the industry, in the promoters ’ group, etc. which may show the direction in which a company ’ s operations will go and whether there is inherent resilience in the promoters and the project to face rough weather and come out unscathed. 25. while diligent appraisal is a major factor in eliminating dodgy borrowers, subsequent monitoring also plays a vital role in identifying potential frauds. in many cases we find that the discovery that stocks have been clandestinely sold, diversion to related parties and siphoning off of funds have taken place and documents provided had been fabricated, is made after the account shows stress and becomes an npa. any action taken at that stage is as useful as locking the proverbial stable doors after the horse has bolted. 26. it is obvious that if anyone wants to identify potential frauds before they happen, it is possible only by continuous monitoring. we have therefore prescribed stage wise actions in the life cycle of a loan account and also prescribed actions that a bank may take in each stage to safeguard its interest. a system of identifying red flagged accounts based on early warning signals has been put in place. a red flagged account is one where a suspicion of fraudulent activity is thrown up by the presence of one or more early warning signals. the presence of these signals should trigger a detailed investigation into the rfa. 27. as one of the major problems in fraud risk management was time delays in dealing with a fraud, we have prescribed time limits within which certain actions like investigating for fraud should be completed and a decision on whether an account is indeed a fraud or not is made. similarly the delays and divergent stands taken by banks in a consortium or multiple banking arrangements have also been tackled by spelling out time lines for actions like informing other banks of a red flagged account, commissioning a forensic audit and arriving at a consensus / majority decisions, etc. if frauds have to be minimised it is not enough to tighten the actions incumbent on banks alone. in preventing frauds a major part is played by the deterrent actions and punishments that are meted out to the fraudsters. towards this end henceforth the fraudster borrowers will not be able to avail bank finance for five years after full repayment of the dues. this is of course in addition to the criminal complaints to be filed with police or cbi. this is expected to build in a disincentive for any borrower to consider committing a fraud on

database on credit information, centralized registry for recording security interests central registry of securitisation, asset reconstruction and security interest ( cersai ), centralized know your customer registry, central repository of information on large credits ( crilc ), etc have been established or being built to share information among the bankers. a central fraud registry is also being planned. 22. another initiative in this respect is the list of wilful defaulters. fraudsters are included in this list. with this list in hand, the banks get not only cautioned about the fraudsters, they can also bring in certain deterrent action against them. bis central bankers ’ speeches the new framework to deal with frauds 23. recently, we had constituted an internal working group that went into the causes for delays in detecting frauds, suggest ways to compress the time between occurrence of fraud and detection and also to remove any other impediments that may prevent deterrent actions taking place. the group after wide consultations had recommended for a new framework to deal with frauds. the study revealed that there were a lot of delays in detecting a fraud and in quite a few large value frauds, the time taken was more than five years. further to this initial delay, in case it was a consortium or multiple banking facility, the divergent opinion among the financing bankers on whether an account was a fraud or not also contributed to further delays. any delay in detection of fraud entails further delays in filing of complaints with law enforcement agencies and other consequent actions. such delays, it is needless to add, enable a fraudster to enjoy banking facilities with impunity and ensnare more bankers and other innocent individuals in his net. the money trail gets cold and prospects of recovery becomes dim as each day passes. this scenario calls for a focussed response from the regulators, bankers and other stakeholders. 24. the best way to prevent frauds especially, loan frauds is to tone up the appraisal process. a good appraisal can weed out many undesirable or flawed proposals that may eventually turn out to be fraud. a good appraisal does not mean only analysing the financial statements and projections submitted by the potential borrowers. it requires going beyond the given and independently gathering intelligence on the potential borrower. this requires accessing public databases, news reports on any adverse governmental action like raids, etc. a good appraisal should also take into account problems brewing in