NPA crackdown endless battle


The NPA crackdown

An endless battle

The upward rise in non-performing assets (NPAs) has placed the Indian banking and financial services sector in jeopardy, and the writing on the wall is that the situation may not get any better in the near term. However, regulators are making efforts towards ensuring that such high NPAs levels do not appear in the future.

RBI’s stance on rising NPAs
The regulator has frequently raised concerns over the rising trend in loan related frauds in the financial sector. The key issues identified by the RBI (Reserve Bank of India) were:

  • An unusually long time for fraud detection 
  • Delay in reporting of frauds to the RBI which further delays alerting other banks by the RBI, and, 
  • Timely initiation of staff accountability proceedings.

Keeping these in mind, RBI introduced the concept of a Red Flagged Account (RFA) as an important step in fraud risk control. As defined by RBI (in its circular dated 7 May, 2015), a RFA is one where a suspicion of fraudulent activity is thrown up by presence of one or more Early Warning Signals (EWS). EWS in turn, is a solution to identify borrowers in the bank’s portfolio showing early signs of stress, thereby enabling timely and corrective action planning. Ideally, these signals in a loan account should immediately put the bank on alert regarding a weakness or wrong doing which may/ could ultimately turn out to be fraudulent.

Next steps
The EWS system can enable banks to adopt a proactive fraud monitoring approach for early fraud detection. It will also help take timely corrective action to minimise impact and quantum of loss which may occur in case of continuance of the fraud.

Further, the existing credit monitoring process is required to be aligned and integrated with the fraud risk framework in order to populate early warning signals in a timely manner. The EWS could be identified based on two types of triggers:

  • Automated triggers which could be system generated reports on the account activity/ behaviour 
  • Manual triggers which could be identified based on the review of documents and research.

In our experience, the proper mix of automated and manual triggers needs to be rightly placed during all the stages of life cycle of the loan account in order to fetch timely and effective results.

Last but not least, the team responsible, should be trained and sensitised to observe and promptly report any indication of the EWS to the right forum in the organisation. They should be encouraged to report fraudulent activities noted in a loan account, along with reasons in support of their views.

Additionally, to cope with the current levels of NPAs, all banks will need to maintain strict vigilance during their pre and post sanction due diligence processes. They must also fortify their internal processes to effectively monitor funds.

If you have any questions about the types of alerts that could turn out to be fraudulent, or how best to use the EWS and RFA or any other comments/ views you would like to share, please write to us at or on Twitter by following @deloitteindia.

Authored by: KV Karthik, Partner, Deloitte India and Nishkam Ojha, Director, Deloitte India

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