MASTER DIRECTION

MONITORING OF FRAUDS IN NBFC (RESERVE BANK)

DIRECTIONS, 2016
 WHAT IS A
FRAUD?

2 Special features of Audit of Non-banking Financial Companies

 CLASSIFICATION OF FRAUDS
a) Misappropriation and criminal breach of trust
b) Fraudulent encashment through forged instruments,
manipulation of books of account or through fictitious
accounts and conversion of property
c) Unauthorized credit facilities extended for reward or for
illegal gratification
d) Negligence and cash shortages
e) Cheating and forgery
f) Irregularities in foreign exchange transactions
g) Any other type of fraud not coming under the specific heads
above.
3
Special features of Audit of Non-banking Financial Companies
REPORTING OF FRAUDS TO RBI

Frauds involving amount less than Rs. 1 Lakh

Frauds involving amount Rs. 1 lakh & above

Frauds committed by unscrupulous borrowers

Frauds involving Rs. 1 Crore & Above

Cases of attempted fraud

4 Special features of Audit of Non-banking Financial Companies

 • If fraud amount < 1 crore

• Reports in FMR 1

• To Regional Office of the Department of Non-

Banking Supervision of the Bank under whose
jurisdiction the Registered Office of the applicable
NBFC falls

• Within 21 days

5 Special features of Audit of Non-banking Financial Companies

 Fraud reports to be submitted if:

Frauds perpetrated through either of

cases (a) to (g).
If central investing agencies initiated
criminal proceedings or bank directed
they shall be reported as frauds.
FRAUDS INVOLVING If committed in its subsidiaries and
RS. 1 LAKH & ABOVE
affiliates/ joint ventures.

NBCFs to furnish case-wise quarterly

reports in FMR – 3, only to Regional
Office of the bank, Department of Non-
Banking Supervision within 15 days of
the end of quarter to which it relates.

6 Special features of Audit of Non-banking Financial Companies

Fraudulent discount of
instruments.

Fraudulent removal of pledged

stocks/ disposing of hypothetical
stocks without the NBFCs
knowledge/ inflating the value of FRAUDS COMMITTED BY
stocks in the stock statement and UNSCRUPULOUS
drawing excess finance; BORROWERS

Diversion of funds outside the

borrowing units, criminal neglect
etc.

7 Special features of Audit of Non-banking Financial Companies

 Fraud reports to be submitted:

Within 3 weeks,

 To Central Fraud Monitoring Cell,

Department of Banking Supervision,
RBI and to the Regional Office of the
FRAUDS INVOLVING Department of Non-Banking
RS. 1 CRORE & ABOVE
Supervision of the Bank.

 D. O. Letter addressed to the Chief

General Manager-in-charge of the
Department of Banking Supervision,
RBI, Frauds Monitoring Cell- Central
Office Bengalaru within a week.

8 Special features of Audit of Non-banking Financial Companies

Individual cases involving Rs 25
Lakh or more to be placed before
Audit Committee of applicable
NBFC’s Board.

Report to contain:
• Modus operandi of attempted CASES OF ATTEMPTED
fraud. FRAUD
• How the attempt failed.
• Measures taken to strengthen
existing systems.
• New systems & controls put in
the area where fraud was
attempted.

9 Special features of Audit of Non-banking Financial Companies

 AUDIT CHECK-LIST

Asset Finance Company

Investment
Loan Company
Companies Hire Purchase Finance Company Equipment Leasing Finance Company

10 Special features of Audit of Non-banking Financial Companies

POINTS RELATED TO INVESTMENT

Physical
Authorization
Verification

Compliance of
Valuation Classification
AS 13

External
Income
Confirmation
Recognition
s
11 Special features of Audit of Non-banking Financial Companies
 POINTS RELATED TO CREDIT
Appraisal and
Sanctioning follow up
system

Security Classification

Compliance of
Loan against prudential
own shares norms
12 Special features of Audit of Non-banking Financial Companies
 https://m.rbi.org.in/Scripts/BS_ViewMasCirculardetails.as
px?id=9808#31
 http://www.iibf.org.in/documents/guide-lines-on-fraud.pdf

13 Special features of Audit of Non-banking

Financial Companies