RBI issues directions for banks, NBFCs to cut fraud risk

Mumbai, July 15 – The Reserve Bank of India on Monday issued three revised Master Directions on fraud risk management for banks, NBFCs and housing finance companies.

These Master Directions are principle-based and strengthen the role of the Board in overall governance and oversight of fraud risk management in the regulated entities (banks, NBFCs and cooperative banks). These Directions also emphasise the need for instituting robust internal audit and controls framework in banks and NBFCs, the RBI said.

These master directions have been prepared based on a comprehensive review of the earlier master directions, circular and emerging issues, the RBI added.

“The Master Directions now expressly require that banks and NBFCs shall ensure compliance with the principles of natural justice in a time-bound manner before classifying Persons/Entities as fraud, duly taking into account the Supreme Court Judgment dated March 27, 2023 (in the matter of State Bank of India & Ors. vs. Rajesh Agarwal & Ors.). Framework on Early Warning Signals and Red Flagging of Accounts has been strengthened further for early detection and prevention of frauds in the REs and timely reporting to Law Enforcement Agencies and Supervisors. Further, requirement for Data Analytics and Market Intelligence Unit for strengthening risk management systems have been mandated,” according to the RBI statement.

These directions have now been made applicable to Regional Rural Banks, Rural Cooperative Banks and Housing Finance Companies as well, with the intent of promoting better fraud risk management systems and frameworks in such regulated entities.

With the issuance of these Master Directions, the existing 36 circulars on the subject stand withdrawn. This is done with the intent of rationalising the existing instructions and reducing the compliance burden on the regulated entities, the RBI statement added.