15 July 2024

In a significant move aimed at bolstering financial sector integrity, the Reserve Bank of India (RBI) has issued fresh directives titled the "Reserve Bank of India (Fraud Risk Management in NBFCs) Directions, 2024". These directives mandate stringent measures for Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs), categorized by their asset size of ?500 crore and above.

Key Provisions and Purpose:

The core objective of these directions is to establish a robust framework within NBFCs to prevent, detect early, and promptly report incidents of fraud. It requires NBFCs to develop comprehensive policies approved by their boards, outlining roles, responsibilities, and procedures for managing fraud risks effectively.

Governance and Oversight:

Under the new guidelines, NBFCs are mandated to establish specialized committees such as the 'Special Committee of the Board for Monitoring and Follow-up of cases of Frauds' (SCBMF). This committee, comprising key board members and executives, will oversee fraud risk management strategies, conduct root cause analyses of fraud incidents, and recommend enhanced internal controls.

Implementation and Accountability:

The directives stress on accountability, requiring senior management to implement board-approved policies rigorously. It mandates a structured approach for issuing notices, conducting investigations, and delivering reasoned decisions on fraud classifications, ensuring adherence to principles of natural justice.

Enhanced Monitoring through Early Warning Signals:

NBFCs are also directed to adopt Early Warning Signal (EWS) frameworks, integrating these with operational systems to monitor credit facilities and financial transactions rigorously. The frameworks will help in identifying potential fraud indicators promptly, triggering deeper investigations and preventive actions.

Reporting and Disclosure:

Furthermore, NBFCs must ensure transparent reporting of fraud incidents to both RBI and Law Enforcement Agencies (LEAs) promptly. This includes categorizing incidents under specific fraud types and reporting them through designated portals within stipulated timeframes.

Penalties and Legal Framework:

The directives outline penalties for entities involved in fraudulent activities, including restrictions on fund-raising and credit facilities from regulated financial entities for up to five years. It also mandates stringent legal audits of large-value loan accounts and procedures for handling fraud cases during the resolution of non-performing assets.

Conclusion:

These directions mark a pivotal step by RBI towards fortifying the resilience of NBFCs against fraud risks, aiming to uphold trust, transparency, and stability in the financial ecosystem. By enforcing these guidelines, RBI seeks to mitigate financial vulnerabilities, safeguard investor interests, and uphold the integrity of the banking and financial sectors.