RBI raises alarm over misuse of ‘lakhs of accounts’ in banks

RBI raises alarm over misuse of 'lakhs of accounts' in banks

RBI raises alarm over misuse of 'lakhs of accounts' in banks

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The Reserve Bank of India has highlighted concerns about the misuse of internal accounts in banks for fraudulent transactions and the evergreening of loans.

The Reserve Bank of India (RBI) has raised concerns about the misuse of internal accounts in some banks, revealing that these accounts have been used as conduits for fraud and the evergreening of loans. RBI Deputy Governor Swaminathan J highlighted this issue during a conference with statutory auditors and chief financial officers (CFOs) of commercial banks and financial institutions.

Swaminathan noted that some banks have opened lakhs of internal accounts without valid reasons. These accounts, intended for a bank’s own operations such as managing liquidity, tracking fee income, and monitoring activities. These are not meant for actually, customer or external transactions. Instead, some of these accounts were found to be used for fraudulent activities and loan evergreening.

The RBI has instructed the CFOs of these banks to close unnecessary accounts and maintain only the essential ones. Swaminathan emphasized the importance of CFOs investing in technology and data analytics to provide accurate and real-time financial insights, which would aid in strategic decision-making and swift responses to audit findings.

CFOs are also urged to maintain open and honest communication with auditors and bank supervisors. The banks must try ensuring transparency and comprehensive data sharing. This collaboration is crucial for building trust, ensuring regulatory adherence, and contributing to the financial stability and reputation of the institution.

Additionally, Swaminathan stressed the importance of conducting thorough root cause analyses of any deficiencies observed during audits or supervisory reviews. By understanding and addressing the underlying causes, banks can prevent the recurrence of problems and strengthen their overall governance and control environment.

“CFOs should conduct thorough root cause analyses of any deficiencies observed during audits or supervisory reviews,” he said. 

“Rather than implementing short-term fixes, understanding and addressing the underlying causes of these issues ensures that compliance is sustained over the long term. This approach helps prevent the recurrence of problems and strengthens the overall governance and control environment of the bank,” Swaminathan said

In September 2019, the RBI had advised lenders to conduct internal appraisals of accounts potentially used to hide bad loans through evergreening. The central bank warned that funds in such transitory internal accounts could be misused by branch managers to fund unauthorized overdrafts.

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