Bank Statement Analysis: Crucial For Banks & NBFCs

Introduction

A bank statement is the summary of the inflows and outflows of any particular account holder during the specified time period. It is the bank’s transactional history which is usually considered to be robust documentation for assessing any account holder’s financial health. All sources of revenues, expenses, withdrawals, overdraft payments, credit card payments, etc. become a part of the bank statement as and when incurred. There is a reason why, for every loan process or auditing financial transaction – whether analysing commercial loans for companies and analysing retail loan for individual, the primary document asked is a bank statement. A bank statement can reveal any information which may prove to be of key importance for the analyser for approving the loans or validating the financial transaction.

Bank statement Analysis is an evaluation of the bank statement. There are multiple reasons and different objectives to do analysis on the bank statement. Mostly commercial and retail banking, investment banks, institutional investors and Auditing firms do the bank statement analysis. Commercial and retail banking uses bank statement analysis to verify borrower’s financial health and compare all necessary transaction details with provided other documents including Income tax or GST fillings, financial statements.  Audit firms do bank statement analysis to complete the audit process through validate all transactions by comparing financial statements. Bank statement analysis can be used for different types of borrowers including corporates, small-medium enterprises, and individuals which provide good insights on borrower’s health.

Where and how bank statement analysis can be used?

A bank statement analysis is not compulsorily done by banks, but it can be done by various parties for various purposes such as:

1. To Assess Creditworthiness: A majority of the operational revenue for any financial institution—be it commercial banking, retail banking, NBFC, etc.—comes from granting loans. Before doing so, institutions assess borrower creditworthiness. Here, the importance of bank statement analysis becomes critical to ensure timely loan repayment.

2. To Identify Red Flags: With the aid of the bank statement analysis tool, one can easily identify any red flags such as high cash deposit and cash withdrawals, negative balances, crossing limits for overdrafts, cheques bounced, cross verification with all other provided documents. These activities provide an indication of the deteriorating financial health of the account holder.

3. For Tax-related Purposes: The tax officers could use bank statement analysis as a tool to figure out whether all transactions have been disclosed by the assesse in his/her returns and appropriate taxes have been paid on.

4. Fraud Checks within the Organisation: An organisation can conduct bank statement analysis of its vendors or other parties if they believe that fraudulent transactions are being undertaken. Moreover, the bank statement analysis also helps in identifying if bank statements furnished in PDF formats have been tampered with an intent to defraud.

5. To Derive Patterns: Bank statement analysis can help to derive patterns for banking activity. This analysis can help in forecasting and predicting bank deposits, withdrawals, overdrafts, etc. Moreover, an analysis of sales vs. collections can be done with the help of bank statement analysis. This can help an organisation to reduce its customer ageing and identify customers who take relatively higher time to pay. Further, other reports such as collection pattern for top 20 customers vs. sales to these customers, deviation between sales and bank collections, etc. can also be generated.

Challenges Faced

Although the analysis of bank statements may sound easy and simple, the fact is that it is not so. The following challenges are generally faced while conducting bank statement analysis:

1. Lack of Uniformity: Bank statements from different banks are not uniform. Contents, format, non-standard abbreviation, and narration hampers the process of bank statement analysis. For eg. the columns, the headings, sequence of columns, etc.

2. File Formats of Bank Statements: The file formats of bank statements could range from PDF, XML, scanned images, etc. To analyse such different formats from different banks is a challenge.

3. Tedious Exercise: Consolidation of bank statements in different formats and file formats leads to a tedious exercise when done manually.

Suggested Solutions

For the aforementioned issues and challenges, we suggest that organisations invest in a good automated bank statement analysis tool which can help offer the following features

1. 1. Offer analysis solution via API which readily integrates with your existing system.
   2. Supporting all sorts of bank statement formats such as pdf, txt, html, xml, etc. by converting such statements in machine-readable format with the help of Optical Character Recognition (OCR).
   3. Provides accuracy in the analysis done.
   4. Saves time as the manual analysis takes days to analyse and is not free from errors.
   5. Provides cross-correlation with GST data furnished on.

Conclusion