RBI’s Fraud Risk Management Norms for Borrowers

Abhishek Kumar

23 Jul, 2024

The RBI has updated its guidelines on managing fraud risks following suggestions from the Supreme Court. The apex court instructed banks to listen to borrowers before labelling an account fraudulent. The RBI’s latest guidelines now specifically stipulate that regulated entities (such as commercial banks, cooperative banks, and NBFCs) must send a show-cause notice to any individual or organisation accused of fraud.

Retail borrowers have the option to reply to the show cause notice within 21 days. The RE (Registered Entities) must consider pertinent information and the borrower’s submission before determining if the account is part of fraudulent activity.

Fraudulent Activities as per 2024 Master Directions

The 2024 Master Directions define the general categories of transactions/activities/incidents that will be classified as fraudulent activities.

The following items are:

• Fraudulent credit facilities extended for illegal gratification
• Cash deficits due to deceitful actions
• Deceptive activities related to currency exchange transactions.
• Illegal electronic financial transactions related to banks and non-bank financial institutions (NBFCs)
• No other forms of deceitful behaviour are included in the mentioned categories.
• Misappropriation of funds and fraudulent violation of trust
• Criminal cashing through counterfeit documents
• Falsifying financial records or using fake accounts and transferring assets
• Deceiving someone through hiding information and pretending to be someone else is considered cheating.
• Creating fake documents or electronic records with the intent to deceive for fraudulent purposes.
• Intentional fabrication, damage, modification, or damage of any book, electronic record, paper, writing, valuable security, or account to deceive.

RBI’s New EWS Mandate: Enhancing Fraud Risk Management

The recent update in the master directions requires banks to establish a system for Early Warning Signals (EWS) and identify fraudulent accounts that the bank suspects of potential fraud. This falls within the comprehensive risk management strategy.

In addition to the mentioned rules, the RBI has required banks to enhance their EWS system by identifying appropriate potential fraud indicators. The RBI statement now includes Regional Rural Banks, Rural Cooperative Banks, and Housing Finance Companies in the guidelines to enhance fraud risk management systems.

What Does That Mean for the Borrowers Through Expert Opinion?

The experts say that the RBI is enhancing honesty and accountability in the financial system by implementing a more transparent and fair procedure, as recommended by experts, to protect borrowers’ rights. We believe that this development will promote increased trust and cooperation between lenders and borrowers, ultimately supporting the financial system’s resilience.

Moreover, the experts mentioned that mandating data analytics and market intelligence units to improve risk management systems in the Central Bank is seen as a beneficial step during the evaluation period. At present, lenders are using AI technology extensively to evaluate credit risk, offering benefits like enhanced precision, productivity, and inclusiveness.

With the release of the updated guidelines, the RBI stated that 36 current circulars regarding fraud risk management in regulated entities have been revoked. The exercise aimed to streamline current instructions and lessen the burden of compliance on the REs.

Conclusion

The RBI’s updated fraud risk management guidelines improve banking security and trustworthiness, ultimately helping borrowers mitigate fraud risk and guarantee safer financial transactions. These rules promote greater confidence, clarity, and responsibility within the banking industry, resulting in improved decision-making when borrowing and enhanced protection of personal information. In general, borrowers benefit from a financial environment that is more secure and transparent.