Explain the difference between Early Warning Signals (EWS) and Red Flagged Accounts (RFA).

A Red Flagged Account (RFA) is one where a suspicion of fraudulent activity is thrown up by the presence of one or more Early Warning Signals (EWS). These signals in a loan account should immediately put the bank on alert regarding a weakness or wrongdoing which may ultimately turn out to be fraudulent. A bank cannot afford to ignore such EWS but must instead use them as a trigger to launch a detailed investigation into an RFA. Banks may choose to adopt or adapt the relevant signals from this list and also include other alerts/signals based on their experience, client profile and business models. The EWS so compiled by a bank would form the basis for classifying an account as an RFA. The threshold for EWS and RFA is an exposure of ₹500 million or more at the level of a bank irrespective of the lending arrangement (whether solo banking, multiple banking or consortium). All accounts beyond ₹500 million classified as RFA or 'Frauds' must also be reported on the Central Repository of Information on Large Credits (CRILC) data platform together with the dates on which the accounts were classified as such. The RBI has set up the CRILC to collect, store, and disseminate credit data to lenders. Hence, banks will have to furnish credit information to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of ₹5 million and above. Similarly, banks will be required to report among others, the SMA status of the borrowers to CRILC. The modalities for monitoring of loan frauds below ₹500 million threshold is left to the discretion of banks. However, banks shall continue to report all identified accounts to Central Fraud Monitoring Cell (CFMC), RBI as per the existing cut-offs. The tracking of EWS in loan accounts should not be seen as an additional task but must be integrated with the credit monitoring process in the bank so that it becomes a continuous activity and also acts as a trigger for any possible credit impairment in the loan accounts, given the interplay between credit risks and fraud risks. In respect of large accounts it is necessary that banks undertake a detailed study of the Annual Report as a whole and not merely of the financial statements, noting particularly the Board Report and the Managements' Discussion and Analysis Statement as also the details of related party transactions in the notes to accounts. The officer responsible for the operations in the account, by whatever designation called, should be sensitized to observe and report any manifestation of the EWS promptly to the Fraud Monitoring Group (FMG) or any other group constituted by the bank for the purpose immediately. To ensure that the exercise remains meaningful, such officers may be held responsible for non-reporting or delays in reporting. The FMG or any such designated committee shall classify the account as RFA and the details of RFA accounts shall be put up to the CMD/CEO every month. A report on the RFA accounts shall be put up to the Special Committee of the Board for monitoring and follow-up of Frauds (SCBF) providing, inter alia, a synopsis of the remedial action taken together with their current status.