Reserve Bank of India (Local Area Banks – Fraud Risk Management) Directions, 2026

भारतीय ǐरज़वर् बैंक Reserve Bank of India

पयर्वेक्षण ͪ वभाग, भारतीय ǐरज़वर् बैंक, केंद्रȣय कायार्लय, मेकर टावर-ई, 20वीं मंिजल, कफ परेड, कोलाबा, मुंबई-400 005 दूरभाष: 022-6989 2022 ई-मेल: fmgdosco@rbi.org.in Department of Supervision, Reserve Bank of India, Central Office, Maker Tower-E, 20th floor, Cuffe Parade, Colaba, Mumbai- 400 005 Tel: 022-6989 2022 Email: fmgdosco@rbi.org.in

ᳲहंदी आसान है, इसका ᮧयोग बढ़ाइए RBI/DoS/2026-27/446 DoS.CO.FMG.40/23.04.001/2026-27 July 31, 2026 Reserve Bank of India (Local Area Banks – Fraud Risk Management) Directions, 2026

Table of Contents

Chapter I - Preliminary ............................................................................................. 4 A. Short Title and Commencement ..................................................................... 4 B. Applicability ..................................................................................................... 4 C. Definitions ........................................................................................................ 4 Chapter II - Governance and Oversight .................................................................. 6 A. Governance Structure for Fraud Risk Management ..................................... 6 Chapter III - Early Detection of Frauds - Framework for Early Warning Signals and Red Flagging of Accounts ............................................................................... 9 A. Governance Structure ..................................................................................... 9 B. Early Warning Signal / Red Flagging of Accounts Framework for Credit Facilities / Loan Accounts ............................................................................. 10 C. EWS Framework for Other Banking / Non-Credit Related Transactions ... 10 Chapter IV - General Instructions ......................................................................... 12 A. Credit facility / Loan Account Classified as Red-flagged Account and Reporting of Fraud ........................................................................................ 12 B. Independent Confirmation from Third-party Service Providers including Professionals ................................................................................................. 13 C. Staff Accountability ....................................................................................... 13 D. Penal Measures .............................................................................................. 14 E. Treatment of Accounts under Resolution ................................................... 14 Chapter V - Reporting of Frauds to Law Enforcement Agencies ....................... 16 Chapter VI - Reporting to Reserve Bank of India................................................. 17 A. Reporting of Incidents of Fraud ................................................................... 17 B. Central Fraud Registry .................................................................................. 17 C. Modalities of Reporting Incidents of Fraud ................................................. 18 D. Closure of Fraud Cases Reported ................................................................ 19 Chapter VII - Cheque Related Frauds - Reporting to Law Enforcement Agencies and Reserve Bank of India .................................................................................... 20 Chapter VIII - Other Instructions ........................................................................... 21 A. Legal Audit of Title Documents in respect of Large Value Loan Accounts ........................................................................................................ 21 B. Treatment of Accounts classified as Fraud and sold to other Lenders / Asset Reconstruction Companies ............................................................... 21 C. Role of Auditors ............................................................................................. 21 Chapter IX - Reporting Cases of Theft, Burglary, Dacoity and Robbery ........... 22 Chapter X - Repeal and Other Provisions ............................................................ 23 A. Repeal and Saving ......................................................................................... 23 B. Application of Other Laws not barred .......................................................... 23 C. Interpretations ................................................................................................ 24

Introduction

These Directions are issued with a view to providing a framework for prevention, early detection, and timely reporting of incidents of fraud by Local Area Banks to Law Enforcement Agencies (LEAs) and Reserve Bank of India (‘RBI’) and dissemination of information by RBI and matters connected therewith or incidental thereto. In exercise of the powers conferred under Section 21 and Section 35-A of the Banking Regulation Act, 1949, and all other provisions / laws enabling RBI in this regard, RBI being satisfied that it is necessary and expedient in public interest so to do, hereby, issues these Directions hereinafter specified.

Chapter I - Preliminary

A. Short Title and Commencement

1. These Directions shall be called the Reserve Bank of India (Local Area Banks - Fraud Risk Management) Directions, 2026.
2. These Directions shall come into effect immediately upon issuance.

B. Applicability

3. These Directions shall be applicable to Local Area Banks (hereinafter collectively referred to as 'LABs' and individually as 'LAB').

C. Definitions

4. In these Directions, unless the context states otherwise, the terms herein shall bear the meaning assigned to them below: (1) ‘Central Fraud Registry (CFR)’ is a web-based searchable database maintained by RBI. Fraud related data, including the updates thereof, directly flow to CFR from online reporting by the LAB through Fraud Monitoring Returns (FMRs). (2) ‘CRILC’ is the Central Repository of Information on Large Credits as referred to in the Reserve Bank of India (Local Area Banks – Supervisory Returns) Directions, 2026. (3) ‘Date of Classification’, for the purpose of reporting under FMR, is the date when due approval from the competent authority has been obtained for such classification, and the reasoned order is passed. (4) ‘Date of Detection’ to be reported in FMR, is the actual date when the fraud came to light in the concerned branch / audit / department of the LAB, as the case may be, and not the date of approval by the competent authority of the LAB. (5) ‘Date of Occurrence’, for the purpose of reporting under FMR, is the date when the actual misappropriation of funds has started taking place, or the event occurred, as evidenced / reported in the audit or other findings. (6) 'Red Flagged Account' is one where suspicion of fraudulent activity is thrown up by the presence of one or more Early Warning Signal (EWS) indicators, alerting / triggering deeper investigation from potential fraud angle and requiring initiation of preventive measures by all banks.

Chapter II - Governance and Oversight

A. Governance Structure for Fraud Risk Management

5. The LAB shall put in place a Board approved policy on Fraud Risk Management delineating roles and responsibilities of Board / Board Committees and Senior Management of the LAB. The policy shall inter alia contain measures towards prevention, early detection, investigation, staff accountability, monitoring, recovery, and reporting of frauds as well as a framework for Early Warning Signals (EWS) and Red Flagging of Accounts (RFA). In this context, ‘Board’ will refer to ‘Board of Directors’ of the LAB.
6. The Policy shall also incorporate measures for ensuring compliance with principles of natural justice[1] in a time-bound manner, which at a minimum, shall include: (1) Issuance of a detailed Show Cause Notice (SCN) to the Persons (including Third Party Service Providers and Professionals, inter-alia, architects, valuers, chartered accountants, advocates and other professionals / service providers), Entities and their Promoters / Whole Time Directors (WTDs) and Executive Directors (EDs) against whom allegation of fraud is being examined. The SCN shall provide complete details of transactions / actions / events basis which declaration and reporting of a fraud is being contemplated under these Directions. As non-Whole Time Directors (like nominee directors and independent directors) are normally not in charge of, or responsible to the company for the conduct of business of the company, the LAB may take this into consideration before proceeding against such directors under these Directions. (2) The LAB shall provide a reasonable time of not less than 21 days to the Persons / Entities on whom the SCN was served to respond to the said SCN. (3) The LAB shall have a well laid out system for issuance of SCN and examination of the responses / submissions made by the Persons / Entities prior to declaring such Persons / Entities as fraudulent. (4) The LAB shall serve a reasoned Order on the Persons / Entities conveying its decision regarding declaration / classification of the account as fraud or otherwise. Such Order(s) must contain relevant facts / circumstances relied upon, the submission made against the SCN and the reasons for classification as fraud or otherwise. Explanation: The requirement of ensuring compliance to the principles of natural justice is applicable to all Persons / Entities and their Promoters / WTDs and EDs classified as fraud by the LAB. In other words, this requirement is applicable in all cases of fraud classification which may have civil consequences (i.e., penal measures, caution listing) as observed in the Judgement of the Hon’ble Supreme Court dated March 27, 2023 (Civil Appeal No. 7300 of 2022 in the matter of State Bank of India & Ors. Vs. Rajesh Agarwal & Ors.).
7. The Board shall review the Fraud Risk Management Policy at least once in three years, or more frequently, as may be prescribed by the Board.
8. Special Committee of the Board for Monitoring and Follow-up of cases of Frauds: (1) The LAB 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 a WTD and a minimum of two independent directors / non-Executive Directors. The Committee shall be headed by one of the independent directors / non-Executive Directors. (2) SCBMF shall oversee the effectiveness of the Fraud Risk Management in the LAB. SCBMF shall review and monitor cases of frauds, including root cause analysis, and suggest mitigating measures for strengthening the internal controls, risk management framework and minimising the incidence of frauds. The Board of the LAB shall decide the coverage and periodicity of such reviews. The coverage may include, among others, categories / trends of frauds, industry / sectoral / geographical concentration of frauds, delay in detection / classification of frauds and delay in examination / conclusion of staff accountability. (3) The Board of the LAB shall decide the threshold amount of fraud cases to be placed before the SCBMF, after duly taking into account the scale and complexity of its operations.
9. The Senior Management shall be responsible for implementation of the fraud risk management policy approved by the Board of the LAB. The Senior Management of the LAB shall also place a periodic review of incidents of fraud before Board / Audit Committee of Board (ACB), as appropriate.
10. The LAB 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 its Whistle Blower Policy.
11. The LAB shall set-up an appropriate organisational structure for institutionalisation of Fraud Risk Management within its overall risk management functions / department. Fraud Risk Management includes prevention, early detection, investigation, staff accountability, monitoring, recovery, analysis, reporting of frauds, and other related aspects under the Board approved Policy. A senior official in the rank of at least a General Manager or equivalent shall be responsible for monitoring and reporting of frauds.

Chapter III - Early Detection of Frauds - Framework for Early Warning Signals

and Red Flagging of Accounts

A. Governance Structure

12. The LAB shall have a framework for EWS and Red Flagging of Accounts (RFA) under the overall Fraud Risk Management Policy approved by the Board.
13. The Risk Management Committee of the Board (RMCB) shall oversee the effectiveness of the Board-approved framework for EWS and RFA. The Senior Management shall be responsible for implementation of a robust Framework for EWS and RFA within the LAB.
14. The RMCB shall approve the EWS indicators identified for monitoring credit facilities / loan accounts and other banking transactions. The RMCB shall prescribe appropriate Turnaround Time (TAT), preferably not more than 30 days, for examination of EWS alerts / triggers.
15. RMCB shall review the status of red flagged accounts, including the EWS alerts / triggers and remedial actions initiated by the LAB at periodic intervals as approved by the Board.
16. The EWS / RFA framework shall be subject to suitable validation in accordance with the directions of RMCB so as to ensure its integrity, robustness and consistency of the outcomes.
17. The EWS / RFA Framework shall provide for, among others: (1) A system of robust EWS which is integrated with Core Banking Solution (CBS) or other operational systems; (2) Initiation of remedial action on alerts / triggers from EWS System in a timely manner; (3) Periodic review of credit sanction and monitoring processes, internal controls and systems; and (4) Effective use of CRILC database and the CFR.
18. The LAB shall put in place / suitably upgrade its existing EWS system on an ongoing basis.

B. Early Warning Signal / Red Flagging of Accounts Framework for Credit

Facilities / Loan Accounts 19. Development of EWS System: The EWS system shall be comprehensive and designed to include both the quantitative and qualitative indicators to make the framework robust and effective. The broad indicators which the EWS system may illustratively capture could be based on the transactional data of accounts, financial performance of borrowers, market intelligence and conduct of the borrowers. 20. Data Analytics and Market Intelligence (MI) Unit: The LAB shall set up a dedicated Data Analytics and MI Unit keeping in view its size, complexity, business mix and risk profile. Such Unit shall facilitate collection and processing of relevant information to enable an early detection and prevention of potentially fraudulent activities. 21. Generation of EWS alert(s) / trigger(s) shall necessitate examination whether the account needs to be red flagged and consequently, investigation from potential fraud angle. 22. The LAB shall report an account, with an aggregate exposure of ₹3 crore and above, once red flagged, in ‘Red Flagged Account Return’ on the Reserve Bank’s CRILC platform within seven days of being red flagged. ‘Exposure’ in this context, shall include all funded and non-funded exposures.

C. EWS Framework for Other Banking / Non-Credit Related Transactions

23. The LAB shall develop / strengthen its EWS system by identifying suitable indicators and parameterising them in its EWS system for monitoring other banking / non-credit related transactions. The LAB shall strive to continuously upgrade the EWS system for enhancing its integrity and robustness, monitor other banking / non-credit related transactions efficiently and prevent fraudulent activities through the banking channel. Further, the effectiveness of EWS system shall be tested periodically.
24. The design and specification of EWS system shall be robust and resilient to ensure that integrity of system is maintained, personal and financial data of customers are secure and transaction monitoring for prevention / detection of potential fraud is on real-time basis or with a minimum time lag without compromising the effectiveness of the outcome of EWS system in prevention / detection of potential frauds. The LAB shall remain vigilant in monitoring transactions / unusual activities, specifically in the non-KYC compliant and money mule accounts, to contain unauthorised / fraudulent transactions and to prevent misuse of banking channel.
25. The Data Analytics and MI Unit or other dedicated analytics set up in the LAB shall extensively monitor and analyse other banking / non-credit related transactions, more specifically the transactions through digital platforms and applications, in order to identify unusual patterns and activities which could alert the LAB timely in initiating appropriate measures towards prevention of fraudulent activities.

Chapter IV - General Instructions

A. Credit facility / Loan Account Classified as Red-flagged Account and

Reporting of Fraud 26. In case of a credit facility / loan account classified as red-flagged account, the LAB shall use an external audit, or an internal audit as per its Board approved Policy, for further investigation in such accounts. 27. The LAB shall frame a policy on engagement of external auditors covering aspects such as due diligence, competency and track record of the auditors, among others. Further, the contractual agreement with the auditors shall, inter alia, contain suitable clauses on timeline for completion of the audit and submission of audit report to the LAB within a specified time limit, as approved by the Board. 28. The loan agreement with the borrower shall contain clauses for conduct of such audit at the behest of lender(s) consequent upon red flagging of the account. In cases where the audit report submitted remains inconclusive or is delayed due to non-cooperation by the borrower, the LAB shall conclude on status of the account as a fraud or otherwise based on the material available on its record and its own internal investigation / assessment in such cases. The LAB shall ensure that principles of natural justice are strictly adhered to before classifying / declaring an account as fraud (Refer to Paragraph 6). 29. The decision to classify any account, either standard or NPA, as a red-flagged account shall be at the individual LAB level and such LAB(s) shall report the status of the account on Reserve Bank’s CRILC platform immediately (not later than seven days from date of classification as a red-flagged account). 30. The LAB (in case of sole lending) or the individual LABs (in case of multiple banking arrangement or consortium lending) shall ensure that the principles of natural justice (Refer to Paragraph 6) are strictly adhered to before classifying / declaring an account as fraud. 31. Once an account has been red-flagged, the entire process of classification of the account as fraud or removal of red-flagged status shall ordinarily be completed within 180 days from the date of first reporting of the account as red-flagged on CRILC platform. Cases remaining in red-flagged status beyond 180 days shall be reported to the SCBMF for review with adequate reasoning / justification thereof. Such cases shall also be subject to supervisory review by RBI. 32. In case an account is identified as a fraud by any LAB, the borrowal accounts of other group companies[2], in which one or more promoter(s) / WTDs are common, shall also be subjected to examination by Regulated Entities (REs) concerned from fraud angle under these Directions. 33. In cases where Law Enforcement Agencies (LEAs) have suo moto initiated investigation involving a borrower account, the LAB shall immediately red-flag the account and follow the usual process for classification of account as fraud and complete the same within the stipulated period as specified at Paragraph 31 above.

B. Independent Confirmation from Third-party Service Providers including

Professionals 34. The LAB places reliance on various third-party service providers as part of pre- sanction appraisal and post-sanction monitoring. Therefore, the LAB may incorporate necessary terms and conditions in its agreements with third-party service providers to hold them accountable in situations where wilful negligence / malpractice by them is found to be a causative factor for fraud. 35. The LAB shall, after complying with the principles of natural justice, report to Indian Banks’ Association (IBA) the details of such third parties or professionals involved in frauds. Indian Banks’ Association (IBA) would, in turn, prepare caution lists of such third parties for circulation among banks.

C. Staff Accountability

36. The LAB shall initiate and complete the examination of staff accountability in all fraud cases in a time-bound manner in accordance with its internal policy.
37. In cases involving very senior executives of the LAB (MD & CEO / ED / Executives of equivalent rank), the ACB shall initiate examination of their accountability and place it before the Board. Such executives shall not participate in the meeting of the Board / ACB / SCBMF in which their accountability is to be considered.

D. Penal Measures

38. Persons / Entities classified and reported as fraud by the LAB and also Entities and Persons associated with such Entities, shall be debarred from raising of funds and / or seeking additional credit facilities from financial entities regulated by RBI, for a period of five years from the date of full repayment of the defrauded amount / settlement amount agreed upon in case of a compromise settlement. Explanation: (1) If it is an Entity, another Entity will be deemed to be associated with it if that Entity is (i) a subsidiary company as defined under clause 2 (87) of the Companies Act, 2013 or (ii) falls within the definition of a ‘joint venture’ or an ‘associate company’ under clause (6) of Section 2 of the Companies Act,

(2) In case of a Natural Person, all entities in which she / he is associated as promoter, or director, or as one in charge and responsible for the management of the affairs of the entity shall be deemed to be associated. 39. Lending to such Persons / Entities, being commercial decisions, the lending LAB shall have the sole discretion to entertain or decline such requests for credit facilities after the expiry of the mandatory cooling period as mentioned at Paragraph 38 above.

E. Treatment of Accounts under Resolution

40. In case an entity classified as fraud has subsequently undergone a resolution either under Insolvency and Bankruptcy Code, 2016 (IBC) or under the resolution framework of RBI[3], resulting in a change in the management and control of the entity / business enterprise, the LAB shall examine whether the entity shall continue to remain classified as fraud or the classification as fraud could be removed after implementation of the Resolution Plan under Insolvency and Bankruptcy Code, 2016 (IBC) or aforesaid resolution framework. This would, however, be without prejudice to the continuance of criminal action against erstwhile promoter(s) / director(s) / person(s) who were in charge and responsible for the management of the affairs of the entity / business enterprise.
41. The penal measures as detailed in Paragraphs 38 and 39 shall not be applicable to entities / business enterprises after implementation of the Resolution Plan under Insolvency and Bankruptcy Code, 2016 (IBC) or aforesaid resolution framework.
42. The penal measures detailed in Paragraphs 38 and 39 shall continue to apply to the erstwhile promoter(s) / director(s) / persons who were in charge and responsible for the management of the affairs of the entity / business enterprise.

Chapter V - Reporting of Frauds to Law Enforcement Agencies

43. The LAB shall immediately report the incidents of fraud to LEAs, subject to applicable laws, as indicated below[4]: