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RBI Flags Concern Over Illegal Accounts

By Manojit Saha
July 10, 2024 16:44 IST
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'We found certain banks having lakhs of such accounts with apparently no valid reason.'

Photograph: Francis Mascarenhas/Reuters

The Reserve Bank of India is alarmed that some banks have 'lakhs' of accounts that are being used for fraudulent transactions and evergreening loans.

'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 on Tuesday in his address to lenders, represented by chief financial officers and auditors.

'Some of these accounts are used for fraudulent transactions and ever-greening of loans. Internal accounts are high-risk in nature on account of its potential for misuse,' he said while asking the CFOs to rationalise those accounts and bring them down to the essential minimum.

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 CFOs must protect the integrity of the financial reporting by guarding against misadventure, or intelligent interpretations of regulations or accounting standards.

He urged the CFOs to have an eye for detail and an honest and transparent communication with the managing director and chief executive officer 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,' he said.

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 was not free from bias.

Citing the impairment framework prescribed under Indian Accounting Standards, Rao said while the framework was forward-looking, it had been observed that some non-banking financial companies primarily relied on the 30 days-past-dues (DPD) criterion 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 had been nudging non-banking financial companies to enhance their quality of disclosures, particularly in the context of the ECL framework.

'Auditors 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, 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 necessitate that the RBI 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 take financial services has increased regulated entities' reliance on third-party service providers and has exposed them to operational risks, including cyber and outsourcing risks,' he said.

Auditors need to evaluate whether management is properly assessing the impact of emerging technologies on internal controls and on financial reporting, he added.

Commenting on his expectations from auditors, Swaminathan said auditors must ensure there were no conflicts of interest that could compromise the objectivity and independence of their audits.

Feature Presentation: Aslam Hunani/

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Manojit Saha
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