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‘Lakhs’ of accounts used for fraud and evergreening are flagged by the RBI

Submitted by admin on July 10th, 2024

During a meeting on Tuesday with chief financial officers and auditors of banks and financial institutions, the Reserve Bank of India expressed concern about certain banks having “lakhs” of accounts used for fraudulent activities and loan evergreening.

The administration and supervision of internal accounts is one area that has received more attention in recent years. In his speech to lenders, RBI deputy governor Swaminathan J stated, “We found certain banks having lakhs of such accounts with apparently no valid reason.”

Additionally, some of these accounts are utilized to carry out certain illegal operations and evergreen loan accounts. He asked the CFOs to rationalize internal accounts and reduce them to the bare minimum, stating that internal accounts are high risk due to their potential for misuse. He stated that periodic reconciliation and accurate reporting to the board’s audit committee would allow banks to exert more oversight.

During his meeting with bank CEOs last week, RBI Governor Shaktikanta Das brought up the subject of mule accounts, or unlawful accounts, and requested that they put an end to digital fraud.

According to Swaminathan, CFOs are responsible for safeguarding the accuracy of financial reporting by preventing errors in judgment and for applying sound interpretations of laws and accounting guidelines.

He advised the CFOs to pay close attention to detail and keep open lines of communication with the CEO, MD, and other members of the senior management. “In the event that a higher level of guidance is required in any matter, you should also maintain the channel of escalation to the Chair of the Audit Committee of the Board (ACB),” he said.

During his remarks, M Rajeshwar Rao, the deputy governor, expressed his apprehension with the way regulated firms are utilizing the freedom provided by the principle-based regulation framework in a biased manner.

Rao stated that although the impairment framework outlined by Ind AS is prospective in nature, it has been seen that certain nonbank financial institutions (NBFCs) predominantly depend on the 30-days-past-due (DPD) criterion to determine if a loan is lost. According to Rao, “using the forward-looking approach of expected credit loss (ECL) is not always in sync with DPD being a lagging indicator.”

According to him, the regulator has been pressuring non-banking financial organizations to improve the caliber of their disclosures, especially with regard to the ECL framework. According to Rao, auditors must also make sure that organizations give relevant qualitative data on governance and control systems.

Rao stated that no provision was made for management fees and costs that were unrecoverable for more than 180 days in the case of Asset Reconstruction Companies (ARCs). According to Rao, these findings made the Reserve Bank publish prudential rules requiring the deduction of such unrealized management fees from regulatory capital for determining capital adequacy ratios.

Rao emphasized the difficulties brought about by new technologies that are altering the banking and financial sector environment, especially in light of the dependence of regulated companies on outside service providers.

He stated that “REs’ reliance on third-party service providers has increased due to the exponential growth in the usage of digital channels to avail financial services,” and that “auditors need to evaluate whether management is properly assessing the impact of emerging technologies on internal controls and financial reporting.”

Speaking about what he expected of auditors, Swaminathan stated that in order to maintain the highest levels of integrity, auditors must make sure that no conflicts of interest exist that would jeopardize the independence and impartiality of their audits.

“Building confidence among stakeholders, including investors, regulators, and the public, requires transparency and impartiality above all else. In order to maintain their reputation and protect the integrity of audit results, auditors need to scrupulously follow professional ethics and norms, he stated.

RBI’s projections
From CFOs:

• Guide the organization toward resilience and sustainable growth
• Keep lines of communication open and honest with bank supervisors and auditors.
  Maintain the accuracy of financial reporting by steering clear of mishaps or illogical interpretations.
• Make data analytics and technological investments.

From auditors:

• Use strict audit procedures to avoid under-provisioning, divergence, and non-compliance. Evaluate material dangers that enterprises pose holistically.
• Request thorough reporting on sustainability from both financial and non-financial organizations.
• Determine if management is appropriately evaluating how emerging technology may affect financial reporting and internal controls.