Three updated Master Directions on fraud risk management for banks, NBFCs, and housing finance businesses were released by the Reserve Bank of India on Monday.
The Board’s involvement in overall governance and oversight of fraud risk management in the regulated entities—banks, NBFCs, and cooperative banks—is strengthened by these principle-based Master Directions. The RBI stated that these Directions also highlight the necessity of establishing strong internal audit and controls in banks and NBFCs.
The RBI stated that a thorough examination of previous master directives, circulars, and new concerns served as the foundation for the preparation of these guidelines.
The Supreme Court’s March 27, 2023 ruling in the case of State Bank of India & Ors. vs. Rajesh Agarwal & Ors. is a significant factor that the Master Directions now specifically mandate that banks and NBFCs take into consideration before classifying Persons/Entities as fraudulent. In order to detect and prevent fraud in the REs early on and to ensure prompt reporting to law enforcement agencies and supervisors, the framework for early warning signals and red flagging of accounts has been significantly enhanced. The RBI announcement further states that “requirements for Data Analytics and Market Intelligence Unit for strengthening risk management systems have been mandated.”
The goal of these guidelines is to encourage improved fraud risk management frameworks and systems in these regulated businesses, which currently include Regional Rural Banks, Rural Cooperative Banks, and Housing Finance Companies.
The 36 circulars that have been issued on the subject are withdrawn with the release of these Master Directions. The RBI statement also stated that this is being done with the intention of rationalizing the current instructions and lessening the burden of compliance on the regulated firms.
