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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.

Also read: Banks must outsource due-diligence activities with care: EY report

(This article was published on September 8, 2015)
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