Categorization of loans as “fraud” destroying billions of underlying business value

New Delhi, June 28 ((ANS) Categorizing loans as “fraud” is an over-compliance that in the process destroys billions of underlying business value, industry sources said.

This marking also violates the principle of natural justice because the banks are parties to the transaction and therefore have a direct interest.


Furthermore, the industry wonders how only one of the two parties to a contract has the power to label the other a fraud, and not the other way around.

In the case of auditors, a one-sided view cannot be allowed to destroy a business, regardless of specific business practices and operating standards, sources said.

According to the law, only the judiciary is empowered to “decide” and declare anything as fraud after following due process.

The reporting of banks to every failing business, as fraud causes immense damage to the reputation of the business environment and impacts resolution and recovery from stakeholders.

As soon as a bank reports loan fraud, all participating banks are bound to follow suit, fearing future non-compliance. This sets off a chain reaction and has a cascading effect on operations as funds dry up, thereby completely breaking the economic cycle, leading to erosion and ultimately closure.

“The definition, inclusion and imposition of fraud are constitutionally vague and ambiguous – resulting in arbitrary and discriminatory procedures. It can mean whatever the investigative body wants it to mean,” the sources said. “There is a tiny difference between cheating and breach of contract. Intent is a key differentiator.”

“How can banks and auditors have excessive power to issue a ‘verdict’ without due process of law,” the sources said.

“This is a guilty until proven innocent case, an antithesis to judicial standards.” Governments have been the biggest defaulters in most cases, especially in public services and infrastructure. Does that mean they can be called a fraud? sources said.

The solution to this massive destruction of value and wealth can be easily reduced if the parties involved can take their cases to regulators or the judiciary and let them categorize the loans accordingly – after following due process.

Bank officials and auditing agencies should not have the power to label anything as fraud and, at best, they can flag particular transactions and let the courts decide, sources said.

Source: IANS

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