RBI Revises Fraud Norms: Banks Must Hear Borrowers First

Mumbai, Jul 15 (PTI) The Reserve Bank on Monday revised its master directions on fraud risk management to incorporate the recommendations of a Supreme Court judgement which asks banks to hear a borrower before an account is classified as fraud.

The central bank said the three revised master directions on fraud risk management are principle-based and strengthen the role of the board in overall governance and oversight of fraud risk management.

"The master directions now expressly require that the REs (regulated entities) shall ensure compliance with the principles of natural justice in a time-bound manner before classifying persons/entities as fraud, duly taking into account the Supreme Court Judgment dated March 27, 2023," a RBI statement said.

In the SBI versus Rajesh Agarwal case, an SC bench led by CJI DY Chandrachud batted for the rights of the borrower to be heard before an account is classified as fraud.

"The principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks/ JLF before their account is classified as fraud under the master directions on frauds," it had said.

"Since the master directions on frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem (right to be heard) has to be read into the provisions of the directions to save them from the vice of arbitrariness," the order had added.

The RBI said the framework on early warning signals (EWS) and red flagging of accounts (RFA) has also been strengthened further for early detection and prevention of frauds in the REs and timely reporting to law enforcement agencies and supervisors.

The central bank has also mandated data analytics and market intelligence units for strengthening risk management systems as part of the review, the RBI said.

The directions also emphasise the need for instituting robust internal audit and control framework in the REs, it said.

A total of 36 existing circulars on fraud risk management in the regulated entities stand withdrawn with the issue of the revised guidelines, it said, adding that the exercise has been carried out with the intent of rationalising the existing instructions and reducing the compliance burden on the REs.