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Welcome to the 120th edition of The Pattern, a weekly newsletter where we delve into the latest in the world of finance, technology, and economy. Let’s get started.   

RBI releases master directions on treatment of willful defaulters  

The Reserve Bank of India (RBI) released its master directions on the treatment of willful defaulters. It defined willful default to have occurred when a loan is defaulted on despite the borrower having the capacity to honour their obligation. The apex bank laid down the mechanism for identifying and classifying willful defaulters which involves examination by an identification committee to review the borrower's track record to ascertain if the default was deliberate or not. 

In case of willful default, the borrower will be issued a show-cause notice giving them 21 days to respond and present their case. The decision will then fall to a review committee to characterize the borrower as a willful defaulter or otherwise after considering any written or personal representations.  

The process expressly prohibits lawyers from being involved in these proceedings. The RBI has emphasized that the mechanism for identification of willful defaulters should be internal.  

The identification of willful defaulters is already an integral part of risk assessment in lending. Lenders focus on gauging the intent of users during underwriting using intelligence derived from alternative data, identifying behavioural patterns, and conducting thorough risk assessments based on credit history, among other things. 

As more and more regulations are steadily rolled out, fintechs are responding with services that help regulated entities adhere to them. The rollout of these guidelines is likewise expected to be followed by a spurt in regtech solutions focused on pre-empting, identifying, and correcting willful default. 

Fraud prevention gets a facelift  

The RBI issued three revised master directions on fraud risk management applicable to several registered entities like banks, NBFCs, housing finance companies, and cooperative banks. The scope of the master directions has been broadened to also include NBFCs worth Rs 500 crore and above, as well as regional rural banks.  

The new master directions also lay down a framework for early warning systems for fraud detection. It requires REs to set up a market intelligence unit and data analytics to identify unusual activities in the bank account. It also asks banks to upgrade their existing EWS systems within six months. Here are some other key takeaways from the master directions: 

• The role of internal audit in fraud risk management of banks and NBFCs has been defined. 

• NBFCs must now follow the RBI's new requirements for legal audits of title documents in the large vale loan account category. 

• Registered entities must finish investigating each loan from a fraud angle and report to the RBI if the account is ascertained to be fraudulent. 

• REs must report instances of fraud to law enforcement agencies within a prescribed timeline. 

• The new guidelines have prescribed additional categories of fraud for classification and reporting. 

• REs must consider the following for closure of frauds: 

1. The conditions of write off, recovery, insurance claims, and review of systems and procedures have been removed. 

2. Write off, insurance claims, recovery, and system review conditions have been removed. 

3. The limit on closure of fraud for reporting has been revised from Rs 25 lakhs to Rs 1 crore. 

At FinBox, we have developed a comprehensive risk intelligence suite with a special focus on fraud prevention and detection. You can learn more about it here . 

That’s all from me for now – as always, leaving you with a reading list.  

APP fraud in the app is costing us millions

UPI clocks Rs 20 lakh crore for the third straight month in July  

Flipkart Pay brings all its payments, fintech services under one unified interface  

India's digital economy to make up 1/5th of GDP by 2026: RBI   

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates.   Cheers,   Mayank  

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.