RBI Releases New Directions to Tackle Fraud in NBFCs and Housing Finance Companies

The Reserve Bank of India (RBI) has issued new master directions aimed at curbing fraudulent activities within Non-Banking Financial Companies (NBFCs) and Housing Finance Companies. These measures are designed to prevent, detect early, and report incidents of fraud promptly to Law Enforcement Agencies, RBI, and the National Housing Bank (NHB).

Key Measures Include:

1. Board-Approved Fraud Risk Management Policy:

·??Applicable NBFCs must have a Board-approved policy on fraud risk management.

·??This policy must outline the roles and responsibilities of the Board, Board Committees, and Senior Management.

2. Issuance of Show Cause Notices:

·??Detailed Show Cause Notices must be issued to individuals or entities involved in fraudulent activities.

·??A minimum of 21 days must be provided for these individuals or entities to respond to the notices.

3. Formation of Special Committee (SCBMF):

·??A 'Special Committee of the Board for Monitoring and Follow-up of Cases of Frauds' (SCBMF) must be constituted.

·??The SCBMF should include at least three Board members: the Chief Executive Officer and two Independent Directors.

·??An Independent Director will head the Committee.

·??The SCBMF will oversee the effectiveness of the fraud risk management system, review and monitor fraud cases, conduct root cause analyses, and recommend measures to strengthen internal controls and risk management frameworks.

4. Early Warning Signals (EWS) Framework:

·??NBFCs in the Upper and Middle Layers must establish an EWS framework under the overall fraud risk management policy approved by the Board.

·??A Board-level Committee will oversee the effectiveness of the EWS framework.

·??Senior Management is responsible for implementing a robust EWS framework.

·??In cases of suspected or indicated fraud, NBFCs must use either external or internal audits, as per their Board-approved policy, for further investigation.

These directions emphasize the importance of a structured and rigorous approach to fraud risk management within NBFCs and Housing Finance Companies, aiming to protect the financial system and maintain trust.

Stay informed about the latest measures being implemented to combat financial fraud!