RBI issues Revised Master Directions on Fraud Risk Management in the Regulated Entities

The Reserve Bank of India (RBI) has amended the basic guidelines to incorporate the Supreme Court’s recommendations on fraud risk management. In its order, the Supreme Court had asked banks to listen to borrowers before classifying an account as fraudulent.

The central bank said that the 3 revised basic guidelines on fraud risk management are principle-based. These strengthen the role of the board of directors in monitoring the entire operational system and fraud risk management.

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RBI said in the statement, “The original instructions now clearly require that the entities (regulated entities) under the purview of the central bank ensure compliance with the principles of natural justice in a timely manner before classifying the accounts of individuals/entities as fraudulent, keeping in mind the decision of the Supreme Court dated March 27, 2023.” RBI said, “The individuals/entities who were served show cause notices will be given a reasonable time of at least 21 days to respond in the matter.”

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SC heard the voice of the common man

It is noteworthy that in the SBI vs Rajesh Agarwal case, a bench headed by Chief Justice DY Chandrachud advocated the right of the borrower to be heard before classifying an account as fraudulent. According to the statement, “Under the principle of natural justice, borrowers should be given notice, given an opportunity to explain the findings of the forensic audit report and the concerned banks should be allowed to present their side before classifying their account as fraudulent under the master instructions.

RBI said that things have been further improved to detect and prevent fraud in the units under its purview and to inform about early warning signals (EWS) and irregularities in accounts for timely information to law enforcement agencies and supervisors. It said that the directive also highlights the need to establish a strong internal audit and control framework in financial institutions.

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