RBI asks lenders to ensure compliance with the principles of natural justice in a time-bound manner

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The Reserve Bank of India (RBI) on Monday issued revised Master Directions on fraud risk management for lenders, requiring them to ensure compliance with the principles of natural justice in a time-bound manner before classifying Persons / Entities as fraud.

Further, the central bank asked the lenders to set up Data Analytics and Market Intelligence Unit for strengthening risk management systems.

The requirement to ensure compliance with the principles of natural justice in a time-bound manner before classifying Persons / Entities as fraud duly takes into account the Supreme Court Judgment of March 27, 2023 in the matter of State Bank of India & Others Vs. Rajesh Agarwal & others.

RBI said framework on Early Warning Signals (EWS) and Red Flagging of Accounts (RFA) has been strengthened further for early detection and prevention of frauds in the REs (regulated entities) and timely reporting to Law Enforcement Agencies and Supervisors.

“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 (REs).

“These Directions also emphasise the need for instituting robust internal audit and controls framework in the REs,” per the revised MD.

The revised Master Directions (MDs), which have have been prepared based on a comprehensive review of the earlier MDs, Circular and emerging issues, are applicable to lenders/REs such as 1) commercial banks (including Regional Rural Banks) and All India Financial Institutions; 2) cooperative banks (Urban Cooperative Banks / State Cooperative Banks / Central Cooperative Banks); and 3) Non-Banking Finance Companies (including Housing Finance Companies).

The central bank observed that 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 framework in such REs.

With the issuance of three MDs on “Fraud Risk Management” for the three categories of lenders, RBI said the existing 36 Circulars on the subject stand withdrawn.

This has been done with the intent of rationalising the existing instructions and reducing the compliance burden on the REs, it added.