'Lakhs' Of Internal Bank Accounts Used For Frauds, Evergreening Of Loans, RBI Flags Misuse

RBI has raised caution on the misuse of banks' internal accounts. RBI said that many of the banks’ internal accounts are being used for fraud. What are these accounts and why is RBI concerned? Let’s find out.
The central bank has raised concerns over the misuse of internal accounts in some banks.
Inspections carried out by the RBI revealed that some banks opened lakhs of internal accounts with no valid reason.
What are internal accounts? These are accounts not meant for customer or external transactions. So they are not your average customer bank accounts. These are opened for operational efficiency. Internal accounts are also used to manage a bank's liquidity, track fee income and to monitor certain activities.
RBI says that some of these internal accounts are being used for fraudulent transactions and evergreening of loan accounts.
Evergreening of loans is a form of zombie lending. It is a practice of extending new or additional loans to a borrower who is unable to repay the existing loans, thereby concealing the true status of the non-performing assets (NPAs) or bad loans. Now this makes Internal accounts high risk in nature given their potential for misuse.
RBI has taken a step against the misuse by asking the Chief Financial Officers (CFO) of the banks in question, to close all these unnecessary bank accounts.
RBI also asked CFOs to rationalise these accounts, bring them down to the essential minimum.
Remember, RBI Governor Shaktikanta Das had flagged the issue of the rising mule accounts or illegal accounts during his interaction with bank chiefs last week and had asked them to curb digital frauds.
RBI is now finally nipping it in the bud. RBI deputy governor Swaminathan J has urged CFOs to invest in technology and data analytics to empower them to provide more accurate and real-time financial insights.
To exercise greater control through periodical reconciliation and proper reporting to Audit committee of the board.
Swaminathan said CFOs must protect the integrity of the financial reporting by guarding against misadventure, or intelligent interpretations of regulations or accounting standards.
Remember, back In Sept 2019, RBI had told lenders to conduct an internal appraisal of such accounts which might have been used to hide bad loans through evergreening, where funds lie in an internal account for a few days before being credited to the actual beneficiary.
The central bank had said that the funds in such a transitory phase are at the internal risk of being misused by a branch manager to fund unauthorised overdrafts.
The central bank is now finally taking action on these accounts.
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