Legal audits by banks: A boon or a bane?

Non-performing assets of public sector banks have increased to 4.1% of their gross advances as per latest reports. These borrowers often fail to service their debt, which is coupled with the difficulty of enforcement of the security provided. Recent cases of fraud and misrepresentation have come to light where borrowers didn’t have authority over properties they provided as security, resulting in various banks and financial institutions contending to enforce security over the same property.

There have been reports of cases where individuals holding key positions in banks bypassed the requirements for sanctioning a loan and colluded with the borrower in an attempt to grant favourable loan terms. This amounted to a fraud on the banks.

Lately, the Reserve Bank of India (RBI) has ordered audits on certain large public sector banks to assess the reasons for the rise in bad loans in such banks and to check for irregularities in the sanctioning of loans. The Ministry of Finance and the Central Bureau of Investigation have also been investigating such cases. In light of the above, the RBI, in addition to the other steps taken by it, has directed banks to conduct legal audits.

Jeet Sen Gupta is a partner, Deep Roy is an associate partner and Megha Agarwal is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.