What changed
RBI replaced the 2016 Master Direction on Monitoring of Frauds in NBFCs with a comprehensive 2024 framework. The new directions expand applicability to NBFCs in Upper, Middle, and Base Layers with asset size of ₹500 crore and above. They introduce detailed governance structures, early warning signal frameworks, and stricter reporting timelines for fraud incidents to law enforcement agencies and RBI.
What it means for you
NBFCs must now implement board-approved fraud risk management policies with clear roles for senior management and committees. The emphasis on early detection and timely reporting will increase compliance costs but reduce fraud losses. Lenders need to strengthen internal controls, staff accountability, and legal audit of title documents for large-value loans to avoid penalties.
What you must do
- Review and update your board-approved fraud risk management policy to align with the 2024 directions.
- Establish a governance structure with clear roles for board committees and senior management for fraud detection and reporting.
- Implement early warning signal mechanisms to detect potential frauds proactively.
- Ensure timely reporting of fraud incidents to law enforcement agencies and RBI as per the new modalities.
- Conduct legal audits of title documents for large-value loan accounts as specified.
Who it affects
All NBFCs in Upper Layer, All NBFCs in Middle Layer, All NBFCs in Base Layer with asset size ₹500 crore and above, Housing Finance Companies in these layers, Senior management and board members of applicable NBFCs, Auditors and third-party service providers of NBFCs
Which NBFCs are covered under the new fraud risk management directions?
The directions apply to all NBFCs (including HFCs) classified in the Upper Layer, Middle Layer, and Base Layer with asset size of ₹500 crore and above. These are collectively called 'Applicable NBFCs'.
What are the key governance requirements under the new directions?
Applicable NBFCs must have a board-approved fraud risk management policy that defines roles of the board, board committees, and senior management. The policy must include measures for natural justice, such as issuing detailed show cause notices to persons and entities involved.
How does the new direction change fraud reporting?
The directions mandate timely reporting of fraud incidents to law enforcement agencies and RBI, with specific modalities for reporting. They also require closure of fraud cases reported to RBI, and introduce clear definitions for 'Date of Occurrence', 'Date of Detection', and 'Date of Classification' of fraud.