Banks are getting cautious while making new loans as they suspect businesses may downplay the impact of Covid

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Highlights

  • Banks also exercise due diligence in cases where they need to make new loans to old customers after the end of the moratorium period.
  • Banks and financial institutions want to make sure borrowers don’t disguise their financial statements
  • Investigations are carried out on accounts that have not gone bad or even shown signs of distress

New Delhi: With the second wave of Covid having a different impact on different sectors, the main private sector banks have become cautious while granting new loans to companies that have not opted for the moratorium.

According to a report in the Economic times, leading private banks have subjected the loan accounts of hundreds of borrowers to forensic examination on suspicion that they were off the streetcar tracks. Banks also exercise due diligence in cases where they need to make new loans to old customers after the moratorium period ends or to businesses looking for new lines of credit.

Banks suspect these companies of falsifying or exaggerating their financial statements, embezzling funds or lying about the impact of Covid on their operations. “Banks and financial institutions want to ensure that borrowers are not putting on a facade for their financial statements and, in some cases, want to independently find out the impact of Covid-19 on operations and business performance,” said the publication as cited by Dhruv Phophalia, Managing Director and Head of A&M Litigation and Investigations Practice in India.

“In some situations, some lenders are concerned that some companies have underestimated the impact of Covid-19 by projecting and reporting cash flows to lenders or potentially embezzled funds. “

The publication citing people in the know mentions that the investigations being conducted relate to accounts that have not gone bad or even shown signs of distress – at least not under current parameters. Banks also use investigators to check financial statements or the business in general before granting new loans, experts say. While most banks have their internal risk assessment framework to detect deviations, the big banks say that may not be enough.

“Existing risk assessment frameworks may not be adequate to incorporate the impact of the pandemic on the client’s risk profile,” the financial daily said citing a knowledgeable person.

“Many lenders are considering a holistic approach consisting of an improved framework and strict due diligence to identify risk hot spots as part of the sanction process. In many cases, this due diligence includes examining the financial health of the company and using external data sources not only to corroborate their valuation process, but also (to use it) as a framework for continuous monitoring, ”KV Karthik, partner, financial advisory services, at Deloitte India told the publication.


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