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RBI/DOS/2024-25/120 DOS.CO.FMG.SEC.No.7/23.04.001/2024-25 July 15, 2024 The Chairman / Managing Director / Chief Executive Officer All Non-Banking Financial Companies (including Housing Finance Companies) Madam / Dear Sir, Master Directions on Fraud Risk Management in Non-Banking Financial Companies (NBFCs) (including Housing Finance Companies) Please find enclosed as Annex ‘Reserve Bank of India (Fraud Risk Management in NBFCs) Directions, 2024’ issued in exercise of the powers conferred by Sections 45K, 45L and 45M of the Reserve Bank of India Act, 1934 (Act 2 of 1934) and Sections 30A, 32 and 33 of the National Housing Bank Act, 1987. These Directions shall supersede the earlier Directions on the subject, namely, the Master Direction – Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016 dated September 29, 2016 . Yours faithfully (Rajnish Kumar) Chief General Manager Encl.: as above.
Annex Master Directions (MD) on Fraud Risk Management in Non-Banking Financial Companies (NBFCs) (including Housing Finance Companies)
CONTENTS INTRODUCTION CHAPTER I 1.1 Short Title and Commencement 1.2 Applicability 1.3. Purpose CHAPTER II 2. Governance Structure in NBFCs for Fraud Risk Management CHAPTER III 3. Framework for Early Warning Signals for Detection of Frauds CHAPTER IV 4.1 Credit facility / Loan account / Other financial transactions - indication of fraudulent activities 4.2 Independent confirmation from the third-party service providers including professionals 4.3 Staff Accountability 4.4 Penal Measures 4.5 Treatment of accounts under Resolution CHAPTER V 5 Reporting of Frauds to Law Enforcement Agencies (LEAs) CHAPTER VI 6.1 Reporting of Incidents of Fraud to Reserve Bank of India (RBI) 6.2 Modalities of Reporting Incidents of Fraud to RBI 6.3 Closure of Fraud Cases Reported to RBI CHAPTER VII 7. Other Instructions 7.1 Legal Audit of Title Documents in respect of Large Value Loan Accounts 7.2 Treatment of Accounts classified as Fraud and sold to other Lenders / Asset Reconstruction Companies (ARCs) 7.3 Role of Auditors 7.4 ‘Date of Occurrence’, ‘Date of Detection’ and ‘Date of Classification’ of Fraud – for the purpose of reporting under FMR CHAPTER VIII 8. Reporting Cases of Theft, Burglary, Dacoity and Robbery CHAPTER IX 9. Repeal
INTRODUCTION In exercise of the powers conferred by Sections 45K, 45L and 45M of the Reserve Bank of India Act, 1934 (Act 2 of 1934), and Sections 30A, 32 and 33 of the National Housing Bank Act, 1987, the Reserve Bank of India being satisfied that it is necessary and expedient in the public interest and in the interest of banking policy to do so, hereby, issues the Directions hereinafter specified.
CHAPTER I 1.1 Short Title and Commencement These Directions shall be called the Reserve Bank of India (Fraud Risk Management in NBFCs) Directions, 2024.
1.2 Applicability The provisions of these Directions shall, unless otherwise provided, apply to:
1.3. Purpose These Directions are issued with a view to providing a framework to Applicable NBFCs for prevention, early detection and timely reporting of incidents of fraud to Law Enforcement Agencies (LEAs), Reserve Bank of India (RBI) and National Housing Bank 4 (NHB) and matters connected therewith or incidental thereto.
CHAPTER II 2. Governance Structure in Applicable NBFCs for Fraud Risk Management 2.1 There shall be a Board 5 approved Policy 6 on fraud risk management delineating roles and responsibilities of Board / Board Committees and Senior Management of the Applicable NBFC. The Policy shall also incorporate measures for ensuring compliance with principles of natural justice 7 in a time-bound manner which at a minimum shall include:
2.2 The Fraud Risk Management Policy shall be reviewed by the Board at least once in three years, or more frequently, as may be prescribed by the Board.
2.3 Special Committee of the Board for Monitoring and Follow-up of cases of Frauds: Applicable NBFCs shall constitute a Committee of the Board to be known as ‘Special Committee of the Board for Monitoring and Follow-up of cases of Frauds’ (SCBMF) with a minimum of three members of the Board, consisting of the Chief Executive Officer 10 and two Independent Directors. The Committee shall be headed by one of the Independent Directors. Applicable NBFCs categorised as Middle Layer and Base Layer for regulatory purposes 11 , shall have the option of constituting a Committee of the Executives (CoE) with a minimum of three members, at least one of whom shall be a Whole-time director or equivalent rank Official for the purpose of performing the roles and responsibilities of SCBMF as required under these Directions.
2.4 The Senior Management shall be responsible for implementation of the fraud risk management policy approved by the Board of the Applicable NBFC. A periodic review of incidents of fraud shall also be placed before Board / Audit Committee of Board (ACB), as appropriate, by the Senior Management of the Applicable NBFC.
2.5 Applicable NBFCs shall put in place a transparent mechanism to ensure that Whistle Blower complaints on possible fraud cases / suspicious activities in account(s) are examined and concluded appropriately under their Whistle Blower Policy.
2.6 Applicable NBFCs shall set-up an appropriate organisational structure for institutionalisation of fraud risk management 13 within their overall risk management functions / Department. A sufficiently senior official shall be responsible for monitoring and reporting of frauds.
2.7 Applicable NBFCs shall disclose the amount related to fraud reported in the company for the year in their Financial Statements – Notes to Accounts.
CHAPTER III 14 3.1 Framework for Early Warning Signals for Detection of Frauds
