Banking Practices: Benefits of making them more secure & efficient

Reported by: |Updated: December 4, 2019

Deepak Bhawnani
CEO and founder of Alea Consulting

Over the past few years, the Indian banking system has faced various complex issues.  Now, more than ever, a bank’s financial performance is scrutinized for its burgeoning NPAs, loan recovery mechanisms and frauds reported. Though a key profit center for banks, corporate banking is also the largest source of regular write-offs for bad debts.

To ensure current banking practices become more secure and efficient, both internal and external factors are to be considered. We look at the banking sector in 3 segments – On-boarding, Customer Relationship Lifecycle and Recovery.



Credit Appraisal & Risk Management

For high loan limits, senior-level approvals from credit risk management teams are mandatory. A clear audit trail recording the approval process of big-ticket loans to private and publicly listed entities must be maintained. Specialist credit risk groups with appropriate experience and accountability must have the absolute authority – the decision cannot be limited to a line manager or a top-level executive. Instances of collusion can only be avoided by regular independent review and updating of processes.

Authorization and Training

The level of authority to sanction changes according to the quantum of exposure, and inherent risks related to the transaction is necessary. Banks must ensure that their officers have the necessary knowledge or background in banking, finance or law along with sector knowledge, and provide appropriate training, where needed.


The banking landscape of India has compliance lacunae. The RBI has cumulatively imposed penalties of about Rs 1.23 billion between January and July 2019, primarily for lapse of compliance. Sound corporate governance in a bank is important to create strong compliance culture.  Usually a chief risk officer or equivalent is clear on required compliances mandated by regulators. Mostly, risk and compliance activities are completed in silos by different departments of a bank. Hiring skilled regulatory compliance specialists and/or upskilling existing staff with new and evolving regulations can help mitigate compliance risk.


Enhanced due diligence should be initiated if a potential client qualifies as PEP, before accepting him as a customer. This KYC should include significant depth and detail and identify source of funds.  Monitoring of subsequent transactions is the onus of the bank to avoid embroiled in any money-laundering scandal.

Multiple Checks

KYC checks are initiated to understand the company profile, industry, financial credibility, working capital relationships, cash dealings, assets, and more. Anti-Money Laundering (AML) controls check for prior records of criminal or other nefarious activities. Any organization and its key employees’ names must be run through the latest anti-fraud systems and databases. The Central Fraud Registry (CFR), a web-based RBI database, is available to financial institutions for early identification and reporting of credit risk governance and mitigation of fraud risk.  Red Flagged Accounts (RFA) and Early Warning Signals (EWS) in the CFR database help banks to a greater extent in decision making. CBI and Central Economic Intelligence Bureau (CEIB) share their databases selectively with financial institutions.

Sectoral Expertise

While a financial institution is ready to handle a loan appraisal, the senior team must be aware of current trends, opportunities and issues of industry where its corporate client is active. Professionals with 10-15 years of sectoral expertise are in a better position to opine concerns to mitigate risk.

Green Light Committee

Each bank should consider a formal Green Light Committee (comprising senior members across locations and departments) that reviews an applicant. The GLC, using its objective expert knowledge, can scrutinize, revise and streamline the review process and enable faster responses to the increasing demand of bank services.


Banks keep customers with responsive services and low charges. Regular interactions with a relationship manager, for submission of information on investment plans, capital expenses and advice on other financial instruments are necessary. A certain level of transparency has to be maintained as bank is now a significant stakeholder in the corporate client. Such business relationships can continue for decades and withstand inevitable economic cycles. Banks must maintain optimal engagement for client retention and for its own reputation management.


To support the relationship, apart from document checks and human interaction, there is a clear need for technological intervention given the sheer volume of transactions. Anti-fraud algorithms, AI and other systems assist in evaluation of transaction and client data. These systems need to improve and be more accurate but are making great strides.

Frequent Checks

When bankers remain long-term stakeholders, checks and balances must be in place. They cannot be complacent for long-term clients.  Avoiding a recovery situation is the best remedial solution, making frequent checks imperative.


A listed company cannot have the same auditors for two terms of 5 years. Similarly, it should be mandatory to change relationship managers to avoid collusion.

Updation of Personal Guarantees

Usually a bank has corporate or personal guarantees in place.  Verification and validation of securitized assets must be checked. Frequent monitoring and valuation of declared assets are also needed, especially when credit limits are being enhanced.


Loan repayment ‘90 days overdue’ marks the onset of a recovery phase. How can a financial institution get the client to return what they owe?  One option is a transfer to the Distressed Debt or Special Situations Team who have a different relationship with the corporate client.

Accessibility of Information

All information provided to the bank by the corporate client, when the relationship was mutually beneficial, should be fully available to the recovery team. The data should be thorough and complete so that the legal/recovery team can respond faster to recover assets.

Early Warning System

Communication within departments is more critical now than ever. Delay in interest payments, non-disclosure of information, change of CFOs could be some of the early warning signs to begin recovery action before other lenders, which may minimize the eventual haircut.

In situations where fraud related concerns or loss of confidence in the creditor’s intention to pay is assessed, external due diligence can be considered. There is a wealth of information to be collected, collated and analysed in a legal and ethical manner, by an established due diligence company. This information significantly supports making appropriate decisions to recover.

Compliance issues that are available in the public domain may not be known to bankers, as reporting such incidents may not be a requirement. For example, EPFO records for number of employees or attrition rates may not be a default disclosure.

Asset Discovery

There is anxiety observed in budgeting for asset discovery as it is seen as an intangible cost. In our experience, we found that it is best to institutionalize this process, which removes the process being viewed on a case to case basis. External agencies have the capabilities and resources to search across India and internationally, irrespective of the asset size. Asset discovery cases have provided evidence of undisclosed personal assets in millions of dollars in which is far below the overall cost of retaining external agencies.

Independent Agencies

External agencies hired need to be completely independent and they must not be providing other services to the financial institution to avoid any conflict of interest.  These vendor entities should not comprise ex-employees of the financial institution, as this can be a conflict issue.  There is a requirement by many global lending organisations that any family link of a vendor to any employee of the client organisation must be disclosed.

With advances in technology, the banking and financial services industry continues to evolve. As consumer needs change so will opportunities for fraudsters therefore, mandating multiple enhanced approaches of combating fraud can improve functional efficiency and ensure regulatory compliance.

Deepak Bhawnani is CEO and founder of Alea Consulting