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Sunday, September 13, 2015

Top Officials Of Bank Speak Truth


I have been writing for several years that internal position of bank's assets is not at all good and real volume of bad debts is on an avrage more than 25 percent of total advances and may go even  beyond 50 percent. In many branches of many bank NPA is more than 50 percent of total advances . Still banks are considered as healthy and none of auditors and regulating agencies are worried in reality.
 
But quarter after quarter CEO of each bank will firmly speak to media and say that they will reduce Gross NPA ratio in forthcoming or next quarter. In the same way ,RBI and Finance Minister say and vlaim good health of bank because they also believe on such clever and shrewed bank officials and give them promptest promotion and even give them job after retirement.
 
Banks as well as Government of India function based on certificates. Banks get Certificates of good health from branches and from auditors and RBI in turn gets the certificate from CEOs of each bank. Finance Minister have full trust on RBI and CEOs of bank. This is why , officers are habituated in submitting false certificates. They know and they are cent percent sure that no power on earth can take punitive action against their misdeeds or for submitting false certificates. This is the reason that quality of assets in banks is going from bad to worse every quarter and every year. But learned FM says that quality of assets in banks are matter of concern but not worrisome.
 
But now when a secret survey has been carried out by Earnst & Young , Majority of top officials interviewed or who responded on questions submitted by EY India to them have admitted the bitter truth of bank's asset quality and admit that future of bad debts is alarming keeping a condition that their names will not be disclosed. In brief, bankers without disclosing their names have accepted following bitter truths in a survry conducted by E & Y
 
1. that problem of bad debts is likely to go up in coming two-three years.
 
2. that steps taken by RBI are not going to help bankers in stopping slippages to NPA category .
 
3. that Diversion of fund is very common with companies. They do not use the fund for which they avail from banks and  diversion of borrowed fund  to stocks, real estate is very common.
 
4. that Borrowers borrow money beyond their repayment capacity and bankers sanction the same for reasons best known to them.
 
5. that they do not accept the stress on face value but they want forensic audit of companies to ascertain intent of the borrrower.
 
6.that bankers resort to outsourcing of vital functions knowing very well that outsourcing of due-diligence activities by banks to various entities, such as surveyors, financial analysts and other verification agencies is risky .
 
7. That Lenders rely significantly on the inputs issued by such third parties. Reports are made as a routine with little scrutiny. In some situations the report may be drafted under the influence of unscrupulous borrowers.
 
8.It is therefore important that the selection of such third parties is independent, done in a transparent manner and is based on their capability and credentials,"
 
9.that banks often send their sales force instead of credit officers to do credit appraisal activities, such as in-person verification, background checks, and factory visits, which is inherently conflicting to their role of loan origination.
 
10.that in most large proposals, the due diligence or credit appraisal done by the consortium leader is accepted by the member banks. This is applicable in multiple bank lending relationships, where the lenders with low exposure rely on checks done by the lenders with higher exposure, it added.
 
11. Even after noticing warning signals, bank officials in general try to hide it and suggest juniors ways how to keep the account in Standard category by using wrong and improper tools to save their colleagues . Borrowers take advantage of banker's constraints and compulsion of sticking to NPA target fixed by higher authorities. They seek more and more fund to divert the same to other field like stock, real estate or other business activities or even misuse the excess fund for consumption and for leading a life of highest standard for which he is not capacitated.
 
One can imagine the quality of bank's assets and what is going to happen in near future . I need not enlighten elaborately on this issue now. There exists a unlawful relation and partnership between borrowers and bank officers directly and indirectly with various VIPs sitting outside.

 


 

Most bankers expect bad loans to worsen: Survey-Times of India 9th September 2015


MUMBAI: The banking sector's prospects do not look all that good with a majority of lenders expecting the bad loan situation to worsen in coming years. There is lack of faith in stressed borrowers who, bankers believe, are misusing the restructuring facility and are responsible for the problem in bank loans.

Describing the bad loan situation as a 'crisis', management consultancy firm Ernst & Young said that 72% of the respondents in a lender survey feel the situation was set to get worse, while only 15% feel that the slippage of loans into default category would get arrested due to measures taken by the Reserve Bank of India.

The findings gain significance considering that the total size of bad loans in the country is estimated to be over Rs 2.6 lakh crore with the top 30 defaulters accounting for close to Rs 95,000 crore. This does not take into account restructured loans. Stressed loans, which are a combination of bad loans and restructured loans, now account for over 11.1% of all bank advances.


Speaking to TOI, Vikram Babbar, executive director (fraud investigation & dispute services) at Ernst & Young, said that in 87% of the cases where the loans had gone bad, the borrower had diverted funds. "In diversion, there are two situations. One where the borrower's business has turned unviable because of the global situation and he has to change his line to stay as a going concern. There are other borrowers with aggressive growth aspirations who start looking at alternate businesses like stocks and real estate to make a quick buck. In both cases, banks are not involved and it can be an issue even if bets made by the promoter pays off because it is not the intent of the banker to pick up an exposure in a new area."

An overwhelming 91% of lenders are unwilling to take stressed borrowers at face value and feel that an forensic audit is needed to ascertain the intent of the borrower. "The defaulter always blames the global situation and slowdown for stress in the business, yet until the banker does a 'deep dive' and investigates the account, he cannot ascertain whether the default was on account of global situation or the borrower using leveraged funds for speculative activity," said Babbar.

According to him, one of the biggest tell-tale sign of a wilful default is the sudden surge in related-party transactions. "In eight cases out of ten, I have seen a pattern of relative parties being used to divert money or siphon off money. The wilful defaulters create a web of companies and within this web they build up sales and purchase transactions. They raise funds against these make-believe transactions, passing them off as high turnover and the borrowed money again goes out to these related parties," said Babbar.

"Some of the red flags are very common, you can look for them before the loan is given. Today, key issue is that there is no monitoring after the money is given. Monitoring has to be very critical," he said.

Banks must outsource due-diligence activities with care: EY report -Hindu Business Line
Mumbai, September 8:  


Outsourcing of due-diligence activities by banks to various entities, such as surveyors, financial analysts and other verification agencies, is an Achilles heel for the banking sector, according to an EY report.
“Lenders rely significantly on the inputs issued by such third parties. Reports are made as a routine with little scrutiny. In some situations the report may be drafted under the influence of unscrupulous borrowers.
“It is therefore important that the selection of such third parties is independent, done in a transparent manner and is based on their capability and credentials,” the report said.
Vikram Babbar, Executive Director – Fraud Investigation & Dispute Services, EY, said in many cases banks often send their sales force instead of credit officers to do credit appraisal activities, such as in-person verification, background checks, and factory visits, which is inherently conflicting to their role of loan origination.
Discretion needed

Various checks need to conducted done discreetly while visiting the factory premises of a prospective client, says Babbar.
These include speaking to employees on whether their salaries are paid on time, doing a random check on whether inventory actually exists, talking to their suppliers and service providers about concentration of their business, besides the behaviour of the company towards doing business.
Information on negative issues, such as raids by the officials of excise/ customs/ income tax/ provident fund departments are also an important part of the due diligence process, according to Babbar.
On what stops banks from talking to their peer banks where the prospective client has a banking relationship, Babbar says such checks should be independent and the borrower should not refer the bank to his banker.
This is because there are chances of the referral being directed to someone in the branch who is not authorised to speak on the borrower’s account. On banks often blaming their software vendors and core banking implementation partners for glitches in their CBS (core banking solution platform), Babbar said that the onus of the CBS rests on the bank. It is up to the bank to decide on how to capture the data, and the type of reports that are required.
Closely monitoring exceptions, especially related to NPAs (non-performing assets), are an imperative, as the first early warning signal on an account turning NPA is thrown up by account behaviour — data for which rests within the CBS, Babbar said.
Bad loans mainly due to diversion of funds, says EY report
Mumbai, September 8:  

Diversion of funds to unrelated business or fraud, lapses in initial borrower due diligence, and inefficiencies in the post-disbursement monitoring process are the main reasons for the bad loans predicament of banks, according to an EY report.
Around 87 per cent of the more than 110 respondents from the banking sector believe that the rise in NPAs/stressed assets is due to diversion of funds to unrelated businesses or frauds.
Sixty four per cent of the respondents felt that a major reason for every stressed asset/NPA is lapses in the initial borrower due diligence (pre-sanction). Around 54 per cent attributed this to the inefficiencies in the post-disbursement monitoring process.
Credit appraisal

The EY report has observed that in most large proposals, the due diligence or credit appraisal done by the consortium leader is accepted by the member banks.
This is applicable in multiple bank lending relationships, where the lenders with low exposure rely on checks done by the lenders with higher exposure, it added.
Stressed asset percentages have consistently been a cause of concern over the last few years. As on March 2015, gross NPAs of the banking sector stood at 4.6 per cent of advances as compared to 4.1 per cent in the previous year.
Further, gross NPAs of public sector banks stood at 5.17 per cent of advances as of March-end 2015 while the stressed assets (NPAs and restructured loans) were 13.2 per cent.
While corporate borrowers have repeatedly cited the economic slowdown as the primary factor responsible for rising NPAs, periodic independent audits on borrowers have revealed diversion of funds or wilful default leading to stress situations, the report said.


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