'Give sufficient time to those who do not repay the loan before declaring them as defaulters', important guidelines issued for banks

The Reserve Bank of India has asked banks and lending institutions to give enough time before designating accounts of persons who do not repay loans as fraudulent. First, listen to how these account holders respond. Customers will also be required to receive show-cause warnings with full details about the fraudulent activity.

In a circular issued on Monday, RBI said, defaulting individuals or institutions should be given at least 21 days to respond to the show cause notice. The amendment of the existing rules of the central bank includes the decision of the Supreme Court in March last year. The Supreme Court had said that banks cannot unilaterally declare an account as fraud without giving the defaulter the right to be heard. The court had said, the principles of natural justice demand that borrowers should be given a notice giving them an opportunity to explain the conclusion of the forensic audit report. They should be allowed to represent themselves before banks or financial institutions before their account is classified as fraud.

The fraud risk management policy of lenders will be reviewed by the board at least once in three years. Banks will also have to constitute a special committee of the board to monitor and take action on fraud cases. Banks also need to strengthen their EWS system by identifying appropriate indicators of fraud.