Rising NPAs and fraud cases in the Indian banking sector reflect deeper governance failures. Discuss the multi-agency regulatory response to NBFC failures in India with suitable examples.

Bad loans and frauds in India are rarely accidents of the credit cycle; they trace back to weak boards, promoter-driven lending and delayed detection. The failures of IL&FS (2018), DHFL (2019) and Reliance Home Finance Ltd (RHFL) expose both this governance rot and the layered regulatory response it has provoked.

Governance failures behind NPAs and frauds

• Related-party lending: RHFL's general-purpose corporate loans to promoter-linked entities were approved without due diligence; SEBI's September 2024 adjudication order penalised RHFL directors, including a ₹1 crore penalty on Jai Anmol Ambani [3].
• Weak boards and risk functions: independent directors and chief risk officers were bypassed, mirroring IL&FS's undisclosed exposures.
• Asset-liability mismatch: short-term market borrowing funding long-tenure housing assets triggered the 2018–20 NBFC liquidity squeeze.
• Delayed detection: banks often tag fraud years after default, which is why RBI's 2024 Directions mandate Early Warning Signals and red-flagging [1].

The multi-agency response

Default in an NBFC
  ├─ RBI  → Scale Based Regulation; HFCs moved under RBI
  ├─ Bank → show-cause notice, fraud tag, Central Fraud Registry
  ├─ SEBI → penalties, market debarment (listed entities)
  ├─ NCLT → time-bound resolution under IBC
  ├─ CBI  → criminal prosecution
  └─ HC   → writ review under Article 226
Caption: Converging regulatory action on a single NBFC failure

• RBI: the Scale Based Regulation framework (2021) tiers NBFCs into base, middle, upper and top layers, with tighter norms for systemically important entities [2].
• Fraud governance: before tagging an account fraudulent, banks must issue a show-cause notice, allow at least 21 days, grant a hearing and pass a reasoned order [1] — a safeguard the Supreme Court read in through natural justice in SBI v. Rajesh Agarwal (2023) [5].
• Resolution: RHFL was resolved through a creditor-approved plan under the IBC, 2016 [4], though directors' individual regulatory and criminal liability survives.

The Indian response has thus shifted from post-mortem punishment to prevention plus due process. Sustaining it needs faster fraud detection, genuinely independent NBFC boards and inter-regulator data sharing, so that credit discipline is enforced early without sacrificing the fairness that constitutional review demands.