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Informist, Monday, Jul 15, 2024

MUMBAI – The Reserve Bank of India has issued revised guidelines on fraud risk management for regulated entities to promote better fraud and risk management systems and framework, according to a press release by the central bank. The new guidelines will also be applicable to regional rural banks, rural cooperative banks, and housing finance companies, it added. 

The framework for early warning signals and red flagging of accounts has been strengthened further for early detection and prevention of fraud in regulated entities and timely reporting to law enforcement agencies and supervisors, RBI said.

"A red flagged account is the one where suspicion of fraudulent activity is thrown up by the presence of one or more early warning signals indicators, alerting or triggering deeper investigation from potential fraud angle and initiating preventive measures by the banks," RBI said.

With the issuance of these revised guidelines, the existing 36 circulars on the subject stand withdrawn, the release said.

In all the circulars, RBI has urged banks, non-bank lenders and co-operative banks to have risk management committees which will oversee the effectiveness of the framework for early warning signals and red flagging of accounts.

The guidelines have also been revised after taking into account the Supreme Court's judgement of Mar 27, 2023 in the matter of State Bank of India & Ors. Vs. Rajesh Agarwal & Ors, where the court held that a borrower must be heard before its account is classified as fraud. The top court said that debarring borrowers from accessing institutional finances causes a severe impact on them and is akin to their blacklisting, which affects credit score.

A decision classifying a borrower account as fraudulent must be with reasoned order, the apex court said. Classification of accounts as fraud results in civil consequences for borrowers, and it amounts to blacklisting of borrowers, the top court said, adding, "hence opportunity of hearing must be granted for the borrowers under the Master Directions on Fraud".  End

Reported by Kshipra Petkar

Edited by Deepshikha Bhardwaj

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