Too Many Internal Accounts Could Be Doorway To Evergreening, RBI Warns CFOs

The Reserve Bank of India has found that certain banks have lakhs of internal accounts, and has warned chief financial officers to ensure control.

In a separate speech delivered on Tuesday, RBI Deputy Governor M. Rajeshwar Rao told banks and other financial sector auditors to move towards principle-based audits rather than rule-based ones.

In his speech, Rao highlighted certain observations the regulator had made about non-bank firms. While implementing the IndAs accounting framework at non-bank finance companies, the RBI noted certain deficiencies in the sale of assets from the amortised cost category.

The regulator also noted that NBFCs are relying on days past default as a metric to move accounts from Stage 1 to 2. The IndAS framework, however, allows for more forward-looking factors, Rao said.

"DPD, being a lagging indicator, is not always in sync with using the forward-looking approach of ECL (expected credit loss)," he added.

Even at asset reconstruction companies, the RBI noted no provision was created for management fees and expenses, which remained unrecoverable for more than 180 days.

A recent order by the National Financial Reporting Authority, in the case of an audit report of a non-banking financial company, highlighted that the auditor did not perform the audit procedures to ensure the reasonability of ECL provisions.

"We're of the view that such issues require greater levels of scepticism from the auditors," Rao said.

As independent assessors, auditors should critically evaluate and challenge management’s judgement and assumptions to ensure that they are aligned with the underlying principles of accounting standards and prudential norms, he said.