitherto. Further, in the ultimate analysis, if so made rigid, that should really help and lead to borrower himself being cautioned against, in advance, investing in a property with fatal deficiencies, hidden or otherwise.
(May be contd.)

vswami

2 years ago

OFFHAND
In framing the so called, nay wrongly dubbed as, signals, intended to identify and minimise the ‘risks’ lending by banks is potent with, certain vital aspects have been unwittingly or otherwise glossed over:
a. At the pre-sanction level – The RMG shall be responsible for collecting information on the potential borrower which could be as an input by the sanctioning authority.
Comment : Information collected must be not only on the ‘potential’ of the intending borrower; but also, rather more importantly and essentially, on the quality and adequacy of the ‘security’ offered, and accepted by bank to fall back upon in the likely event of borrower's failure to due repayment.
b. At disbursement stage – The RMG shall ensure that at the disbursement stage there is focus on adherence to terms and conditions of sanction. Where there is a dilution of the terms and conditions, such dilution should be subject to the review of the RMG..
Comment : In so far as those relate to the factor of ‘security’ referred to under ‘a’ above, the “ terms and conditions of sanction” need not, or ought not, to be diluted in any respect, but must be made rigid and uncompromising, and strictly adhered to, with no scope for a ‘dilution’ or discretion to ‘review’ as implied, Otherwise, the presently obtaining powers of ‘discretion’ in sanctioning of loan will continue to play havoc as hitherto. Further, in the ultimate analysis, if so made rigid, that should really help and lead to borrower himself being cautioned against, in advance, investing in a property with fatal deficiencies, hidden or otherwise.
(May be contd.)

Dipak Shah

2 years ago

No Not at all. This reminds me a case of one Mr.Amal Doss of Pondicherry . WHo paid the amount to one of his Loan account by cash. E M I was stopped by State Bank of India JPMR Branch Pondicherry for three months. !! After three months debit of E M I Started lesser than EMI fixed at the time of grant of Loan amount. No explanations , proper , about who stopped the debit of EMI and who approved authorized lesser amount of EMI? Even Chairman of the Bank is silent not giving any details of this ? This Branch is fraudster branch only.
How can we expect to detect the frauds?
Shah D J

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