The Reserve Bank of India (RBI) issued a new circular on Monday (15 July, 2024) to make sure that borrowers are treated fairly before their accounts are labeled as “fraud accounts”.
According to RBI, banks and financial institutions must give defaulting borrowers enough time to respond before classifying their accounts as fraud. Also, banks must now send notices to borrowers who they think have committed fraud. These notices need to explain the fraud and give borrowers at least 21 days to respond.
“A reasonable time of not less than 21 days shall be provided to the Persons / Entities on whom the SCN was served to respond to the said SCN,” said RBI.
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This change comes after a Supreme Court ruling in March 2023. The ruling says banks can’t call an account fraud without letting the account holder explain.
RBI highlighted that principles of natural justice must be followed. Borrowers should be informed about the audit report’s conclusions and allowed to explain their side before their accounts are marked as fraud accounts. This ensures that the regulated entities follow a fair process in line with RBI’s master directions.
Additionally, the RBI has mandated that the boards of financial institutions should regularly review their fraud risk management policies every three years. Banks must also set up a special committee to monitor and follow up on fraud cases.
The new guidelines include a framework for Early Warning Signals (EWS) to help banks identify and flag accounts showing signs of potential fraud. This proactive approach aims to improve the overall risk management policy.
Also Read: RBI Governor to Banks: Act against Mule Accounts
In addition, the RBI has extended these guidelines to Regional Rural Banks, Rural Cooperative Banks, and Housing Finance Companies. This change aims to improve fraud risk management systems across all regulated entities.
The RBI’s new directives ensure that borrowers get a fair chance to explain themselves before their accounts are classified as fraud accounts. Banks must now follow a more transparent and fair process, showing their commitment to managing fraud risk management and protecting borrowers’ rights.
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