Unmasking India’s NPA issues

Forensic & Integrity Services

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Recent news around increasing non-performing assets (NPAs) and instances of bribery and corruption have put the banking and financial services sector in jeopardy. Promoter integrity issues have implied further financial losses for banks. To cope with this, all banks will need to maintain strict vigilance during pre- and post-sanction due diligence processes. They must fortify their internal processes to effectively monitor funds. The Indian Government is undertaking a regulatory upheaval for addressing the NPA “crisis”. Bankers are cautiously optimistic that the NPA situation will improve, albeit at a slow pace.

Our team conducted a comprehensive survey to decode the reasons and challenges around increasing NPAs in corporate loans.

Key findings

of the respondents stated that the NPA crisis in India is set to worsen

of them opine that existing monitoring procedures such as internal audits and concurrent audits alone are not enough to verify adequate functioning of the NPA mechanism

of the respondents believe that the rise in NPA/stressed asset numbers is due to a diversion of funds to unrelated business or fraud

stated the impact on provisioning or performance of the bank branch is one of the key reasons that is preventing banks from reporting borrowers as “willful defaulters”

of the respondents seemed optimistic about the effect of regulatory changes and increased supervision by the Reserve Bank of India (RBI)

emphasized the need to develop internal skill sets on credit assessment/evaluation

stressed on the importance of mandating forensic audit to check borrower intent

Survey respondents highlighted key investment areas for the next year as part of their proactive strategies to manage NPAs.

Technology and data analytics
The launch of new banking products and increase in customer coverage calls for technology upgradation for comprehensive monitoring. Data analytics is a valuable component to effectively conduct periodic reviews and audit. Analytics provides insight into process anomalies, trends and risk indicators through the extraction and analysis of transactional data.

Independent borrower background checks
One of the key reasons for stressed assets could be traced back to the lapses in the initial customer due diligence and inefficiencies in the sanctioning process. Past history - earlier defaults, excise/ income tax raids and/or negative information about the borrower should be adequately disclosed to the sanctioning committee of banks. Apart from discussion with the borrower, surprise site visits should be undertaken especially in case of high value loans.

Enhancing internal skill sets on credit assessment/evaluation
Keeping the business dynamics and complex business structures into account, banks are required to enhance the skill sets of the credit teams. For instance, credit team/analysts need to undergo periodic training to upgrade their skills; scoring models, industry benchmarks and credit evaluation sheets should be updated regularly.

Formulating separate team for monitoring of accounts
Some banks have a separate dedicated team for monitoring the performance of key accounts. The accounts are selected based on the amount disbursed, vulnerability of the business model/industry, indication of diversion or siphoning off bank funds, etc. A separate dedicated team for account monitoring would assist in early identification of irregularities, if any, and focus on immediate remedial measures.

Market intelligence
Public domain searches and market intelligence can assist banks to gather additional information around the borrower and its business operations, where indicators for suspicious activities exist. The new RBI guidelines have also emphasized on collecting independent information through market intelligence/public domain/Registrar of Companies/defaulter list as a part of the pre-sanction process. Tracking of “market information” and monitoring databases during the annual review have also been stipulated by the regulator.

A slow but steady outlook

Banks need to be proactive in framing policies/guidelines and implementing them from the grass-root level, with constant supervision by top management. The new RBI guidelines have laid a firm pathway for improving overall robustness to manage loan frauds. Banks would need to adopt and implement the measures in true spirit and substance and not just in “form”. The key to this is to integrate and analyze transactional data (bank statements) with documents available (audit report, sanction documents, etc.,) and gather information from the public domain, including market information, to find anomalies. Banks will need to fix specific roles for designated persons, who will constitute the FMG/ensure compliance with the circular guidelines.