The bad loan crisis in the banking industry has been exacerbated by diversion of funds by borrowers to unrelated businesses through fraudulent means, say a majority of bankers surveyed by EY India. Further, bankers have said that most borrowers are misusing the restructuring norms set by the regulatory authorities and the bad loan crisis is set to worsen before it becomes better.
The EY survey, aimed at uncovering the elements which contributed to the NPA issue, said 87 per cent of the respondents stated that diversion of funds to unrelated business via fraudulent means is one of the root causes for the non-performing asset (NPA) crisis. “72 per cent of bankers believe that borrowers are misusing the restructuring norms set by the authorities,” EY said.
The EY survey is based on the responses of over 110 respondents from public, private, foreign and co-operative banks during November 2014 to March 2015. The respondents also said 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.
According to the survey, 91 per cent of bankers stated forensic audit should be made mandatory to check the borrower intent and “further 54 per cent respondents said that this would help in weeding out ‘wilful defaulters’ from genuine borrowers.” Around 86 per cent 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.
Only 15 per cent of the respondents seemed optimistic and felt that NPA numbers will be curbed due to regulatory changes and increase supervision by the Reserve Bank of India (RBI). The RBI’s 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. Nearly 86 per cent respondents stressed on the need for an effective mechanism to identify hidden NPAs.
Additionally, around 56 per cent stated that the use of data analytics and technology can be an efficient enabler to identify any red flags or early warning signals. Nearly 44 per cent of bankers surveyed 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’.
Arpinder Singh, partner and national leader, fraud investigation & dispute services, said: “We have seen that an often overlooked, but integral, aspect is lapses in integrity by the borrowers or gaps in the initial sanctioning process undertaken by financial institutions. With the RBI’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.”