(In) eight out of 10 cases, there is an element of wilful diversion of funds. So, the stress on assets is not only due to external factors, says Vikram Babbar, executive director, Fraud Investigations and Dispute Services, EY
The problem of rising bad loans is expected to worsen in the coming 2-3 years due to fraudulent borrowers that are hidden so far because of lapses in initial due diligence and lax monitoring post disbursals by banks, according to bankers surveyed by consulting firm Ernst & Young.
EY surveyed bankers across public sector, private and foreign banks about various issues related to the rise in bad loans and solutions to contain the problem through an online questionnaire and more than 110 bankers responded to the queries. In its report, “Unmasking India’s NPA issue”, the consultancy said 72% of its 110 respondents felt the restructuring norms by the Reserve Bank of India are being misused.
“Eight out of 10 cases, there is an element of wilful diversion of funds. So, the stress on assets is not only due to external factors,” Vikram Babbar, executive director of Fraud Investigations and Dispute Services at EY, told FE. Babbar believes that it would take bankers at least a year to implement the RBI’s guidelines on red flagging accounts that show fraudulent behaviour.
In May, the RBI detailed norms that require banks to identify and red flag accounts that show fraudulent behavior.
The central bank provided an exhaustive list of 45 factors through which banks can judge whether a borrower is fraudulent or genuine.
Bouncing of high-value cheques, delay in repayments, significant increase in working capital borrowings as a percentage of turnover, etc., are signs that bankers should look to, the RBI had said.
Once an account is red flagged, the borrower cannot get any additional funding from any bank. “While banks may not adopt forensic audit as a practice for all accounts, they are placing safeguards to identify accounts,” said Babbar.
According to the EY report, the overall level of stressed loans, which is the sum of gross NPAs and gross restructured assets, rose to over 11% in March 2015, from 9.2% in March 2013. Around 40% of the loans restructured between 2011 and 2014 had gone bad, the report said.
According to the survey, 68% of bankers felt that boosting internal capabilities such as sound credit assessment and monitoring, and a majority also felt that an independent assessment of the borrowal account will ensure more safety.