RBI red flags 'lakhs' of accounts used for fraud and evergreening

Says nudging NBFCs to enhance disclosure quality

The Reserve Bank of India has raised an alarm over certain banks having ‘lakhs’ of accounts used for fraudulent transactions and evergreening of loans during an interaction with chief financial officers and auditors of banks and financial institutions on Tuesday.

“One area that has come into sharper focus in the last couple of years is the control and management of internal accounts. We found certain banks having lakhs of such accounts with apparently no valid reason,” RBI deputy governor Swaminathan J said in his address to the lenders.

“Some of these accounts are also used as a conduit for certain fraudulent transactions and evergreening of loan accounts. Internal accounts are high risk in nature on account of their potential for misuse,” he said while asking the CFOs to rationalise those accounts and bring them down to the essential minimum. He said banks should exercise greater control through periodical reconciliation and proper reporting to the audit committee of the board.

 

Last week RBI Governor Shaktikanta Das, during his interaction with bank chiefs, had raised the issue of mule accounts (illegal accounts) and asked them to curb digital frauds.
 

Swaminathan said the CFOs must protect the integrity of financial reporting by guarding against any misadventure or intelligent interpretation of regulations or accounting standards.

He urged the CFOs to have an eye for detail and maintain honest and transparent communication with the MD & CEO and the rest of the top management. “You should also keep alive the channel of escalation to the Chair of the Audit Committee of the Board (ACB) if a higher level of guidance is needed in any matter,” he said.

In his speech, deputy governor M Rajeshwar Rao shared his concern about regulated entities using the flexibility offered in the principle-based regulation framework in a way that is not free from bias.

Citing the impairment framework prescribed under Ind AS, Rao said while the framework is forward-looking, it has been observed that some NBFCs primarily rely on the 30 days-past-due (DPD) criteria for loan loss. “DPD being a lagging indicator is not always in sync with using the forward-looking approach of expected credit loss (ECL),” Rao said.

He said the regulator has been nudging non-banking finance companies to enhance their quality of disclosures, particularly in the context of the ECL framework. “Auditors also have the responsibility of ensuring that entities provide appropriate qualitative information related to governance and control mechanisms,” Rao said.

In the case of Asset Reconstruction Companies (ARCs), Rao said it was observed that no provision was created for management fees and expenses which remained unrecoverable for more than 180 days. “Such observations necessitated the Reserve Bank to issue guidelines from a prudential perspective so that such unrealised management fees are deducted from regulatory capital while calculating capital adequacy ratios,” Rao said.

Rao highlighted challenges emanating from emerging technologies which are changing the banking and financial sector landscape, particularly in the context of regulated entities' reliance on third-party service providers.

“Exponential growth in usage of digital channels to avail financial services has increased REs reliance on third-party service providers and has exposed them to operational risks including cyber and outsourcing risks,” he said, adding that auditors need to evaluate whether management is properly assessing the impact of emerging technologies on internal controls and financial reporting.

Commenting on his expectation from auditors, Swaminathan said upholding the highest standards of integrity, auditors must ensure there are no conflicts of interest that could compromise the objectivity and independence of their audits.

“Transparency and impartiality are of the utmost importance in fostering trust among stakeholders, including regulators, investors, and the public. Auditors must adhere strictly to professional ethics and guidelines to uphold their credibility and preserve the integrity of audit outcomes,” he said.

RBI’s expectations
 

From CFOs
 

> Lead the institution towards sustainable growth and resilience

>  Maintain open and honest communication with auditors and bank supervisors

>  Ensure the integrity of financial reporting, avoiding misadventure or creative interpretation

>  Invest in technology and data analytics
 

From auditors
 

> Apply rigorous audit processes to prevent divergence, under-provisioning, and non-compliance

> Holistically assess material risks posed by businesses

> Demand robust sustainability reporting from financial and non-financial entities

>  Evaluate if management is properly assessing the impact of emerging technologies on internal controls and financial reporting