📷 Image Credits: The Economic Times
The Reserve Bank of India has recently issued a new circular that mandates lenders to provide defaulting borrowers with a minimum of 21 days to respond before classifying their accounts as ‘fraud.’ This move by RBI comes after a Supreme Court ruling which requires banks to issue a show-cause notice to defaulters and give them a chance to respond before declaring their accounts fraudulent. The central bank’s new rules aim to ensure fairness and transparency in dealing with loan defaulters in the country.
The amendment to the current rules incorporates a Supreme Court judgment from March last year, emphasizing that banks cannot unilaterally declare an account as fraud without providing the defaulter the right to be heard. According to the new guidelines, principles of natural justice demand that borrowers must be served a notice giving them an opportunity to explain the conclusions of a forensic audit report and represent themselves in front of the lenders before their account is classified as fraud.
Furthermore, the revised directions also require banks to review their fraud risk management policies at least once every three years. They are also mandated to constitute a special committee of the board to monitor and follow-up on fraudulent cases. Additionally, banks are required to have a framework for Early Warning Signals and Red Flagging of Accounts to detect suspicious activities promptly.
In line with the new regulations, all regulated entities are now obliged to have a board-approved policy on fraud risk management that incorporates measures for ensuring compliance with principles of natural justice in a time-bound manner. The policy should outline the minimum requirements for issuing detailed show-cause notices to persons/entities against whom fraud allegations are being examined.
The RBI has also stressed the need for data analytics and market intelligence units to strengthen risk management systems. These fresh directives will not only apply to commercial banks but also to regional rural banks, rural cooperative banks, and housing finance companies to promote better fraud risk management practices in the financial sector of India.
