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Reserve Bank of India by exercising its power conferred under section 45k, 45L and 45M of the RBI Act, 1934 issued a master direction to monitor the fraud ensue in NBFCs. The direction shall be called Monitoring of Frauds in NBFCs (Reserve Bank Direction, 2016).
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The financial sector in India has witnessed accelerated growth in the past few years. At the same time, the incidence of deception has also been on the rise. In today’s economic environment, where the opportunity for growth is increasing day by day, the ratio of committing fraud has also been improved. For instance, cybercrime, money laundering, accounting frauds are generally known crimes that take place in the finance sector. Our regulatory authorities are continuously evolving, strict regulatory compliance and the regulators can be seen becoming more aggressive.
According to RBI, “the primary responsibility of preventing fraud lies with banks themselves.” Regulations governing financial institutions, institutions like Scheduled Commercial Banks (SCB), Insurance Companies, Non-Banking Financial Companies (NBFC), Regional Rural Banks (RRBs), are set to have a tremendous impact. Acknowledging, the risk factors applicable in NBFC, RBI has issued a master circular on reporting of these frauds. Master circular describes the responsibility of monitoring and preventing scams, subjecting NBFC to uncertain financial risks. The leaflets urge the NBFCs to place a reporting system to record the fraud without any delay.
The direction provided in the master circular shall apply to all deposit-taking Non-Banking Financial Companies and systemically important non –banking financial companies’ (NBFC-ND-SI).
Classification of frauds
Cases of ‘negligence and cash shortages’ and irregularities in foreign exchange transactions are to be reported as fraud if the intention of cheat/defraud is suspected/proved.
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Central Fraud Monitoring cell, Department of Banking Supervision, Reserve Bank of India, 10/3/8 Nrupathunga Road, P.B. No. 5467, Bengaluru –560001
The same report of fraud shall be sent to the Regional Office of the Department of Non-Banking Supervision of the Bank under whose jurisdiction the NBFC fall.
NBFCs are advised to close the fraud cases where the fraud amount is up to 25 lakh, where,
In case of reporting the fraud to police such as unauthorized credit facilities extended by NBFC for illegal gratification, negligence, and cash shortage, cheating, and forgery. The fraud shall be reported to state police authorities. In the following scenarios, the fraud cases should be referred to state police.
Read our article:Loan Exposure of NBFC Increased: A Complete Analysis
NBFC sector has evolved in terms of its size, functions, technological development. With such developments, risk factor related to frauds also increases rapidly, as being a financial entity. In consideration of these frauds related to misfeasance, embezzlement, misappropriation of funds, conversion of property, cheating, shortage, irregularities, etc… Reserve bank of India has issued a master circular for reporting frauds. Similar to the banking sector the master circular of RBI for reporting the frauds, stating a road map to fix the liability of averting the frauds on NBFCs, subjecting them to uncertain financial risks.
Also Read: New Trend in NBFC Business Model, Challenges and a Scalable Business model.
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