In a significant move to enhance fraud risk management across the financial sector, the Reserve Bank of India has issued three revised master directions. These new guidelines apply to a wide range of Regulated Entities (REs), including commercial banks, RRBs, All India Financial Institutions, cooperative banks, and NBFCs including housing finance companies.
The updated master directions follow a comprehensive review of previous directions and circulars, addressing emerging issues in the sector. They adopt a principle-based approach, reinforcing the governance and oversight role of the Boards of these REs in managing fraud risks effectively. Key aspects include the institution of a robust internal audit and controls framework within the entities.
A notable inclusion in these directions is the explicit requirement for REs to comply with the principles of natural justice before classifying individuals or entities as fraudulent. This aligns with the Supreme Court’s judgment dated March 27, 2023, in the case of State Bank of India & Ors. vs. Rajesh Agarwal & Ors. This provision ensures a fair process is followed in a timely manner.
Furthermore, the Directions have strengthened the framework for Early Warning Signals (EWS) and Red Flagging of Accounts (RFA). These enhancements aim to facilitate the early detection and prevention of fraud, ensuring timely reporting to law enforcement agencies and supervisors. The directions also mandate the establishment of data analytics and market intelligence units within REs to bolster risk management systems.
With the issuance of these Master Directions, the existing 36 circulars on the subject have been withdrawn. This step is intended to rationalize existing instructions and reduce the compliance burden on REs, thereby streamlining the regulatory framework.
