RBI Directs Banks To Toughen Fraud Detection And Prevention Structure

RBI Directs Banks To Toughen Fraud Detection And Prevention Structure

The framework will be incorporated into the banks’ Fraud Risk Management Policy, approved by their respective Boards

The Reserve Bank of India (RBI) has mandated banks to implement a comprehensive framework for Early Warning Signals (EWS) and Red Flagging of Accounts (RFA) to bolster fraud detection and prevention.

The RBI’s master directions on Fraud Risk Management for commercial banks apprised, “A Red Flagged Account is one where suspicion of fraudulent activity is thrown up by the presence of one or more EWS indicators, alerting/triggering deeper investigation from potential fraud angle and initiating preventive measures by the banks.”

The banking regulator directed the Risk Management Committee of the Board (RMCB) to oversee the effectiveness of the EWS and RFA framework.

Henceforth, the senior management within banks will be responsible for implementing the robust framework. The EWS indicators for monitoring credit facilities, loan accounts, and other banking transactions will have to be approved by the RMCB. It will prescribe an appropriate Turnaround Time (TAT), preferably not exceeding 30 days, for examining EWS alerts and triggers.

The RBI added, “The RMCB shall review the status of red-flagged accounts, including the EWS alerts/triggers, and remedial actions initiated by the bank at periodic intervals as approved by the Board.”

The framework would be subject to suitable validation in accordance with the directions of the RMCB to ensure its integrity, robustness and consistency.

The EWS/RFA framework’s main components include integration with Core Banking Solutions (CBS) or other operational systems, timely initiation of remedial actions on alerts, periodic reviews of credit sanction and monitoring processes, and effective use of the Central Repository of Information on Large Credits (CRILC) database and the Central Fraud Registry (CFR).

The RBI statement further read, "The EWS system shall be comprehensive and designed to include the quantitative and qualitative indicators to make the framework robust and effective. The indicators could be based on the transactional data of accounts, financial performance of borrowers, market intelligence and conduct of the borrowers.”

Banks are expected to establish dedicated data analytics and Market Intelligence (MI) units. These will facilitate the collection and processing of relevant information to enable early detection and prevention of potentially fraudulent activities.

Generating EWS alerts will require an examination to determine if the account is to be red-flagged and investigated for potential fraud. Accounts meeting the CRILC reporting threshold, once red-flagged, must be reported to the RBI within seven days.

The RBI also emphasized the need for banks to continuously upgrade their EWS systems to efficiently monitor non-credit-related transactions and prevent fraudulent activities.

The banks must remain vigilant in monitoring transactions/unusual activities, specifically in the non-KYC compliant and money mule accounts, to contain unauthorized/fraudulent transactions and prevent misuse of banking channels.

The watchdog has given a six-month deadline to the banks to implement or upgrade their existing EWS systems in compliance with the new directions.

It furthered, “The design and specification of EWS system must be robust and resilient to ensure that integrity of the system is maintained, personal and financial data of customers are secure and transaction monitoring for prevention/detection of potential fraud is on a real-time basis.”