The Reserve Bank of India (RBI) is certainly not at ease with the means deployed by some lending institutions to grow their business. RBI Deputy Governor Swaminathan J’s address to the statutory auditors and chief financial officers of commercial banks and financial institutions bears out this discomfiture. While asking bank CFOs to ensure completeness and integrity in maintaining the books of accounts and in complying with statutory and regulatory requirements, he pointed to the misuse of bank internal accounts. These are accounts other than client accounts used by banks for their internal accounting and record keeping. Swaminathan has observed that some banks maintain lakhs of such accounts for no valid reason. It is good that the RBI is keeping a close watch on the internal processes of the lenders, warding off threats to financial stability.

The misuse of internal accounts is no trivial matter. Last year, the RBI Governor and other officials had warned against sharp practices being adopted by banks and other lending institutions to dress up their financial accounts. This was followed by penal action against several lenders including Paytm Payments Bank, IIFL Finance, JM Financial and Kotak Mahindra Bank this year, stopping them from onboarding customers, making fresh loans, issuing credit cards and so on. The Deputy Governor’s speech indicates that action is likely against lenders using internal accounts to conceal the true state of their asset quality and business growth.

Swaminathan has also urged the CFOs to maintain open and honest communication channels with auditors and bank supervisors and “eschew the notion of hiding, withholding or providing incomplete information to these teams.” The hint here is that financial statements of some lenders may not be accurate or reliable. Wilful misstatement of accounts misleads all stakeholders and poses a risk to the lender’s existence.

The central bank is right in maintaining a tight vigil on high growth sectors in bank lending, where the numbers appear too rosy. While bank credit growth has moderated from the highs recorded in 2022, it continues to grow at healthy double-digit levels, led by personal and credit card loans to households. Banks and NBFCs have been chasing sub-prime borrowers and new borrowers in their bid to grow their loan books. But despite this fast-paced growth in unsecured lending, asset quality has been healthy with non-performing assets at record lows. Fortunately, the increase in lending rates following the interest rate hikes since 2022, prima facie does not seem to have impacted high-risk loans. It is well that the RBI is asking lenders to be more transparent about their actual state of affairs. Bank audit committees should play a proactive role to ensure that financial accounts are prepared in a transparent manner. Their role in the financial reporting structure of banks is critical and audit committees should keep an eye out for sharp accounting and business practices.

Related Topics