RBI Red Flags ‘Lakhs’ of Accounts Used for Fraud and Evergreening
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Lakhs of accounts used for fraud
RBI Red Flags ‘Lakhs’ of Accounts Used for Fraud and Evergreening
The Reserve Bank of India (RBI) has raised concerns over the discovery of numerous accounts used for fraudulent transactions and loan evergreening at certain banks. This issue was highlighted during an interaction with chief financial officers (CFOs) and auditors of banks and financial institutions.
Key Highlights:
- RBI’s Concerns:
- RBI deputy governor Swaminathan J pointed out that some banks have ‘lakhs’ of internal accounts without valid reasons.
- These accounts are often used for fraudulent transactions and loan evergreening, posing high risks due to potential misuse.
- Swaminathan urged CFOs to rationalize these accounts, reduce them to the essential minimum, and exercise greater control through periodic reconciliation and proper reporting to the audit committee.
- Calls for Enhanced Control:
- Banks are advised to exercise stringent control over internal accounts to mitigate misuse.
- CFOs are encouraged to maintain transparent communication with the MD & CEO and the top management.
- Escalation channels to the Chair of the Audit Committee of the Board (ACB) should be kept active for higher-level guidance when needed. Lakhs of accounts used for fraud
Further Insights:
- Mule Accounts and Digital Frauds:
- RBI Governor Shaktikanta Das emphasized the need to curb digital frauds, especially those involving mule accounts (illegal accounts).
- Financial Reporting Integrity:
- Swaminathan stressed the importance of protecting the integrity of financial reporting and avoiding misinterpretation of regulations or accounting standards.
- Regulation Framework Concerns:
- Deputy governor M Rajeshwar Rao expressed concerns over the biased use of flexibility in principle-based regulation by some regulated entities.
- Rao highlighted issues with the impairment framework under Ind AS, where some NBFCs rely on the 30 days-past-due (DPD) criteria for loan loss, which does not align with the forward-looking expected credit loss (ECL) approach. Lakhs of accounts used for fraud
- Auditors’ Responsibilities:
- Auditors are responsible for ensuring proper disclosures related to governance and control mechanisms.
- In the case of Asset Reconstruction Companies (ARCs), RBI observed that some ARCs did not create provisions for management fees and expenses unrecoverable for more than 180 days, leading to the issuance of prudential guidelines. Lakhs of accounts used for fraud
- Challenges from Emerging Technologies:
- Rao highlighted the operational risks from the increased reliance on third-party service providers due to the growth of digital channels.
- Auditors need to assess whether management is adequately evaluating the impact of emerging technologies on internal controls and financial reporting.
Expectations from CFOs and Auditors:
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.
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.
By addressing these concerns, the RBI aims to strengthen the financial sector’s integrity and resilience, ensuring better governance and risk management practices across banks and financial institutions.
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