Lenders must hear loan defaulters before declaring accounts fraud: RBI

India's central bank on Monday asked lenders to give defaulting borrowers enough time to respond before they are classified as "fraud accounts," following a judgment by the country's top court.

Banks will now have to issue a show-cause notice to fraudulent entities, with complete details of the fraud, the Reserve Bank of India said in a release.

A "reasonable" time of "not less than 21 days" should be provided to such persons or entities to respond to the show-cause notice, it added.

The amendment to current rules incorporates a Supreme Court judgment in March last year that banks cannot unilaterally declare an account as fraud without providing the defaulter the right to be heard.

Principles of natural justice demand that borrowers must be served a notice giving an opportunity to explain the conclusion of the forensic audit report and be allowed to represent themselves in front of the lenders before their account is classified as fraud under the master directions, the court had said.

Lenders' fraud risk Management policy shall be reviewed by the board at least once in three years, as per the central bank.

Banks are also required to constitute a special committee of the board to monitor and follow-up fraudulent cases, the RBI said.

Under the revised directions, banks are also required to have a framework for Early Warning Signals and the so-called Red Flagging of Accounts - where suspicion of fraudulent activity is thrown up by the presence of one or more indicators - under the overall risk management policy.

Banks are also required to strengthen their EWS system by identifying suitable indicators of fraud, the RBI said.