RBI comes up with new fraud risk management guidelines for REs
The master directions are principle-based and strengthen the board’s role in overall governance
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REs will now have to shall ensure compliance with the principles of natural justice in a time-bound manner before classifying persons or entities as fraud
The Reserve Bank of India has issued three revised master directions on fraud risk management for regulated entities. They include commercial banks (including regional rural banks) and All India financial institutions, cooperative banks (urban cooperative banks/state cooperative banks/central cooperative banks) and finally non-banking finance companies, including housing finance companies.
These master directions are principle-based and strengthen the role of the board in overall governance and oversight of fraud risk management in Regulated Entities (REs). The directions also emphasise the need for instituting a robust internal audit and controls framework in the REs.
The RBI has revised its circular on fraud risk management for REs, marking a positive step towards enhancing governance and due diligence among financial institutions and reporting frauds at an early stage.
Talking to Bizz Buzz, Ashwani Kumar, MD and CEO, UCO Bank, says, “We have started a transaction monitoring vertical team. KYC and other such segments have been brought under the same roof under the purview of the vertical team. Moreover, we have integrated it with call centres and mule accounts under the system.”
As per the circulation, REs are required to implement a framework to detect Early Warning Signals (EWS) and Red Flagging of Accounts (RFA). This will ensure that fraud cases are identified and reported at the earliest, allowing REs to control financial damage. By following the circular, REs will be able to adopt best-in-class governance practices for reporting frauds, thereby creating digital trust within the financial ecosystem.
Ankit Ratan, co-founder and CEO of Signzy, says, “It’s an important regulation as this will make reporting of fraud more important and help REs slowly build a system that will help them define and report fraud by adopting right governance practices.
The regulation will help create a most required central fraud repository in future in addition to credit bureaus.”
The regulation will encourage REs to use AI-led technology to trace document forgery at a mass scale and ensure that even small instances of frauds are detected at early stage and are reported to the relevant regulatory body, he said.
REs will now have to shall ensure compliance with the principles of natural justice in a time-bound manner before classifying persons or entities as fraud, duly taking into account the Supreme Court Judgment dated March 27, 2023 (Civil Appeal No. 7300 of 2022 in the matter of State Bank of India & Ors. Vs. Rajesh Agarwal & Ors.).
The framework on Early Warning Signals (EWS) and Red Flagging of Accounts (RFA) has been strengthened further for early detection and prevention of frauds in the REs and timely reporting to law enforcement agencies and supervisors.
Further, requirement for data analytics and market intelligence unit for strengthening risk management systems have been mandated.
