In a significant move to streamline the fraud detection process, Indian banks plan to formally approach the Reserve Bank of India (RBI) to allow parallel internal investigations in cases where Law Enforcement Agencies (LEAs) have already initiated probes into borrower accounts.
The Core Conflict: LEA Probes vs. Regulatory Timelines
Under existing regulations, banks face a “misalignment” between their internal regulatory requirements and the pace of external criminal investigations:
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The 180-Day Deadline: Banks are currently mandated to decide the status of a “Red Flagged Account” (RFA) within 180 days.
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The Problem: LEAs (such as the CBI or ED) often take much longer than 180 days to complete an investigation.
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The Regulatory Gap: Currently, if an LEA starts a probe, banks must tag the account as RFA and report it to the Central Repository of Information on Large Credits (CRILC) within a week. However, banks often lack clarity on the specific evidence or time period the LEA is investigating, leaving them vulnerable to legal challenges from borrowers.
What Banks are Proposing
Lenders are seeking to tighten their internal frameworks to improve consistency and reduce legal exposure:
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Independent Verification: Banks want the authority to conduct their own internal investigations simultaneously with LEAs. This would allow them to wait until fraudulent activity is internally established before officially tagging an account as “Fraud” or “RFA.”
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Consortium Autonomy: In cases of consortium lending, banks are requesting that the final decision to classify an account as fraud rest with individual lenders based on their own internal risk policies, rather than a collective mandate that may not reflect each bank’s specific exposure.
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Improved Early Warning Signals (EWS): By conducting parallel probes, banks aim to refine their EWS systems to detect “unusual patterns” in credit and non-credit transactions before they escalate into high-value frauds.
The Legal Context: Supreme Court Ruling (April 7, 2026)
This proposal follows a landmark Supreme Court ruling earlier this week which brought finality to a long-standing debate on “Natural Justice”:
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No Personal Hearing Needed: The Court ruled that borrowers are not entitled to an oral or personal hearing before a bank tags their account as “fraud.”
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Access to Reports: While no oral hearing is required, banks must provide the borrower with access to the relevant portions of the Forensic Audit Report and allow for a written response before passing a “reasoned order.”
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Scale of the Problem: The ruling noted that in the 2024-25 fiscal year alone, high-value fraudulent advances involved ₹33,148 crore, accounting for over 90% of total fraud value in the banking system.
Impact Table: Parallel Probes vs. Current System
| Feature | Current System | Proposed Parallel Probe System |
| Trigger | LEA probe automatically leads to RFA tagging. | Bank conducts internal probe to confirm fraud before tagging. |
| Timeline | Strict 180-day regulatory window. | More flexible, evidence-based internal timeline. |
| Information | Limited sharing from LEAs to Banks. | Internal data used to fill information gaps. |
| Legal Risk | High (due to lack of specific “reasoned” evidence). | Lower (supported by bank’s own internal audit). |
The Bottom Line: By seeking permission for parallel probes, banks hope to move away from being “reactive” to LEA actions and instead become “proactive” in their fraud risk management. This shift is intended to protect banks from being sued by borrowers while ensuring that the ₹1.12 trillion in previously “withdrawn” fraud classifications can be handled with greater regulatory certainty.
