The RBI (Local Area Banks – Fraud Risk Management) Directions, 2026 were issued on July 31, 2026 by the Department of Supervision, RBI under Sections 21 and 35-A of the Banking Regulation Act, 1949. These Directions provide a comprehensive framework for prevention, early detection, investigation, classification, and reporting of frauds by Local Area Banks (LABs), while ensuring compliance with principles of natural justice before fraud classification.
The Directions require LABs to implement a Board-approved Fraud Risk Management Policy, establish a Special Committee of the Board for Monitoring and Follow-up of Frauds (SCBMF), and strengthen Early Warning Signal (EWS) and Red Flagging mechanisms using banking systems, CRILC/CFR data, and
analytics. Red-flagged accounts with exposure of ₹3 crore and above must be reported to RBI’s CRILC platform within 7 days. The framework prescribes mandatory investigation, staff accountability, timely fraud classification, and reporting to RBI and Law Enforcement Agencies (LEAs). Banks
must issue a Show Cause Notice, provide at least 21 days for response, and pass a reasoned order before classifying any person/entity as fraud. Fraud cases must generally be concluded within 180 days, with FMR reporting to RBI within 14 days of classification. The Directions also cover cheque fraud reporting, legal audit requirements for large loans, auditor responsibilities, and reporting of theft, burglary,
dacoity, and robbery, while superseding earlier fraud risk management directions for LABs.
