After the fraud at mortgage lender Aviom India Housing was uncovered, the National Housing Bank (NHB) alerted housing finance companies (HFCs) to pay closer attention to their risk management and audit functions. NHB, which has been carrying out periodic inspections at HFCs, emphasized the need for stricter compliance during these audits, according to insiders. In its annual inspection of financial records, the regulator highlighted the importance of closely monitoring internal audits, risk management functions, and regularly assessing any potential red flags in investment portfolios and loan disbursals, an official said. This feedback was provided despite the official asserting that their books were squeaky clean. Last month, Aviom India Housing Finance had informed its lenders that payments might be delayed after fraudulent transactions were detected. In a letter to its lenders, Aviom explained that NHB had initiated a third-party forensic audit following a regular on-site inspection, which revealed that mutual fund account statements appeared to be manipulated. Initial audits indicated that Aviom had inflated mutual fund investments to show higher cash balances. One official mentioned that once the audit at Aviom is completed, the regulator might issue new directives regarding risk management and internal audit functions. Another official added that the NHB had been stressing the need for stricter adherence to rules and more rigorous internal audits during its supervisory audits. They also anticipated that once the findings at Aviom were fully reviewed, the NHB would likely issue verbal communications to all HFCs. Officials further explained that the regulator's emphasis on tightening processes stems from the significant role non-bank financial companies (NBFCs) and housing finance companies (HFCs) play in the financial system, as they are major borrowers, with a large portion of their funding sourced from banks. Any failure of an NBFC or HFC could lead to a solvency crisis for their lenders, potentially triggering widespread contagion.