The Reserve Bank of India (RBI) on Monday revised its master directions on the fraud risk management to incorporate the recommendations of a Supreme Court judgment that asks banks to hear a borrower before an account is classified as fraud. The banking regulator said the three revised master directions on fraud risk management are principle-based and strengthen the role of the board in overall governance and oversight of fraud risk management.
“The master directions now expressly require that the REs 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 Hon’ble Supreme Court Judgment dated March 27, 2023,” said the central bank in a circular.
In the SBI versus Rajesh Agarwal case, the top court had held that banks can not unilaterally declare an account as fraud without giving the defaulter the right to be heard.
In its revised circular, the RBI said all regulated entities must have a board-approved policy on fraud risk management. The fraud policy would also have to incorporate measures for ensuring compliance with principles of natural justice in a time-bound manner, laying out the minimum requirements.
All regulated entities will now have to issue a detailed show-cause notice to the persons, entities and its promoters/whole time and executive directors against whom the allegation of fraud is being examined. The notice would have to provide complete details of transactions/actions/events on the basis of which declaration and reporting of a fraud is being contemplated, the RBI said.
“A reasonable time of not less than 21 days shall be provided to the persons/entities on whom the show cause notice was served to respond to the said show cause notice,” the central bank said.
The RBI has also called for requirement for data analytics and market intelligence unit for strengthening risk management systems. Fresh directions will be applicable for regional rural banks, rural cooperative banks and housing finance companies as well, with the intent of promoting better fraud risk management systems and framework, the RBI said.