RBI red-flags use of internal accounts for frauds, loan evergreening

Internal accounts are not meant for customers or external transactions but for internal purposes and are opened for operational efficiency.
The Reserve Bank of India
The Reserve Bank of India (File Photo)

MUMBAI: The Reserve Bank has red-flagged the tens of thousands of internal or ‘fake’ accounts that some banks are using for frauds and evergreening of dud accounts.

“One area that has come into sharper focus in the past couple of years is the control and management of internal accounts. We have found some banks having lakhs of such accounts with apparently no valid reason,” the deputy governor Swaminathan J told the chief financial officers and statutory auditors of banks and other financial institutions.

The meeting, also addressed by another deputy governor M Rajeshwar Rao, was a part of a conference on statutory auditors and chief financial officers of commercial banks and other financial institutions. The meeting was also attended by over 300 CFOs and auditors apart from Ajay Bhushan Prasad Pandey, the chairperson of the National Financial Reporting Authority and Ranjeet Kumar Agarwal, the president of the Institute of Chartered Accountants.

“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,” Swaminathan said while asking CFOs to rationalise those accounts and bring them down to the essential minimum.

It can be noted that internal accounts are not meant for customers or external transactions instead they are for internal purposes and are opened for operational efficiency.

“Since internal accounts are high risk in nature on account of its potential for misuse, I request CFOs to have them rationalised completely, bring them down to the essential minimum and exercise greater control through periodical reconciliation and a proper reporting to the audit committee,” he said.

He also urged CFOs to invest in technology and data analytics to empower themselves and to provide more accurate and real-time financial insights. This not only aids in strategic decision-making but also enhances the ability to respond swiftly to any issues identified during audits or supervisory reviews.

He also said banks should exercise greater control through periodical reconciliation and proper reporting to the audit committee of the board.

Last week 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.

The Reserve Bank of India
RBI Governor Das warns banks against mule accounts

Asking CFOs to protect the integrity of financial reporting by guarding against any misadventure or intelligent interpretation of regulations or accounting standards, Swaminathan urged them to have an eye for details and maintain honest and transparent communication with their MDs/CEOs 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 if a higher level of guidance is needed in any matter,” the commercial banker-turned central banker said.

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

On his expectation from auditors, Swaminathan said upholding the highest standards of integrity, auditors must ensure there are no conflicts of interest that can 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, adding together with the regulator, auditors have a shared vision and responsibility for advancing assurance and banking supervision.

Being a CFO at his previous role in SBI before becoming one of its MDs and then joining the RBI as a deputy governor, Swaminathan said although there is a chief risk officer dedicated to risk management, the contribution of the CFO in auditing is crucial, particularly in managing capital adequacy, maturity mismatches and liquidity.

Integral to this collaboration is the need for CFOs to maintain open and honest communication channels with auditors and bank supervisors. It is imperative to eschew the notion of hiding, withholding, or providing incomplete information to these teams. Transparency is the key, by sharing comprehensive and accurate data, CFOs not only facilitate a smoother audit and supervision process but also reinforce the bank’s commitment to integrity and compliance, he said. 

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