Corporate funds diversion big reason for NPAs: Study

 “Around 87 <g data-gr-id="27">per cent</g> of the respondents stated that diversion of funds to unrelated business through fraudulent means is one of the root causes for the non-performing assets crisis,” EY said in its survey titled ‘Unmasking India’s NPA issues: can the banking sector overcome this phase?’.

The report is based on the response from over 110 respondents from the public, private, foreign and co-operative banks during November 2014 to March 2015. Almost 72 per cent respondents predicted that the crisis is set to worsen. The respondents indicated that lapses in the initial borrower pre-sanction process and inefficiencies in post-disbursement monitoring have played a key role in the country’s non-performing asset mess. 

“We have seen that an often overlooked, but integral aspect is lapses in integrity by borrowers or by gaps in the initial sanctioning process undertaken by financial institutions,” EY’s partner and national leader (fraud investigation and dispute services), Arpinder Singh, said.

Nearly 72 <g data-gr-id="22">per cent</g> said borrowers are <g data-gr-id="21">misusing</g> restructuring norms set by regulatory authorities. Around 86 per cent stated that existing monitoring procedures such as internal audits and concurrent audits alone were not enough to verify <g data-gr-id="28">adequate</g> functioning of the non-performing assets mechanism. .

“This highlighted the need to strengthen internal processes and controls for early detection of issues,” the survey said. Close to 91 <g data-gr-id="26">per cent</g> respondents stated that forensic audit must be made mandatory to ascertain the intent of the borrower while 54 per cent respondents said this would help in weeding out ‘wilful defaulters’ from genuine borrowers and thereby reduce recovery costs.

Of the 110 respondents, 44 <g data-gr-id="23">per cent</g> are of the view that the impact on provisioning or performance of the bank branch is one of the key reasons that prevented banks from reporting borrowers as ‘wilful defaulters’. A measly 15 <g data-gr-id="63">per cent</g> respondents seemed optimistic, who felt that non-performing assets numbers will be checked due to regulatory changes and greater supervision by the Reserve Bank.