When we talk about NPA Management, two important concepts come to our mind. They are the diversion of funds and siphoning of funds. These two concepts are critical because they can help business owners to manage their funds in a proper way.
Let’s know about these two concepts in detail.
Diversion of funds
Diversions of funds is the use of funds for a particular purpose for which the loan was never sanctioned. For example, the loan was given to arrange working capital purposes, but it is utilized in buying immovable property out of the cash credit limit.
The use of short-term working capital funds for long-term purposes is not in conformity with the terms of the sanction of the loan. Some examples of diversion of the fund are:
- When you deploy funds for activities or purposes for which the loan was not sanctioned.
- When you deploy funds to create assets other than those intended.
- You transfer funds to other group companies or subsidiaries.
- You route the fund through any other bank than the lender bank or members of the consortium without prior permission of the lenders.
- When the funds are invested in other companies by acquiring debt instruments or equities without the approval of lenders.
- When there is a shortfall in the deployment of funds versus the disbursed or drawn amount and its difference is not accounted for.
NPA Management is an important activity that considers the diversion of funds.
Siphoning of Funds
Siphoning of funds, on the other hand, is a different scenario. If the fund borrowed from a lender is used for a purpose not related to the operations of the borrower, to the detriment of the financial health of the entity of the lender, then it is called siphoning of funds.
Whether an instance falls under the umbrella of siphoning or not depends on several aspects. It will be on the judgment of lenders and it is taken on objective facts and circumstances of the case.
Diversion of funds or siphoning of funds can be detected if the end use of funds is being periodically verified or monitored. It is an effective NPA Management activity.
Some of the effective measures are:
- By doing a regular inspection of borrowed assets.
- By having meaningful scrutiny of quarterly progress reports and balance sheets and operating instruments.
- By having periodical scrutiny of books of accounts.
- By having periodical stock audits.
These measures are responsible for the proper management of assets and loans.