Issue of non-performing assets to worsen: EY survey

September 2015

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  • 72% believe that borrowers are misusing the restructuring norms set by the regulatory authorities 
  • 87% stated that diversion of funds to unrelated business through fraudulent means is one of the root causes for the NPA crisis
  • 91% stated forensic audit should be made mandatory to check borrower intent

Mumbai, 8 September 2015: India’s banking and financial services industry has faced a significant impact with the rising non-performing assets (NPAs) in the corporate loans space. To assess the reasons and challenges behind these mounting bad loans, EY Fraud Investigation & Dispute Services released a survey report titled, ’Unmasking India’s NPA issues – can the banking sector overcome this phase?’  In line with its aim to uncover the elements which contributed to this issue, 87% of the respondents stated that diversion of funds to unrelated business through fraudulent means is one of the root causes for the NPA crisis. Furthermore, around 72% have claimed that the crisis is set to worsen before it becomes better. The survey respondents also indicated that lapses in the initial borrower pre-sanction process and inefficiencies in the post-disbursement monitoring process have played a key role in the NPA predicament.

Arpinder Singh, Partner and National Leader, Fraud Investigation & Dispute Services, said that, “The Indian banking industry has been facing a challenging situation in the form of the NPA crisis. We have seen that an often overlooked, but integral aspect is lapses in integrity by the borrowers or by gaps in the initial sanctioning process undertaken by financial institutions. With the Reserve Bank of India’s recent circular on the framework for dealing with loan frauds, the role of forensic audits will become even more critical as it would enable identifying the intent of decision makers, thereby addressing the stress in the sector.”

Mukul Shrivastava, Partner, Fraud Investigation & Dispute Services, added, “Keeping an ear to the ground is extremely crucial during tough times, and we have focused on attaining that insight from the industry. Our flagship survey for the banking and financial services sector strives to outline the current market sentiment with a focus on evaluating the corrective measures that the industry could benefit from. The overall sense brought about by the results is quite sceptical; that while there is yet much left to uncover, the implementation of remedial measures will play a key role in reinvigorating the industry.” 

Vikram Babbar, Executive Director, Fraud Investigation & Dispute Services, said that, “The survey is an attempt to highlight the perspective of the banking sector on various concerns surrounding the NPA issue. While the Government is leaving no stone unturned to resolve the crisis, financial institutions themselves have to take stricter action toward errant borrowers and look beyond the trust, relationship and impact on recovery. Going forward, the focus needs to be on strengthening proactive identification of red flags, close monitoring of NPA identification and reporting process and prompt sharing of information between banks and regulators.”

Some of the key highlights of the survey are:

  • 72% said that the borrowers are misusing the restructuring norms
  • Around 86% of the respondents stated that existing monitoring procedures such as internal audits and concurrent audits alone were not enough to verify adequate functioning of the NPA mechanism. This highlighted the need to strengthen internal processes and controls for early detection of issues.
  • 91% respondents stated that forensic audit must be made mandatory to ascertain the intent of the borrower and further 54% respondents that this would help in weeding out ‘wilful defaulters’ from genuine borrowers and thereby reduce recovery costs/efforts
  • 44% stated the impact on provisioning or performance of the bank branch is one of the key reasons that are preventing banks from reporting borrowers as ‘wilful defaulters’
  • Only 15% of the respondents seemed optimistic and think that NPA numbers will be curbed due to regulatory changes and increase supervision by the Reserve Bank of India (RBI). The RBI recent circular ordering all banks to ensure vigilance during the pre-and-post sanction due diligence processes is expected to prove a step in the right direction.
  • 86% respondents stressed on the need for an effective mechanism to identify hidden NPAs. Additionally, around 56% stated that used of data analytics and technology can be an efficient enabler to identify any red flags or early warning signals.
  • 68% of the respondents said that developing internal skill sets on credit assessment/ evaluation are necessary

About the survey:

Survey approach and participant profile

  • This report is based on the responses received from over 110 respondents during the period November 2014 – March 2015. The principal respondents were banking professionals from public, private, foreign and co-operative banks.
  •  The respondents belonged to business functions such as Vigilance, Credit/ Operations, Legal/ Compliance, Asset Recovery and Audit/ Finance

Notes to Editors

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