Amid a rise in frauds, the Reserve Bank of India has alerted all lenders of instances where ‘intermediary’ or transitory accounts in banks have been misused to hide bad loans or mask money laundering.
The banking regulator has directed banks to carry out internal review of such unauthorised transactions and submit their findings by October.
Funds often lie for a day or two in intermediary or office accounts opened in bank branches before the money is credited to the actual beneficiary. A branch manager may dip into such an account to give unauthorised overdraft facility to enable a borrower regularise a loan and avoid default before the close of a quarter or the due date for servicing the loan or just before the loan account is about to be classified as non-performing asset (NPA).
Within a day or so the transaction is reversed as the borrower arranges fund to repay the overdraft (OD). “If the borrower cannot organise fund, the branch manager may tap another office account to extend a fresh overdraft to close the earlier OD. These are unsanctioned ODs and it all depends on the rapport the borrower shares with the branch head,” said a senior banker.
Undisclosed Cash Deposits
Even if the borrower defaults on the second OD, he has a month before the account is categorised as NPA, he said. Such temporary office accounts may also come handy in depositing unexplained cash. Instead of directly crediting the cash deposited into a customer’s account, the amount is parked in the intermediary account of the branch. Later, when the money is moved from the office account to the customer’s account, it is shown as a normal banking transaction with the cash element in the first leg remaining undisclosed.
As a result, the branch is not required to report any abnormal ‘cash deposit’ to the Financial Intelligence Unit (FIU) — the government’s nodal agency which processes and disseminates information on suspicious financial transactions. Office accounts receive temporary funds when cheques are presented for clearing. The amount is not credited to customers’ accounts immediately but held in an office account. As and when the cheques are cleared, the office account is debited and the customers’ account credited. The unauthorised transactions, happening within 24 to 48 hours, are typically intended to accommodate favoured customers and help them as well as the bank escape regulatory scrutiny.
Branch managers of banks, particularly state-owned lenders, have the power to open multiple intermediary accounts. “In some banks, the process is centralised and branch managers have to take the authorisation of a senior official, may be at the level of a general manager, before opening office account. In many banks, it is not. More than a month ago, RBI told banks it has come across cases where bank branches have indulged in such undesirable practices, involving the core banking system. Now, all banks will have to do an audit, reconcile accounts, and update the regulator on the control procedures,” said the compliance head of a bank.
While the clampdown on cash deals and close vigil on NPAs may have prompted many bank managers to use office accounts, they are also under pressure to retain clients, said the bank official.