KPMG, Deloitte helping domestic banks in detecting NPAs

MUMBAI: A growing number of domestic banks are deploying systems that pick up early signs of stress in loans, a move they hope will help keep a tight lid on nonperforming assets (NPAs).

These systems, put in place mainly with the help of consultancies like EY, Deloitte, PwC and KPMG, raise red flags based on analytical tools as soon as a corporate loan starts showing signs of stress, and in some cases even investigate the company.

“Identifying fraud’s early warning signals can be a challenge for banks, given the lack of availability of data and information from borrowers,” said Mukul Shrivastava, partner, fraud investigation and dispute services, EY. “Deciding whether an account is a Red Flag Account (RFA) can be even more challenging due to the subjectivity involved.”

The mechanism being put in place by the consultancies encompasses a broader gamut of loans when compared with the early warning signals (EWS) introduced by the Reserve Bank of India (RBI) some time ago. Under the EWS system, if a bank finds one or more of these signals then the account has to be treated as a ‘red flag account’ (RFA).

“Our tools go beyond the ‘RFA list’ and include indicators that may help identify additional banking relationships that the borrower may have in addition to the ones declared. Our tools can also identify transactions with potential ‘high risk or black listed’ parties, and highlight issues in periodic stock and financial statements provided to the bank,” said KV Karthik, senior director, forensic, financial advisory, Deloitte India.

Some of the red flags for most banks are checking the credibility of debtors (of the company), the way money is withdrawn from a current account, going through the auditors' report (in balance sheets) and looking at related party transactions, amongst others.

A banker cited an incident where it was found that a debtor had given a declaration that it has an exclusive relationship with a public sector bank. The company had borrowed .`90 crore and said that the funds were required to pay some creditors. But as soon as the loan was disbursed, the entire amount was withdrawn the last penny and deposited in another account.

“Most companies, most of the time, do not require all the funds at one go. When this was brought to our knowledge, we asked the experts to look into it,” said a banker. Following this, the investigators merely checked the account in which the funds were deposited. It was found that the second account was registered under a name of what looked like a shell company. Further investigations traced the shell company’s ownership to the promoter’s bother-in-law.

Many banks, including ICICI and SBI, have been involving investigators. An email sent to ICICI Bank and SBI did not elicit any response till as of press time on Monday. People in the know said almost all major public sector banks are hiring forensic experts for similar mechanisms. Industry trackers said such a warning system can alert banks about a potential bad loan as early as a year before it actually starts seeing any signs of a stress.

“We have devised and are deploying tools where banks can take informed decisions on an account and check the RFA status using an intelligent scoring model. Additionally, we have tools that would also help banks identify and manage potentially hidden NPAs at the branch level,” said Shrivastava.

In some cases, when a bank comes to know of a stressed loan, it asks private investigators to find out about the company and even the promoters. “We are seeing cases where banks are now proactively asking us to conduct a detailed due diligence through forensic audit, including market intelligence, in case of suspicious activity,” said Karthik.