Finance cos funding delinquent accounts to dress up books

MUMBAI: In the lesser-known world of Indian subprime, lenders are playing a different game. Some of the finance companies and arms of banking groups are ‘funding’ delinquent accounts to window-dress their books. The evergreening transaction, similar to an accounting fraud, is done in connivance with the collection agents hired to recover loans. The intention is to keep the loan delinquency figure artificially low.

While two financial services groups have sacked a few of their senior officials after detecting the irregularity, a few local players have turned a blind eye to preserve the valuations of their firms and avert a hit on profitablity.

In the face of mounting defaults, with as high as 11% delinquency in the personal-loan portfolio of a large NBFC, many are moving away from the subprime and particularly low-ticket loans which were aggressively given to less creditworthy customers.

The account evergreening is different from the age-old ploy that banks have perfected. Here, as borrowers miss personal loan EMIs, some of the finance companies extend a fat fee to the collection agent, with the understanding that the agent will return a large part of the amount. When the agent returns the money, it is shown as loan EMIs.

While for the firm the net cash flow is nil — since the money that goes out comes back — it’s a way out to dress up the account.

How finance Firms gain from this?

First, it is not required to provide for the bad loan. When a loan turns bad (ie due for 90 days), it has to be fully provided. In other words, earnings have to be lowered by the outstanding amount. This immediately impacts profitability. This is avoided.
The fee income given to the agent is deducted as an expense thereby helping the company to lower the taxable income.

The delinquency level, or the volumes of non-performing loans, appears well below the actual figure.

Overleveraging

Some of the new aggressive players process a loan application, even though the customer in question may have defaulted on a past loan. The logic is: “The existing loan is performing even though the customer may have defaulted on some of his previous loans”, said a senior banker.

Most players, especially foreign banks and some of the newer NBFCs, rely on direct selling agents (DSAs) to source these personal loans. This is due to the absence of branches. DSAs are paid 2-3% for sourcing these loans. In some cases what is being observed is that if a player A has given a loan to some customer, player B approaches DSAs and tells them to submit the same papers so that they can lend money to the same customer.

Churn in Personal Loans

A difficult market is causing a churn in the personal-loan segment, with lenders relooking at their strategies. Since delinquencies have gone up, many are considering hiking the interest rates and slowing down monthly loan disbursements. Significantly, many banks are wary of giving personal loans to those in industries like BPO, software, hotels and auto ancillaries, thanks to the high turnover in these sectors.

Bankers point that, in many cases, the home address given by customers are false and it becomes difficult to track them later. Some of the cities which show high defaults are Bangalore and Hyderabad.