The Reserve Bank of India has raised concerns about certain banks having ‘lakhs’ of accounts used for fraudulent transactions and loan evergreening.

During an interaction with chief financial officers (CFOs) and auditors of banks and financial institutions on Tuesday, RBI deputy governor (DG) Swaminathan J, said: “We found certain banks having lakhs of such (internal) accounts with apparently no valid reason. Some of these accounts were also used as a conduit for certain fraudulent transactions and ever-greening of loan accounts. Internal accounts are accounts that exist solely within an organisation and are used to transfer funds between business units, he said.

“I therefore request the 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 ACB,” he added.

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CFOs must conduct thorough root cause analyses of any deficiencies observed during audits or supervisory reviews and rather than implementing “short-term fixes”, addressing the underlying causes of these issues ensures that compliance is sustained over the long term, Swaminathan said. 

He further said banks’ must also protect the integrity of the financial reporting by guarding against any “misadventure or intelligent interpretation of regulations or accounting standards”. He also urged the CFOs to have detailed and transparent channel of communication with the MD and top management. 

“Having served as a CFO myself of a bank, I deeply understand the immense responsibilities this role entails. All I can wish for you is that may your audits be clean, your numbers accurate, and your coffee always strong!,” he said.

In addition, auditors must rigorously enhance their processes to mitigate any potential for divergence, under-provisioning, or non-compliance with statutory and regulatory requirements. Further, a critical aspect of the auditor’s role is the careful evaluation of internal financial controls over financial reporting, the DG added. 

In his speech, deputy governor M Rajeshwar Rao the RBI has assessed the disclosures being made by non-banking finance companies (NBFCs) in the context of the expected credit loss (ECL) framework. He noted that many of these disclosures largely repeated the text of the respective accounting standards.

“We could not glean any specific insights such as discussion of the assumptions and methods applied in measuring ECL, shared credit risk characteristics to assess expected loss on a collective basis, qualitative criteria in the determination of SICR,” he said.

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To address the issue, the regulator is nudging lenders to enhance the quality of their disclosures, DG Rao said. He also urged the auditor community to critically evaluate the disclosure practices and ensure that same meet the needs of accounting standards and end-users. He further said that auditors also have the responsibility of ensuring that entities provide appropriate qualitative information related to governance and control mechanisms.