The Reserve Bank of India (RBI) on July 31, 2026, issued the Reserve Bank of India (Local Area Banks – Fraud Risk Management) Directions, 2026, in exercise of powers under Sections 21 and 35-A of the Banking Regulation Act, 1949. Applicable to all Local Area Banks (LABs) and effective immediately, the Directions establish a framework for prevention, early detection, investigation, and timely reporting of frauds to Law Enforcement Agencies and RBI. Key definitions include the Central Fraud Registry (CFR), CRILC, "Red Flagged Account," and the distinct dates of classification, detection, and occurrence used for Fraud Monitoring Return (FMR) reporting.
Chapter II requires each LAB to adopt a Board-approved Fraud Risk Management Policy covering prevention, investigation, staff accountability, recovery, and reporting, alongside an Early Warning Signal (EWS) and Red Flagging of Accounts (RFA) framework, reviewed at least once every three years. The Policy must embed principles of natural justice, including a detailed Show Cause Notice with at least 21 days for response before any person or entity is classified as fraudulent, and a reasoned order communicating the final decision, in line with Supreme Court jurisprudence in State Bank of India & Ors Vs. Rajesh Agarwal & Ors. Banks must constitute a Special Committee of the Board for Monitoring and Follow-up of Frauds (SCBMF), comprising at least three Board members including a Whole Time Director and two independent/non-executive directors, headed by an independent director, to oversee fraud trends, root cause analysis, and control improvements; a senior official of at least General Manager rank must be designated for fraud monitoring and reporting.
Chapter III mandates that the Risk Management Committee of the Board (RMCB) oversee the EWS/RFA framework, approve EWS indicators, and prescribe a turnaround time (preferably within 30 days) for examining alerts, with the system integrated into Core Banking Solutions and supported by a dedicated Data Analytics and Market Intelligence Unit. Accounts with aggregate exposure of ₹3 crore or above, once red-flagged, must be reported on RBI's CRILC platform within seven days. Subsequent chapters (not excerpted in full) address general instructions on red-flagged accounts, third-party confirmations, staff accountability and penal measures, reporting frauds to law enforcement and RBI (including the Central Fraud Registry), cheque-related fraud reporting, legal audits of title documents, treatment of fraud accounts sold to other lenders, auditor roles, reporting of theft/burglary/dacoity/robbery, and repeal of prior applicable instructions.
[Notification No. RBI/DoS/2026-27/446, DoS.CO.FMG.40/23.04.001/2026-27]
