In response to a ruling by the nation’s highest court, the Reserve Bank of India requested on Monday that lenders allow delinquent borrowers sufficient time to address their situation before designating them as “fraud accounts.
According to a press statement from the central bank, banks will now need to provide full details of the fraud in a show-cause letter that they send to fraudulent companies.
It further stated that such individuals or entities should be given a “reasonable” amount of time—”not less than 21 days”—to reply to the show-cause notice.
The Supreme Court’s ruling from March of last year, which states that banks cannot arbitrarily label an account as fraudulent without giving the defaulter a chance to be heard, is incorporated into the revised regulations.
The court held that before an account is labeled as fraudulent under the master directions, borrowers must be served with a notice outlining the forensic audit report’s conclusion and providing them with an opportunity to defend themselves in front of the lenders. This is in accordance with the principles of natural justice.
The RBI states that the board must examine the lenders’ fraud risk management policy at least once every three years.
According to the RBI, banks must also set up a special board committee to keep an eye on and investigate allegations of fraud.
The amended instructions also mandate that banks establish an overall risk management policy that includes a framework for Early Warning Signals and the so-called Red Flagging of Accounts, which occurs when the appearance of one or more signs raises suspicions of fraudulent conduct.
According to the RBI, banks must also improve their EWS system by identifying appropriate fraud signs.
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