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Prj v1

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MEMORANDUM OF MITIGATING FRAUDS AND NEGLIGENCE


AND PROCEDURE FOR MONITORING THE SAME IN A NON BANKING FINANCE COMPANIES

Applicable Circular: RBI circular DNBS (PD) CC. No. 106/03.10.042/2005-06 dated 04.09.2007

Person responsible for monitoring:

Principal Officer

Description:

NBFCs shall appoint a Principal Officer to report frauds the company commits/ has committed to the
RBI and is responsible for submitting all the returns with RBI on required circumstances.

What Internal Procedures must be set to Monitor Frauds?

NBFCs are responsible for monitoring its transaction to avoid frauds on it and detect same in case if it
has happened.

NBFCs should, therefore, ensure that a REPORTING SYSTEM is in place so that frauds are identified
reported without any delay. NBFCs should hold staff accountable for reporting fraud cases to the RBI.

Frauds are classified into the following types:

• Misappropriation and criminal breach of trust.


• Fraudulent encashment through forged instruments, manipulation of books of account or
through fictitious accounts and conversion of property.
• Unauthorized credit facilities extended for reward or for illegal gratification.
• Negligence and cash shortages.
• Cheating and forgery.
• Irregularities in foreign exchange transactions.
• Any other type of fraud not coming under the specific heads as above.

Frauds may also be committed by unscrupulous borrowers, who cheat the NBFC to gain discounted
funds, shares, and/ or other unfair advantages.

Frauds of 1 Lakh and Above:

Fraud reports should be submitted in all cases of fraud of Rs. 1 lakh and above.

The fraud reports in the prescribed format should be sent to the Central Office (CO) of the Reserve
Bank of India, Department of Banking Supervision, Frauds Monitoring Cell where the amount involved
in fraud is Rs. 25 lakhs and above and to Regional Office of the Reserve Bank of India, Department of
Non-Banking Supervision under whose jurisdiction the Registered Office of the NBFC falls where the
fraud amount involved in fraud is less than Rs. 25 lakhs, in the format given in FMR-1, within three
weeks from the date of detection. A copy of FMR-1 where the amount involved in the Fraud is Rs. 25
lakhs and above should also be submitted to the Regional Office of the Department of Non-Banking
Supervision of Reserve Bank of India under whose jurisdiction the Registered Office of the NBFC
falls.

Frauds involving Rs. 25 lakh and above:

In respect of frauds involving Rs. 25 lakh and above, NBFCs may report the fraud by means of a D.O.
letter addressed to the Chief General Manager-in-charge of the Department of Banking Supervision,
Reserve Bank of India, Frauds Monitoring Cell, Central Office and a copy endorsed to the Chief
General Manager-in-charge of the Department of Non-Banking Supervision, Reserve Bank of India,
Central Office within a week of such frauds coming to the notice of the NBFC. The letter may contain

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Prj v1
For discussion purpose Only
Advise of expert to sought before using this memo

brief particulars of the fraud such as amount involved, nature of fraud, modus operandi in brief, name
of the branch/office, names of parties involved (if they are proprietorship/partnership concerns or
private limited companies, the names of proprietors, partners and directors), names of officials
involved, and whether the complaint has been lodged with the Police. A copy of the D.O. letter should
also be endorsed to the Regional Office of Reserve Bank, Department of Non-Banking Supervision
under whose jurisdiction the Registered Office of the NBFC is functioning.

Cases of attempted fraud:

Cases of attempted fraud, where the likely loss would have been Rs. 25 lakh or more, had the fraud
taken place, should be reported to the Central Office of the Reserve Bank, Department of Banking
Supervision, Frauds Monitoring Cell and a copy endorsed to Central Office of the Reserve Bank,
Department of Non-Banking Supervision indicating the modus operandi and how the fraud was
detected. Such cases should not be included in the other returns to be submitted to the Reserve
Bank.

Quarterly Returns:

Form FMR-2 must be used when filing quarterly returns for a reported fraud that is still outstanding,
irrespective of the amount. FMR-3, which is a quarterly progress report, must be filed for outstanding
frauds of 1 lakh or more.

Report to Board:

Frauds of Rs. 1 lakh or more should be reported to the Board within the month following the quarter in
which it took place. For Frauds 25 lakh and above, the Audit Committee of Board or another Board
committee must periodically oversee management and reporting of the fraud.

Annual Review:

An annual review of all frauds shall be held to make sure all frauds were detected and reported.

Report to Police:

At the least, frauds committed by non-employees should be reported to police if amount is at greater
than or equal to Rs. 1 lakh, and Rs. 10,000 for employees.

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Prj v1
For discussion purpose Only
Advise of expert to sought before using this memo

THE FOLLOWING PROCESS IS SUGGESTED FOR IMPLEMENTATION


AS REPORTING SYSTEM FOR EFFECTIVE MONITORING OF TRANSACTION
FROM LOAN SOURCING TILL FINAL REPAYMENT OF THE LOAN AMOUNT

Loan Sourcing:

⇒ Step – I [Responsibility – Sales Team]

Ensure that all data and documents submitted by customers are true and correct

Ensure that all required documents are collected (based on document collection checklist).

For the same the following steps should be adhered:

 All documents to be self attested by the Customers


 All documents to be attested by the LM stating that the original of the same is seen and
verified
 Type of the Collateral to be notified to the risk team

[Reason: As part of KYC policy all financial institutions follow the same and this would bring
accountability to each and every document presented to the Company for various analyses performed
during the loan sourcing].

⇒ Step – II [Responsibility – Risk Team]

 Verification of the data by visit to the customer’s project site


 Tele verification of Data given by the customers
 Legal and Technical check of project and collateral [to be done by legal and technical
manager]
 Residence verification
 Profile Scoring – Based on the following factors:

⇒ Socio economic quality of the location of the school and its feeding area
⇒ Profession and other engagement of the Applicant and Co Applicants
⇒ Quality of the School construction and ownership over it by the Applicant
⇒ Quality of the residence and ownership over it by the Applicant
⇒ Income Proof
⇒ Income Projection through the project
⇒ Cibil Score

 Collateral process mentioned in Credit Manual to be adhered any deviation to the above to be
notified to the Credit Committee

Risk Analysis to include a counter check for veracity of the data and documents given by the
Customer, a detailed check may seem to be impractical. However for the credit committee to act upon
the operational risk team which monitor possible fraud is very much essential.

The Risk monitoring team to verify the data, documents and veracity of the declarations made by the
Customers regarding the asset owned by the Customer during the residence verification either
through enquiries with the neighbours or in a required case by making enquiries with the government
offices.

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Prj v1
For discussion purpose Only
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⇒ Step – III [Responsibility – Operations Team]

Standard Check list to be adhered for documents and data to be handed over and the same to be
recorded in the file.

Operation team member has to attest the receipt of the same, absence of documentation and data
has to be recorded for notice of the credit committee before issue of Sanction Letter.

⇒ Step – IV [Responsibility Risk Team]

Any deviation to any of the process mentioned in the Credit Manual to be put to the notice of the
credit committee with reason explaining such deviation. Credit committee to note the same and
approve or reject during its approval or sanction process.

⇒ Step VI [Responsibility – Operations Team]

Co ordinate for mortgage process, the mortgage documents to be properly stored in safe locker

⇒ Step – VI [Responsibility – Operations Team]

Before preparing the Disbursement Memo Operations team has to verify the data and the document
and should mandatorily ensure that the entire steps are followed and the same has to be recorded.

⇒ Step – VII [Responsibility – Operations Team]

Loan Agreement has to be completed by the Operations Team one day before the disbursement and
the same should be given in a kit to the Customer with necessary flyers from COMPANY regarding
other services and offers.

⇒ Step – IX [Responsibility – Operations Team Leader]

Operations team to ensure that security cheques are obtained from Co Applicants and Guarantors.

⇒ Step – X [Responsibility – Operations Team]

A copy of the Schedule to the Loan Agreement is to be kept in each the Box file, original together with
the mortgage documents to be kept in the sealed cover with the letter from the customer stating about
the list of documents submitted in original.

⇒ Step – XI [Responsibility – Collections Team]

Ongoing project monitoring and recovery of money, this is required to done in line with guidance from
Risk team, Lawyers and with strict regard to collections code if any framed by the Company.

Note: From a control perspective at any point of the transaction employees shall avoid any mode of
cash transactions.

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