Pre-disbursement Due Diligence


Recent headlines around rising Non Performing Assets (NPAs) in India have brought a myriad of challenges faced by banks and financial institutions into the spotlight. Banking and finance sector is struggling with the constant issue of inadequate due diligence about the borrowers.
The issue of gathering information about the borrower can be demystified by segregating it into the various stages of the loan cycle:

Due Diligence while On-boarding

Global banks faced significant fines for violation of Anti Money Laundering provisions. Heightened Risk Professionals have played a significant role in making these banks operationally weak and identifying the Heightened Risk Individuals help the banks to tackle the risks.

This video explains the importance of Indian technology used for identification of heightened risk individuals. Many companies handling the client on-boarding process of the Multi-national banks gained insights due to this database driven solution.

Due Diligence while Sanctioning

There are times when loans are sanctioned without adequate due diligence to confirm authenticity of the promoters background. In the age of continuous monitoring by the regulators it becomes important to conduct the quick review of the background of the borrowers. This becomes even more relevant for loans sanctioned especially at period ends where there is significant pressure on Turn Around Time.
In some instances, it has been observed that the ‘market value’ of the collateral is considered while preparing the sanction documents instead of taking a rather conservative approach and considering ‘book value’ which allows a ‘cushion’ to the lending institution. Information on the types of manipulations done with the value of the security can be understood while completing the Certification course in Banking frauds offered by Indiaforensic.

Another case could be when the evaluation of collateral is often performed by independent agencies that are later identified as being linked to  the borrower (being appointed by the borrower) thus defeating the purpose of independent assessments. In order to identify the nexus between the borrowers and valuers, tools like Biznexxus play a crucial role.

Loan documentation

Documents submitted by the borrower are often taken at face value without adequate diligence and skeptical review. Many of the times it is essential to understand the nexus of the auditors with the borrowers. Auditor borrower nexus can prove costly to the banks.Hence auditor independence check play a crucial role in today’s world.

Some common occurrences in this case would be unavailability of requisite insurance cover or just photocopy of ‘no objection certificate’ obtained from other banks.

In the pre-disbursement stage if the banks perform the additional due diligence checks such as the auditor independence checks, review of the nexus of the borrower with other parties, analysis of undisclosed related parties it helps the banks to take the informed decisions.

CA Mayur Joshi
CA Mayur Joshi is a Forensic Accounting evangelist in India. He is the co-founder of Indiaforensic and is author of 7 books on forensic accounting, fraud investigations and money laundering.