Pre-empt distress in loan accounts
Identifying and managing early signals
In the recent years, banking sector in India has seen a rise in Non-performing Assets (NPAs) due to various reasons. The onset of the COVID-19 pandemic is expected to further negatively impact the NPA position in banks. Many businesses facing a zero-revenue situation might turn to banks for fresh loans or existing loan extensions. Considering the banking sector is already grappling with significant proportion of NPAs, banks need to exercise greater caution while monitoring or sanctioning new loans.
The Institute of Chartered Accountants of India’s (ICAI’s) Guidance note on ‘Early Signals of Fraud in Banking Sector’ also mentions continuous monitoring through tracking of certain early warning signals to pre-empt suspicious behaviours.
This document shares some perspectives on how banks can relook at their fraud risk management efforts to better manage their NPAs.
Leveraging available data
1. Quantitative analysis
- Comparative analysis of financial statements- Multiple techniques incorporating all components of the financial statements involving assets, liabilities, expenses, and income can be used.
- Ratios analysis involves measuring the relationship between two different components of the financial statement.
2. Qualitative factors
- Capital market forces, i.e., downgrading of rating done by credit rating agencies, inability to meet listing requirements of SEBI, litigation with private equity shareholders, etc.
- Judgmental accounting considers other data available with banks, such as periodic debtors’ stock statements, stock audits, receivables audit, site visits, banks statements, projected data, etc., to seek early warning signals.
