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EARLY WARNING AND RED FLAGGING: -

18. Clause 8.3 of the Master Directions-2016 and Clause 3 of the Master Directions-2024 deal with Early Warning Signals (EWS) and Red Flagging of accounts. A Red Flagged Account (RFA) is one where a suspicion of fraudulent activity is thrown-up by the presence of one or more EWS indicators, alerting/triggering deeper investigation from potential fraud angle and initiating preventive measures by the banks.

19. The guidelines also stipulate that the bank may use external auditors including forensic experts or an internal team for investigations before taking a final view on the RFA. Within a period of six months, banks are obligated to either lift the RFA status or classify the account as fraud.

SUBMISSIONS ON BEHALF OF THE BANKS: -

35. Mr. Tushar Mehta, the learned Solicitor General, who appeared for the appellant-banks extensively referred to the 2016 and 2024 directions and particularly the purpose and the objective behind the issuance of the directions. Learned Solicitor General elaborated on the Early Warning Signals [EWS] and the Red Flagging Accounts [RFA] concepts highlighted in the directions and explained the significance of the same. Learned Solicitor General contends that under the procedure prescribed in the Master Directions the account holder is aware even before the issuance of show (1969) 2 SCC 262 cause notice about his account showing early warning signals and, therefore, would be declared a red flagged account; the borrower participates in the process of audit when there is a direction for forensic audit; service of show cause notice along with the conclusions of the forensic audit report; the consideration of the reply in detail, and the making of a reasoned order taking into consideration the facts of the case and the explanation of the account holder which is served upon the borrower. According to the learned Solicitor General, the procedure prescribed is in conformity with the principles of natural justice.

38. Learned Solicitor General submitted that some of the Early Warning Signals [EWS] which would alert the bank officials about the wrongdoings in the loan accounts are default in undisputed payment to the statutory bodies as declared in the annual report; bouncing of high-value cheques; delay in payment of outstanding dues; funds from other banks to liquidate outstanding loan amount except when they are in normal course; exclusive collateral charge to the number of lenders without NOC of existing charge lenders; dispute on title of collateral securities and critical issues, if any, highlighted in the stock audit report. According to the learned Solicitor General, these signals put the banks on alert and trigger a detailed investigation into accounts. Learned Solicitor General submits that the bank prepares a report on the red flagged accounts which is to be put up to the Special Committee of the Board for monitoring and follow-up of Frauds (SCBF).