2/22/2020 RBI’s Master Direction 2016 on Monitoring of Frauds in NBFC’s

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Monitoring of Frauds in NBFC’s; RBI’s Master Direction 2016

Shailza Sharma | Updated: Sep 10, 2019 | Category: NBFC

R
eserve Bank of India by exercising its power conferred under section 45k, 45L and 45M of the RBI Act,
1934 issued a master direction to monitor the fraud ensue in NBFCs. The direction shall be called
Monitoring of Frauds in NBFCs (Reserve Bank Direction, 2016).

Monitoring of frauds in NBFC; An overview

The nancial sector in India has witnessed accelerated growth in the past few years. At the same time, the
incidence of deception has also been on the rise.  In today’s economic environment, where the opportunity for
growth is increasing day by day, the ratio of committing fraud has also been improved. For instance, cybercrime,
money laundering, accounting frauds are generally known crimes that take place in the nance sector. Our

regulatory authorities are continuously evolving, strict regulatory compliance and the regulators can be seen
becoming more aggressive. 2
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2/22/2020 RBI’s Master Direction 2016 on Monitoring of Frauds in NBFC’s

According to RBI, “the primary responsibility of preventing fraud lies with banks themselves.” Regulations governing
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nancial A Call
institutions, Back like Scheduled Commercial Banks (SCB), Insurance Companies, Non-Banking
institutions
Financial Companies (NBFC), Regional Rural Banks (RRBs), are set to have a tremendous impact. Acknowledging,
the risk factors applicable in NBFC, RBI has issued a master circular on reporting of these frauds. Master circular
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describes the responsibility of monitoring and preventing scams, subjecting NBFC to uncertain nancial risks. The
lea ets urge the NBFCs to place a reporting system to record the fraud without any delay.
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Guidelines for Monitoring Frauds in NBFC

+91direction
The Mobile Numberin the master circular shall apply to all deposit-taking Non-Banking Financial Companies and
provided
systemically important non –banking nancial companies’ (NBFC-ND-SI).
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 There shall be a reporting system in all the NBFCs concerning record the fraud without any delay. NBFCs
are
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human?: 9 +to
2 = x theAnswer
accountability of their staff in case of delay in reporting of fraud.

 The NBFC shall strictly adhere to the timeframe allotted in the master direction for reporting the fraud. If
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in case NBFC fails to report the fraud, they shall be liable for punishment as prescribed in chapter V of
Reserve Bank of India act, 1934[1].

 As per the direction, NBFC shall appoint an o cial either of the general manager rank or any other
o cial of equivalent rank. The responsibility of the o cial is to submit all the returns to the bank and
reporting as referred in this direction.

 There is no need for submitting any ‘NIL’ report to the fraud monitoring cell/Regional o ces if no scams
are detected.

 The amount of fraud shall be disclosed by the NBFCs in the balance sheet of the year.

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Classi cation of Frauds

 Frauds have been classi ed as under, mainly based on the provisions of the Indian Penal Code;

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                                       Classi cation of frauds

  Cases of ‘negligence and cash shortages’ and irregularities in foreign exchange transactions are to be reported as
fraud if the intention of cheat/defraud is suspected/proved.

 NBFCs, having o ces/ branches outside India shall report all frauds to the banks as per the procedure
described under chapter IV of the RBI act.

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Reporting of Frauds 2
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 Reporting of frauds involving INR 1 lakh and above let's talk.

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2/22/2020 RBI’s Master Direction 2016 on Monitoring of Frauds in NBFC’s

 A fraud reports should be submitted in all case where fraud amount is 1 lakh or above that committed
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through misrepresentation, breach of trust, manipulation of books, fraudulent encashment of FDRs,
unauthorized handling of security charged to the applicable NBFC, misfeasance, embezzlement,  
Yourmisappropriation
Name of funds, conversion of property, cheating, shortage, irregularities, etc…

  Fraud reports shall be submitted in cases where central investigating agencies have started the criminal
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investigation or where the bank has directed that they are reported as fraud.

+91 NBFCsMobile Number

are required to report the frauds committed in their joint ventures or subsidies.

Select
Where
State the fraud amount is INR 1 crore or above, they are bound to send the reports in the prescribed
format within the three weeks from date of fraud is committed.  The address to where reports need to be
marked-
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Central Fraud Monitoring cell,

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Department of Banking
Supervision,
Reserve Bank of India, 10/3/8
Nrupathunga Road,
P.B. No. 5467, Bengaluru –560001

The same report of fraud shall be sent to the Regional O ce of the Department of Non-Banking Supervision of the
Bank under whose jurisdiction the NBFC fall.

 In the case where the fraud amount is less than INR 1 crore, a report in the prescribed manner (FMR-1)
shall be sent to Regional O ce of the Department of Non-Banking Supervision of the Banks, within 21
days of detection of fraud.

 NBFCs are requested to submit case- wise quarterly progress reports on Frauds, involving INR 1 lakh
 and above in the prescribed format given in FMR -3 only to the regional o ce of bank, department of
Non- banking Supervision under whose jurisdiction the registered o ce of NBFC falls within 15 days of
the end of the quarters to which it relates.

 The case of fraud shall be closed if only the actions are completed and regional o ces have provided
the approval to close the case. The actions which are required to be completed are as such –

the fraud cases pending with CBI/Police/Courts are nally disposed

the accountability of staff accountability has been achieved

the amount of fraud has been recovered or written off

an insurance claim has been settled

The appropriate authority i.e Board, Audit Committee of the board, has certi ed the NBFCs review
system and procedures identi ed as the causative factors.

 NBFCs should proceed along with CBI for the nal disposal of pending fraud cases.

NBFCs are advised to close the fraud cases where the fraud amount is up to 25 lakh, where,
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 the investigation is on, or challan/charge sheet is not lled in the court for more than three years from
the date of ling of FIR

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2/22/2020 RBI’s Master Direction 2016 on Monitoring of Frauds in NBFC’s

 the trial court has not started any proceedings after ling the charge sheet.
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Fraud Committed by Unscrupulous Borrower
YourFrauds
Name committed by unscrupulous borrower including companies, partnership rm/ proprietary concern
or by their director/partners are

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 Fraudulent discount  Instruments

+91 Fraudulent
Mobileremoval
Number of pledge stocks/disposing of hypothecated stocks without NBFCs knowledge.

 Diversion of funds outside the borrowing units, lack of interest or criminal neglect on the part of
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borrowers, their partner, etc…

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  In case of fraud in areas accounts, NBFCs have to furnish their additional information as prescribed
under Part of FMR-1.
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Guidelines for reporting to Police

In case of reporting the fraud to police such as unauthorized credit facilities extended by NBFC for illegal
grati cation, negligence, and cash shortage, cheating, and forgery. The fraud shall be reported to state police
authorities. In the following scenarios, the fraud cases should be referred to state police.

 Cases where fraud amount is INR 1 lakh and above, committed by outsider on their own or by any of the
NBFC staff/o cer.

 Cases of frauds committed by employees of NBFCs, where the amount is exceeding INR 10,000. 

Conclusion

NBFC sector has evolved in terms of its size, functions, technological development. With such developments, risk
factor related to frauds also increases rapidly, as being a nancial entity. In consideration of these frauds related to
misfeasance, embezzlement,   misappropriation of funds, conversion of property, cheating, shortage, irregularities,
etc… Reserve bank of India has issued a master circular for reporting frauds. Similar to the banking sector the
master circular of RBI for reporting the frauds, stating a road map to x the liability of averting the frauds on NBFCs,
subjecting them to uncertain nancial risks.

Also Read: New Trend in NBFC Business Model, Challenges and a Scalable Business model .

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Shailza Sharma

Miss Shailza Sharma, BA.LLB graduate from Himachal Pradesh University. She holds an experience of
2.5 years in various Legal companies and organizations.

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 Sep 04, 2017  Jun 26, 2017  Nov 27, 2017

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