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MUMBAI : India’s largest private lender HDFC Bank Ltd levied a fee to deter customers who submitted forged documents to obtain loans instead of reporting them to law enforcement, a whistleblower alleged in his complaint to the Reserve Bank of India.

According to the complaint filed with the regulator in July, on finding that a customer has applied using forged documents, the bank demanded a fine and called it a “processing fee". The whistleblower, who had also pursued the case of HDFC Bank bundling global positioning system (GPS) devices along with auto loans, alleged the bank has not been reporting such instances to law enforcement.

The fee was charged only in some cases as a deterrent, a person aware of the development said on condition of anonymity.

Lawyers said some provisions allow banks to charge default interest to borrowers if the fraud is detected after the loan has been disbursed.
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Lawyers said some provisions allow banks to charge default interest to borrowers if the fraud is detected after the loan has been disbursed.

In response to Mint’s queries, an HDFC Bank spokesperson said in case any suspected or discrepant document is identified in the application, the bank takes steps that include declining the application and allowing the customer an opportunity to clarify the discrepancies.

“However, we have largely observed in such cases that customers usually do not respond. All such applications are uploaded in the bank’s internal negative database so that future applications from such customers may be identified and prevented," the spokesperson said.

The spokesperson added that all the cases are fully reported, without exception, on the Hunter database of Experian, a database of potential and suspected frauds, and on the basis of the submissions, other financial institutions are protected from applications made by such people. “The processing fees are not waived in such cases, even if the customer responds and engages in discussion. This is because the process of rejection comes after an extensive investment of time, effort and costs to identify such discrepancies," he said.

The spokesperson said that in a number of cases the bank also files police complaints, in addition to and despite having collected the processing charges.

Lawyers said some provisions allow banks to charge default interest to borrowers if the fraud is detected after the loan has been disbursed. Legal experts said forgery of documents is a serious offence, and its different classes are defined under Section 465 to 477 of the Indian Penal Code. The sections relevant in the case of a bank would be 468 or forgery for purposes of cheating and 471 or using as genuine a forged document. The punishment in case of forgery can be up to seven years.

“Since the offence is complete with trying to use a forged document for obtaining benefits, it is required to be reported to the police and the offences of forgery being non-compoundable, banks cannot exonerate the person by levying a fine," said A.P. Singh, partner at law firm MV Kini.

Singh said since such offences are against the society at large, the lender has to report the crime as it has no power to levy a fine in such a criminal matter.

“It is fine that the bank did not report every case of forged documents to police. What I cannot wrap my head around is how it was charging a processing fee from customers who were not sanctioned any loans. It could have said in its internal checks that those loan applications were rejected," said a senior banking sector analyst seeking anonymity.

Others pointed out how reporting such offences is necessary as public funds are involved.

Anjan Dasgupta, a partner at law firm DSK Legal, said if a bank has become aware of forgery by a borrower after disbursement, the bank should accelerate the loan and make the same due and payable immediately for such default as per the terms of the loan agreement.

“In case of fraud, banks need to comply with the RBI circular, Master Directions on Frauds–classification and reporting by commercial banks and select financial institutions," said Dasgupta.

The practice of charging a processing fee even if loan applications get rejected seems to be prevalent in some other banks as well, albeit not specifically for forged documents. Bankers said in some cases a nominal processing fee is charged even if the application is rejected to compensate the bank for time and effort it put in to assess them.

Meanwhile, independent analyst Hemindra Hazari said in a note on 24 September that HDFC Bank responded to his queries on the issue and said it has reported all such instances of spurious documents to the credit bureaus. “There were very few cases where the bank had levied a fee of 2% of the loan amount to prospective customers, and the bank has since ceased such practices," the note said, citing HDFC Bank’s response.

An email sent to RBI remained unanswered till press time.

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