Banks dig deep to verify client claims about Covid impact

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Corporate governance, traditionally an underrated qualitative metric in Indian business, is rapidly climbing the priority ladder — and could make or mar that well-reasoned treasury pitch to bankers for more loans.

Such is the increasing importance of governance in assessing credit-worthiness that top private banks have put the loan accounts of hundreds of borrowers under forensic scrutiny on suspicion they came off the tramlines. Banks are also conducting due diligence in cases where they have to extend new loans to old customers after the moratorium period ended or to companies that are seeking fresh credit lines.

Banks suspect that these companies may have window-dressed or exaggerated their financial statements, diverted funds or lied about the Covid impact on their operations. “Banks and financial institutions want to be sure that borrowers are not window-dressing their financial statements and in some cases want to find out independently the impact of Covid-19 on business operations and performance,” said Dhruv Phophalia, managing director and head of A&M’s disputes and investigations practice in India.

“In certain situations, some lenders fear that some companies may have underplayed the impact of Covid-19 in projecting and reporting cash flows to the lenders or potentially diverted funds.”

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People in the know say that the investigations carried out are on accounts that have not gone bad or even shown any signs of distress — at least not as per the current parameters. The banks are also roping in investigators to check the financial statements or the company in general before extending new loans, say experts. While most banks have their internal risk assessment framework to detect discrepancies, large banks claim that this may not be enough.

“Existing risk assessment frameworks may not be adequate to incorporate the fallout of the pandemic on the customer’s risk profile,” said a person in the know.

“Many lenders are considering a holistic approach consisting of enhanced framework and stringent due diligence to identify risk hotspots as part of the sanctioning process. In many cases, this due diligence includes looking at the financial health of company and using external data sources to not only corroborate their appraisal process, but also (to use this) as a continuous monitoring framework,” said KVKarthik, partner, financial advisory services, at Deloitte India.

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