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.
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