The Reserve Bank of India (RBI) on Monday released a circular to curb the fraudulent activities in the Non-Banking Financial Companies, including Housing Finance Companies.
It aimed at the prevention, early detection and timely reporting of incidents of fraud to Law Enforcement Agencies, RBI and the National Housing Bank (NHB).
The master directions said that there shall be a Board approved Policy on fraud risk management delineating roles and responsibilities of Board/Board Committees and Senior Management of the Applicable NBFC.
The measures for ensuring compliance with principles of natural justice in a time-bound manner include issuance of a detailed Show Cause Notice to the Persons/Entities in the question of fraudulent activity.
A reasonable time of not less than 21 days shall be provided to the Persons/Entities on whom the Show Cause Notice was served.
Formation of special committee:
The RBI master direction further said that the 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).
It shall have a minimum of three members of the Board, consisting of the Chief Executive Officer and two Independent Directors.
The Committee shall be headed by one of the Independent Directors.
SCBMF shall oversee the effectiveness of the fraud risk management in the Applicable NBFC, and 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 coverage and periodicity of such reviews shall be decided by the Board of the Applicable NBFC.
The Senior Management shall be responsible for implementation of the fraud risk management policy approved by the Board of the Applicable NBFC, RBI said.
Early Warning Signals Framework
RBI has said that the NBFCs in the Upper Layer and Middle Layer shall have a framework for Early Warning Signals (EWS) under the overall Fraud Risk Management Policy approved by the Board.
A Board Level Committee shall oversee the effectiveness of the framework for EWS, and the Senior Management shall be responsible for implementation of a robust Framework for EWS.
As per the provisions laid down by the RBI, in case where there is a suspicion or indication of wrongdoing or fraudulent activity, NBFCs shall use an external audit or an internal audit as per their Board approved Policy for further investigation in such accounts.
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