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RBI tells banks to beef up anti-fraud mechanism

Sangita Shah & Freny Patel

The Reserve Bank of India has moved to crack down on bank fraud. In an eight-page circular sent to scheduled commercial banks except regional rural banks, it said it would take penal action against banks that failed to report cases of fraud to the central bank within seven days of getting to be in the know of it.

It has advised banks to initiate departmental action against officials involved in fraud simultaneously with criminal action.

RBI directed banks to strengthen their control mechanisms to detect and prevent fraud and to implement the recommendations of the high-level group set up by the Central Vigilance Commission on frauds in the banking sector.

The RBI instructed banks to adopt the best practices code, suggested by the N L Mitra Committee in September 2000 on the legal aspects of bank fraud. The apex bank has also called for a closed-door meeting next week with bank chairmen to discuss fraud prevention measures.

The Mitra Committee stated that there had to be a two-fold approach to tackling financial fraud. First, preventive measures to minimise malfeasance were required. Second, banks should adopt a prohibitive approach.

The RBI has suggested instead of banks setting up an institution for recording credit data, the existing Credit Information Bureau should implement the Mitra Committee recommendations of recording credit transactions above a certain value. This is with a view to improving the quality of information and to reducing the possibility of fraud.

Based on the suggestions of the Mitra Committee, the RBI has advised banks and financial institutions to develop the best practices code for its officers and staff. This is to provide a detailed rule-based procedural system in customer-related matters and in the application of discretionary powers.

The RBI observed banks failed to "adhere to checks and controls".

The central bank instructed commercial banks to implement the Mitra Committee recommendations on the establishment of an in-house legal compliance certification process. This will ensure the accountability of each member in the management cadre as regards exercising discretion in transactions above a value.

Banks have to undertake a legal compliance and due diligence audit annually. This report is to be submitted to the chairman, the managing director or the chief executive of the bank, and the RBI. The central bank has waived the requirement that the report has to be submitted to shareholders.

The RBI has accepted the Mitra Committee recommendations on incentive systems for promotion of employees in banks.

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