Module: | SEBI LODR & Corporate Governance Frameworks
Q35: Consider the following statements regarding the initiation of Forensic Audits for classifying Wilful Defaulters under the 2026 RBI Master Directions:
1. Banks are generally required to initiate a forensic audit before classifying a borrower with an outstanding balance of Rupees 50 Crore or more as a wilful defaulter.
2. A forensic audit to determine fund diversion or siphoning must be completed within 6 months of the account being classified as a Non-Performing Asset (NPA).
3. The forensic auditor appointed for this investigation is permitted to be the same firm that currently conducts the concurrent audit of the lending bank branch.
Which of the above statements is/are incorrect?
2. A forensic audit to determine fund diversion or siphoning must be completed within 6 months of the account being classified as a Non-Performing Asset (NPA).
3. The forensic auditor appointed for this investigation is permitted to be the same firm that currently conducts the concurrent audit of the lending bank branch.
Which of the above statements is/are incorrect?
✅ Correct Answer: C
🎯 Quick Answer:
C. Only 3 is incorrect.Structural Breakdown: Statement 1 is correct; the Rs 50 Crore threshold heavily triggers forensic scrutiny to substantiate the wilful default tag.
Statement 2 is correct; the RBI enforces strict timelines, generally mandating completion within 6 months of the NPA downgrade to prevent evidence destruction.
Statement 3 is incorrect; to maintain absolute independence and avoid conflicts of interest, the forensic auditor cannot be the concurrent or statutory auditor of the bank or the borrower.
Historical/Related Context: The RBI tightened these norms following widespread litigation where borrowers challenged the wilful defaulter classification on the grounds of arbitrary decision-making by banks without concrete forensic evidence.
Causal Reasoning: Segregating the forensic auditor from the bank's regular concurrent auditors ensures that the investigation into the borrower's fraud is not compromised by the auditor's desire to protect the bank's management or their own previous audit oversights.