Banks are wary of extending new loans as they suspect companies may be underestimating the impact of Covid

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Banks are cautious when issuing new loans

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Key points

  • Banks also conduct due diligence when they need to make new loans to old customers after the end of the moratorium period.
  • Banks and financial institutions want to be sure that borrowers do not hide their financial statements.
  • Investigations are being conducted into accounts that have not deteriorated or even showed no sign of distress.

New Delhi: As the second wave of Covid affected different sectors in different ways, leading private-sector banks have been cautious in providing new loans to companies that have not opted for a moratorium.

According to a report in Economic Times, leading private banks subjected the credit accounts of hundreds of borrowers to forensic examinations on suspicion that they had stepped off the tram tracks. Banks also carry out due diligence when they need to make new loans to old clients after the end of the moratorium or to companies looking for new lines of credit.

Banks suspect that these companies may have hidden or exaggerated their financial statements, divert funds, or lie about the impact of Covid on their operations. “Banks and financial institutions want to be sure that borrowers do not hide their financial statements, and in some cases want to independently find out the impact of Covid-19 on business operations and results of operations,” – quoted by Dhruv Phophalia, Managing Director and Practice Leader A&M disputes and investigations in India.

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

The publication, citing knowledgeable people, mentioned that investigations are being carried out into accounts that have not deteriorated and did not even show any signs of disaster – at least not in accordance with the current parameters. Banks also use investigators to check financial statements or the company as a whole before granting new loans, experts said. While most banks have their own internal risk scoring system to identify discrepancies, large banks say this may not be enough.

“Existing risk assessment systems may be inadequate to include the effects of the pandemic in the client’s risk profile,” the Financial Daily quoted a knowledgeable as saying.

“Many lenders are looking at a holistic approach of extended scope and rigorous due diligence to identify risk hotspots as part of the sanctions process. In many cases, such a due diligence includes a review of the financial condition of the company and the use of external data sources not only to confirm the assessment process, but also (to use it) as a system of continuous monitoring ”, – K.V. Kartik, partner, financial advisory services. , Deloitte India reported.



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