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

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

Contents Executive 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 B Unmasking India s NPA issues

Introduction 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 Unmasking India s NPA issues 1

Executive summary Current environment 72% NPA crisis in India is set to worsen 72% Misuse of restructuring norms 87% Diversion of funds to unrelated business/ fraud 64% Lapses in the initial borrower due diligence (pre-sanction) Root causes 43% Change in political/ regulatory environment leading to business loss 56% Technology and data analytics warning signals Remedial measures 86% Need for a mechanism to identify hidden NPAs 68% Developing internal skill sets on credit assessment/ evaluation 91% Use of forensic audit to ascertain intent of the borrower 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. 2 Unmasking India s NPA issues

Is the NPA crisis just the tip of the iceberg? Bankers say, The rise of stressed assets (in %)* 9.2 10.2 10 10.7 11.1 3.4 1 4.2 4.1 4.5 4.6 2.3 2.2 2.5 2.5 current debt servicing Mar'13 Sep'13 Mar'14 Sep'14 Mar'15 GNPAs NNPAs Overall stressed advances assets Financial Institutions/Non 72% 15% Unmasking India s NPA issues 3

Triggers leading to the NPA predicament Bankers say, While corporate returns have driven the 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 87% 64% 54% 4 Unmasking India s NPA issues

Case study Unmasking India s NPA issues 5

Restructuring applications - need for cautious evaluation Bankers say, Analysis of corporates approaching CDR Aggregate debt - INR in crores 5,00,000 4,00,000 3,00,000 2,00,000 1,00,000 225 cases 647 cases 0 2008-09 2014-15 (upto Dec 14) CDR cell - Progress Report as on 31 Dec 2014 (since inception) Total: 647 cases 5,00,000 Aggregate debt - INR in crores 4,00,000 3,00,000 2,00,000 1,00,000 0 Total cases approved 520 cases (only 15% of the cases have exited sucessfully) 5 cases Cases under consideration of CDR EG 122 cases Cases rejected before admission or approval 6 Unmasking India s NPA issues

Bankers say, EY Viewpoint accounts 72% 19% frauds, Framework for dealing with loan Unmasking India s NPA issues 7

Perils of third party nexus chartered accountants people to cast aspersions on the 2 of 3 8 Unmasking India s NPA issues

Inadequacy of existing mechanisms to identify NPAs Bankers say, According to the respondents, the following areas required substantial focus to enhance 86% 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 as internal audits and concurrent audits This highlighted the need to strengthen EY viewpoint Unmasking India s NPA issues 9

Declaring NPA borrowers as wilful defaulter or fraud Case study 44% Detailed background checks revealed properties and diverted to other business 36% 32% Bankers say, 10 Unmasking India s NPA issues

A slow but steady future outlook Case study 56% 56% background checks 68% skill sets on credit 47% accounts 25% Market intelligence Unmasking India s NPA issues 11

Regulatory sustenance for Banking Inc. banks 12 Unmasking India s NPA issues

Conclusion Unmasking India s NPA issues 13

Survey approach Nature of business 10% 1% 21% 68% A public sector unit A private sector unit A foreign bank A co-operative bank Business functions of respondents 10% 3% 10% 11% 22% 44% Credit/ Operations Legal/ Compliance Asset Recovery Audit/ Finance Vigilance Others Corporate loans (INR in crores) held by respondents bank 16% 34% 50% 0 30,000 30,000 100,000 100,000 and above 14 Unmasking India s NPA issues

Notes Unmasking India s NPA issues 15

About EY Fraud Investigation & Dispute Services Our services Fraud Investigation Services Disputes Services Intelligence Services FIDS India 16 Unmasking India s NPA issues

Pune Panchshil Tech Park Kochi Kolkata Contact us Arpinder Singh Sandeep Baldava Vivek Aggarwal Mukul Shrivastava Anurag Kashyap Anil Kona Rajiv Joshi Yogen Vaidya Dinesh Moudgil Jagdeep Singh Partner and National Leader Partner Partner Partner Partner Partner Partner Partner Partner Partner Vikram Babbar Unmasking India s NPA issues 17

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