Unmasking the issue of nonperforming assets

Unmasking India’s NPA issues – can the banking sector overcome this phase?

B | Unmasking India’s NPA issues

ContentsExecutive summary ................................................2

Is the NPA “crisis” just the tip of the iceberg? .........3

Triggers leading to the NPA predicament .................4

Restructuring applications - need for cautious .......... evaluation ...............................................................6

Perils of third party nexus .......................................8

Inadequacy of existing mechanisms to identify NPAs .......................................................................9

Declaring NPA borrowers as “wilful defaulter” or “fraud” ................................................................. 10

A slow but steady future outlook ........................... 11

Regulatory sustenance for Banking Inc. ................ 12

Conclusion ............................................................ 13

Survey approach ................................................... 14

1Unmasking India’s NPA issues |

Arpinder Singh Partner and National Leader Fraud Investigation & Dispute Services

Abizer Diwanji Partner and National Leader Financial Services

Mukul Shrivastava Partner Fraud Investigation & Dispute Services

Introduction

2 | Unmasking India’s NPA issues

Executive summary

Use of forensic audit to ascertain intent of the borrower

91%

Change in political/ regulatory environment leading to

business loss

43%

Remedial measures

Current environment

Root causes

NPA crisis in India is set to worsen

72%

Lapses in the initial borrower due diligence

(pre-sanction)

64%

Diversion of funds to unrelated business/ fraud

87%

Misuse of restructuring norms

72%

Technology and data analytics

warning signals

56%

Developing internal skill sets on credit assessment/ evaluation

68%

Need for a mechanism to identify hidden NPAs

86%

India is seeing a regulatory upheaval in the way the Government is addressing the NPA “crisis”. The road to recovery is long and winding. But bankers are cautiously optimistic that the NPA situation will improve albeit at a slow pace.


Bankers say,

current debt servicing

Financial Institutions/Non

3.44.2 4.1 4.5 4.6

12.3 2.2 2.5 2.5

9.210.2 10

10.7 11.1

Mar'13 Sep'13 Mar'14 Sep'14 Mar'15

NNPAsGNPAs Overall stressed advances

(in %)*

assets

15%72%

Is the NPA “crisis” just the tip of the iceberg?

The rise of stressed assets


While corporate

So the question remains, is the rise in NPAs due to internal lapses in due diligence at banks or are complexities of business making it

Triggers leading to the NPA predicament

87% 64%

54%

Bankers say,

returns have driven the


Case study


Restructuring applications - need for cautious evaluation

Bankers say,

Agg

rega

te d

ebt -

INR

in c

rore

s

Total cases approved

Cases under consideration of CDR EG

Cases rejected before admission or approval

1,00,000

2,00,000

3,00,000

4,00,000

5,00,000

0

5cases

122 cases

2008-09

1,00,000

2,00,000

3,00,000

4,00,000

5,00,000

0

225 cases

520 cases (only 15% of the cases have exited sucessfully)

647cases

2014-15 (upto Dec’14)

Agg

rega

te d

ebt -

INR

in c

rore

s

CDR cell - Progress Report as on 31 Dec 2014 (since inception) | Total: 647 cases

Analysis of corporates approaching CDR


Bankers say,

EY Viewpoint

accounts 72% 19%

“Framework for dealing with loan frauds”,


Perils of third party nexus

chartered accountants

people to cast aspersions on the 2 of 3


•

•

•

•

•

•

According to the respondents, the following areas required substantial focus to enhance

• Periodic reviews of the automated mechanism to check for errors on a proactive basis

• NPA status

• Enhanced internal skills to reduce dependency on outsourced vendors for managing

Bankers say,

Inadequacy of existing mechanisms to identify NPAs

EY viewpoint

•

•

• �

•

•

•

as internal audits and concurrent audits

This highlighted the need to strengthen

86%


Declaring NPA borrowers as “wilful defaulter” or “fraud”

Bankers say,

Case study

Detailed background checks revealed

properties and diverted to other business

36% 32%

44%


Case study

A slow but steady future outlook

56%

56%background checks

68%skill sets on credit

47%accounts

25%Market intelligence


Regulatory sustenance for Banking Inc.

• banks

•

•

•


Conclusion


Survey approach

44%

22%

11%

10%

10%3%

Business functions of respondents

Credit/ Operations

Others

Legal/ Compliance Asset Recovery Audit/ Finance Vigilance

50%

34%

16%

Corporate loans (INR in crores) held by respondents’ bank

100,000 and above

0 – 30,00030,000 – 100,000

68%

21%

10%

1%Nature of business

A public sector unit A private sector unit A foreign bank A co-operative bank


Notes


FIDS India•

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Our services•

• Fraud Investigation

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• • • • • • • •

Services

• • • •

Disputes Services

• Intelligence Services

About EY Fraud Investigation & Dispute Services


Arpinder Singh Partner and National Leader

Sandeep Baldava Partner

Vivek Aggarwal Partner

Mukul Shrivastava Partner

Anurag Kashyap Partner

Anil Kona Partner

Rajiv Joshi Partner

Yogen Vaidya Partner

Dinesh Moudgil Partner

Jagdeep Singh Partner

Vikram Babbar

Kochi

Kolkata

Pune

Panchshil Tech Park

Contact us

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Unmasking the issue of nonperforming assets

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