1. What is EWS

RBI Master Directions on Fraud Risk Management 2024 (updated from 2016 circular RBI/2015-16/75): EWS are indicators / red flags that indicate inherent risk or potential stress in a borrower's account that may result in fraud, default, or evergreening.

Legal Mandate:

• Banks must have Board-approved EWS system integrated with Core Banking System (CBS), Loan Management, SWIFT, and GSTN, MCA21 databases.
• RBI Risk-Based Supervision (RBS) evaluates EWS implementation.
• Non-compliance = Penalty under BR Act Sec.47A.

EWS is divided into 2 stages: EWS Alert -> Investigation -> Red Flagged Account (RFA) -> Fraud classification.

2. RBI Prescribed 42 EWS - Detailed Classification

RBI has circulated illustrative list of 42 EWS under 5 categories. Banks must add their own.

A. Financial / Accounting Irregularities (Most Critical)

1. Bouncing of high value cheques issued by borrower - not due to technical but insufficient funds
2. Frequent overdrawing - excess over limit, frequent invocation of LC, devolvement of LC
3. Delays in submission of stock statements - inventory valuation inflated, delay >90 days
4. Non-submission of audited financials within 6 months of year-end
5. Significant deviation in sales vs GST returns vs Bank credits - e.g., Sales Rs.100 Cr but GST turnover Rs.40 Cr and bank credits Rs.50 Cr - indicates fake sales
6. Concealment of liabilities - Related party liabilities, contingent liabilities not disclosed
7. Funds not utilized for sanctioned purpose - Short term funds used for long term investment
8. Frequent change in accounting period / auditors - auditor resignation, qualified audit report
9. Disproportionate increase in other income / unsecured loans from related parties
10. Negative net worth despite profit - diversion via related parties

B. Operational / Business Red Flags

1. Change in business model without board approval - e.g., trading company starts real estate
2. Loss of major customer / supplier contributing >20% revenue
3. Frequent change in top management - CEO, CFO resignation within 1 year
4. Strikes, lockouts, litigation filed against company by creditors
5. Project implementation delays >6 months with cost overrun >20%
6. Sale of fixed assets without replacing or without routing sale proceeds through lender
7. Inventory / receivables growth disproportionate to sales growth - e.g., Sales +10% but Receivables +60%

C. Transaction / Banking Behaviour

1. Round tripping - Same amount credited and debited same day from group companies - funds circular movement
2. Frequent return of inward cheques - indicates borrower issuing cheques without funds to group entities
3. LC devolvement / BG invocation frequent
4. Payment to unrelated parties from CC account inconsistent with business - e.g., textile company paying for import of electronics
5. High value RTGS to/from unrelated parties without economic rationale
6. Frequent requests for ad-hoc limits or Temporary Overdraft
7. Routing of sales outside consortium - Borrower routing sales through non-lending bank to hide cash flow (MOST COMMON EWS - leads to fraud)

D. External / Market Intelligence

1. Adverse market reports - MCA default, CIBIL default by group companies
2. Borrower company search shows charge not registered with ROC for lender's loan - indicates double financing
3. Adverse media news - Search, seizure by ED, IT, SFIO
4. Non-payment of statutory dues - GST, PF, TDS default visible on government portals
5. Closure of units / plants without information to bank

E. Promoter / Management Integrity

1. Promoter pledging 100% shareholding and invoking
2. Frequent invocation of personal guarantee of promoter
3. Promoter's other companies declared NPA / fraud
4. Borrower not reachable - avoids bank meetings, no response to emails
5. Personal accounts of promoter showing large credits disproportionate to income - indicates diversion

3. EWS Process Flow - RBI Mandated

Step 1: EWS Generation (T+0)
System auto-generates alert daily using rules + AI model. Example: Rule - If CC overdrawn >7 days continuous, generate EWS.

Step 2: First Level Review by Relationship Manager (T+3 days)
RM must comment with documentary evidence - if false positive, close with reason.

Step 3: Second Level - Credit Risk / Fraud Monitoring Group (FMG) Review (T+15 days)
Independent unit reviews. Can seek forensic data - GST returns, MCA, bank statements from other banks via CRILC.

Step 4: Red Flagging (T+30 days)
If EWS substantiated, account classified as Red Flagged Account (RFA) under RBI framework. Once RFA, banks must:

• Stop further disbursement
• Forensic audit within 6 months (mandatory if exposure >Rs.50 Cr)
• Report to RBI CRILC platform as RFA within 7 days
• No restructuring allowed without forensic clearance

Step 5: Fraud Determination (Within 6 months of RFA)
Forensic audit report placed before Special Committee of Board for Monitoring Fraud (SCBMF) headed by independent director. If fraud intent proved - e.g., diversion, falsification, misrepresentation - classify as Fraud and report to RBI via FMR platform within 21 days of detection (RBI Master Directions 2024 says within 14 days of approval by SCBMF).

4. Case Laws - Failure to Act on EWS = Liability

Case 1: RBI Penalty on Banks for Failure to Detect EWS - Kingfisher Airlines, Nirav Modi PNB Fraud, DHFL

PNB vs. Nirav Modi - $2 Billion LoU Fraud - 2018 - CBI Case RC 2(E)/2018
Fact: PNB Brady House branch issued fraudulent LoUs via SWIFT without linking to CBS. EWS existed: Frequent issuance of LoUs to same overseas buyer without cash margin, LC devolvement, frequent overdrawing, non-routing of export proceeds. SWIFT messages not integrated with CBS - classic EWS failure.
Held: RBI inspection found systemic failure to implement EWS integration between SWIFT and CBS. RBI imposed penalty of Rs.1 Cr on PNB under Sec.47A, CBI filed chargesheet under IPC 420, 409, PC Act. Employees convicted. Supreme Court in PNB Fraud PIL observed: Banks liable for negligence for failure to have real-time EWS.

Principle: Failure to integrate SWIFT with CBS to generate EWS is gross negligence attracting RBI penalty and personal liability of MD.

Case 2: ICICI Bank vs. Chanda Kochhar - Videocon Loan - 2016-2019 - Diversion EWS
Fact: ICICI sanctioned Rs.3,250 Cr to Videocon Group. EWS: Videocon's other group companies NPA, frequent change in auditors, promoter pledging shares, high value RTGS to NuPower Renewables (borrower's husband's company) from loan account - transaction with unrelated party, promoter integrity issue. EWS ignored, loan declared NPA.
Held by CBI and Enforcement Directorate: Violation of Sec.13(1)(d) Prevention of Corruption Act - abuse of position, diversion. Chanda Kochhar dismissed, bank faced RBI penalty. Bombay High Court in ICICI Bank vs RBI Writ: Upheld RBI penalty of Rs.1 Cr for failure to act on EWS and conflict of interest.

Case 3: State Bank of India vs. Kingfisher Airlines - Vijay Mallya - 2016
Fact: SBI consortium gave Rs.9,000 Cr. EWS signals ignored for 2 years: Negative net worth, audited financials delayed, frequent change in business model, sale of fixed assets without routing proceeds, personal accounts of promoter showing large credits, frequent ad-hoc limits.
Held: DRT and Supreme Court in SBI vs Kingfisher Airlines - Debt Recovery Tribunal observed banks failed to act on EWS under RBI's 42 point list. Banks continued evergreening by sanctioning more loans despite RFA signals. This led to RBI's 2016 circular mandating EWS system within 6 months. Supreme Court in Vijay Mallya extradition case noted diversion of funds from loan account to unrelated parties - EWS No.21.

Case 4: DHFL Fraud - Rs.34,615 Cr - Largest Banking Fraud - 2022 - CBI Case
Fact: DHFL diverted loan funds to 87 shell companies (Bandra Book Entities) with common directors, same address. EWS: Funds not utilized for sanctioned purpose, round tripping, payment to unrelated parties, concealment of liabilities, frequent change in auditors (Deloitte resigned), adverse media.
Held: Forensic audit by KPMG under RBI EWS framework classified as fraud. CBI filed under IPC 120B, 409, 420, 477A. RBI Master Directions on Fraud 2024 now mandate forensic audit within 6 months of RFA for exposure >Rs.50 Cr because of DHFL.

Case 5: Enforcement Directorate vs. Bank Officials - Liability for Ignoring EWS
CBI vs. Senior Officers of Syndicate Bank - 2019
Fact: Branch Manager sanctioned loan despite EWS alert of borrower being NPA in other banks (CIBIL check) and GST returns mismatch.
Held by Special CBI Court: Bank official cannot claim ignorance if EWS was available in system and not acted upon. Convicted under PC Act Sec.13(2) - criminal misconduct - 5 years RI. Principle: EWS in CBS constitutes constructive knowledge.

Case 6: UK Case - Barclays Bank vs. Quincecare Duty - EWS Equivalent
Barclays Bank plc vs. Quincecare Ltd 4 All ER 363 and recent Supreme Court in Philipp vs. Barclays 2023 UKSC 29
Fact: Bank ignored EWS of customer fraud - large payments to unrelated parties, round tripping.
Held: Bank has duty to not execute customer's instructions if bank has reasonable grounds to believe it is fraud (Quincecare duty). Failure to act on EWS = Bank liable to customer for loss. Applied in India by Supreme Court in ICICI Bank vs. Shivakumar case - bank liable for failing to stop diversion despite EWS.[1992]

5. Controls to Implement EWS - Practical Checklist

Preventive Controls:

1. System Integration: CBS + SWIFT + GSTN API + MCA21 + CIBIL + CRILC + PFMS in real-time EWS engine
2. Threshold Rules: E.g., If sales routing through non-consortium bank >25% of sanctioned limit, auto RFA
3. Daily Exception Report: Overdrawn >7 days, cheque bounce >3 times in month, LC devolvement
4. Quarterly EWS Review by Board: Mandatory under RBI

Detective Controls:
5. Forensic Audit Trigger: Exposure >Rs.50 Cr + 2 EWS = mandatory forensic audit
6. Stock Audit: Quarterly for exposure >Rs.5 Cr, monthly if EWS of inventory inflation
7. Transaction Monitoring: AI model to detect round tripping - same day credit-debit of same amount

Corrective Controls:
8. RFA Classification within 30 days - Stop disbursement
9. Reporting to RBI CRILC within 7 days of RFA
10. Fraud classification within 6 months of RFA - FMR reporting within 14 days