As lenders pull out all stops to recover stressed loans, they are engaging more closely than ever with external consultants and forensic specialists to conduct due diligence on their borrowers to hasten the recovery process. The focus of these exercises is to trace funds that have been misused or misappropriated by borrowers and use the information to negotiate with them and recover the loans or even take regulatory action against borrowers. It has also helped banks to avoid a further built-up in bad loans.
“If there is evidence that the borrowers have misused funds, we see banks refraining from restructuring accounts,” said Vikram Babbar, partner, fraud investigation & dispute services, Ernst & Young India.“In one particular case, a consortium of banks was engaged in discussions with one of their clients for restructuring an account. But while conducting a forensic audit, it was discovered that the company had diverted funds to alternate businesses, which was not declared to the banks. As the evidence came to light, banks decided not to go ahead with the restructuring,” Babbar said.
Corporate investigation and risk consulting firms have seen a 40-50% increase in such cases over the last 12 months, and in certain cases, banks have agreed to pay up to 50% more in terms of consulting fees to these companies.
“In the last few months, we have seen a lot of bank-related work. The banks are putting in place cash flow monitoring processes, forensic audits and concurrent audits to find out if there have been instances of diversion or leakage of funds. The banks are being very cautious and the level of activity is very high,” said Ashish Chhawccharia, partner, restructuring services, Grant Thornton. In certain instances, external consultants have even been asked by banks to come and present their findings at the joint lenders’ forum (JLF) and advise on the future course of action. Most of these cases relate to corporate lending in sectors such as steel, power, construction and infrastructure.
At present, proceedings against 12 accounts totalling about 25% of the current gross NPA of the banking system are on in various benches of the NCLT. For accounts that do not qualify under the above criterion, it has been recommended that banks should finalise a resolution plan within six months. “In cases where a viable resolution is not agreed upon within six months, banks should be required to file for insolvency proceedings under the IBC,” the RBI had said in a notification. Many borrowers are now approaching banks with resolution plans and it has become very important for lenders to have all information about customers in order to negotiate a deal with them, a senior official with a state-run bank said.
On one hand, if a borrower has misused funds, precise information about it gives a leverage to the bank. On the other hand, in cases of proposals for restructuring loans, advance knowledge helps banks to stay away from such proposals, the official added.“The situation is now more complex and most of the borrowers have a lot of resources and they employ the best lawyers and consultants. In such a scenario, banks are keen to use specialised asset tracing services,” said Tarun Bhatia, MD, Kroll, a corporate investigation and risk consulting firm.