RBI warns banks of 'lakhs' of accounts used for fraud, evergreening
The RBI states that internal accounts in banks are being misused for fraudulent activities. Fake transactions are being carried out through these accounts, and evergreening is being practiced. Many of these internal accounts are operated in the names of customers and are used for fund parking and fake transactions.
New Delhi: A new type of fraud is emerging in banks, and the RBI (Reserve Bank of India) is keeping a close watch on it. The RBI has issued a warning to banks about this fraud. Internal accounts are opened in banks for internal operations, aimed at making the bank’s functions more effective. This includes managing liquidity, tracking income from fees, and monitoring other activities.
However, the RBI says that millions of such internal accounts have been opened in banks without proper justification. These accounts are being misused for fraud and evergreening. What is this fraud, and how is it carried out? What exactly is evergreening? Let’s find out.
The RBI states that internal accounts in banks are being misused for fraudulent activities. Fake transactions are being carried out through these accounts, and evergreening is being practiced. Many of these internal accounts are operated in the names of customers and are used for fund parking and fake transactions.
What is evergreening?
Evergreening occurs when a borrower defaults on their existing loan and the bank starts showing a new loan under the same borrower’s name. The defaulted loan is known as a bad loan or stressed loan. When a bank classifies a loan as a defaulted loan in their records, it shows higher losses and reduced profits.
To avoid this, banks hide stressed loans by showing them as new loans. The benefit of this practice is that the bad loans do not appear in the bank’s records. This way the bank does not have to show the losses from defaulted loans, thereby maintaining their profit margins. This process of bad loans disguised as new ones is known as evergreening. Internal accounts are used to issue new loans, which are then allocated to borrowers with defaulted loans.
In September 2019, the RBI had also directed banks to review such accounts. In May this year, the RBI imposed a fine of ₹91 lakh on private sector Yes Bank for violations of certain regulations, including improper management of internal accounts.
With the increasing problem related to internal accounts, the RBI has now instructed banks to close unnecessary accounts. Banks must also implement stronger controls over these accounts, perform regular audits, and report to the Board Audit Committee.
The RBI emphasizes that the misuse of internal accounts is a serious concern. These accounts are solely for the bank’s internal operations and not for customer transactions or external transactions.