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Understanding the terms 'diversion of funds' and 'siphoning of funds'

Understanding the terms ‘diversion of funds’ and ‘siphoning of funds’


The diversion of funds means utilization of funds by the borrower in deviation of sanction terms of the lender, including any of the following occurrences.

  1. The credit facility extended for the working capital purposes, used by the unit for long term purposes, which is not in conformity with the sanction terms.
  2. The unit deploys borrowed funds for those activities for which the facility was not sanctioned.
  3. The unit moves the funds to its subsidiaries or group of companies or other corporates by transfer or any other modalities.
  4. The unit routing its funds transfers through some other banks, instead of routing through the lending bank, without the consent/ knowledge of the lender bank.
  5. The unit makes the investment in other companies either by way of acquiring equities or debt instrument without taking approval from the lender/s.
  6. The unit did not account for the difference/shortfall in the utilization of funds in relation to the amount released or drawn. 

Siphoning of funds:

The siphoning of funds refers to the occurrence of a situation that the unit has failed in meeting its payment/repayment commitments to the lender bank and also the funds borrowed from the bank was not utilized for the specific purpose for which the credit was released. In addition to utilizing the funds for the purpose unrelated to the operation of the unit, the borrower has no evidence to show that the financed funds are available in any other form of assets with the unit. The decision to reckon the case as siphoning of funds is required to be thoughtfully taken by the lender on the basis of objective facts and circumstances of the case.  

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