Why Strong Due Diligence Is The Need of the Hour

By Omkar Shirhatti, Co-Founder & CEO, Karza Technologies.

A slew of frauds and scandals involving high profile Indian businesses in the recent past have exposed the weakness of the diligence process in India, leaving regulators and investigators scrambling to understand the root cause of these events, and Financial Institutions to deal with the consequent losses.

One of the primary challenges India faces in achieving its stated goal of becoming a 5 trillion-dollar economy is the world’s perception that India is plagued by corruption and frequent scandals, with few solutions readily available to help identify & prevent these.

Worryingly, businesses registered in India have to comply with a multitude of convoluted regulations that vary widely depending on the kind of entity, with vast differences in the compliance requirements of a public company, a private company, partnerships, sole proprietorships and other entity types.

Current state of affairs

Netherlands based TMF Group, in its Compliance Complexity Index 2018, ranks India at the 15th position globally and 5th position in the Asia Pacific region,  based on criteria such as the complexity of opening a business, difficulty in adopting globally accepted and transparent reporting mechanisms etc.  

However, we cannot claim that the diligence process is flawed on account of the onerous regulations placed on businesses in India. If anything, the overregulation and compliance requirements placed on Indian businesses ensure that most frauds can be identified early, with sound diligence practices. It is the scattered nature in which this data is maintained, combined with a lack of a unique identifier that makes diligence processes in India lengthy, cumbersome, and expensive. 

Notwithstanding the problems described above, India’s move towards a digitized economy and recent attempts to simplify some of the regulatory and reporting requirements, including the introduction of the Goods and Services Tax regime, and the proposed introduction of the Account Aggregator ecosystem, have offered a unique opportunity to leverage on the hundreds of data points that are collected to ensure quick and effective diligence. An effective diligence process is going to play an instrumental role in India’s aim to quickly develop its economy.

Challenges and Opportunities

One of the most unique opportunities available in India is that it has the world’s largest workforce, with a majority of the population yet to be integrated into the financial system. 

Though smaller businesses already contribute 29% to our GDP, their growth is frequently hindered by a lack of access to credit, which is directly traceable to the lack of effective diligence mechanisms. The issues with the MSME sector’s lack of access to credit are even more apparent now, with the pandemic hitting smaller, traditional businesses hardest.

As of today, 117 million Indians either run or are employed by small businesses, and their growth potential can be unlocked only through increased accessibility to credit and financial services.

Most lenders using traditional and cumbersome diligence processes cannot afford to lend to the typical unbanked population on account of the lack of readily available information in the public domain, and high cost of diligence with very little upside. Furthermore, creditworthiness is usually ascertained by credit history, which is inadequate in the case of people from tier III, tier IV towns and rural settlements, as they are mostly new to credit (NTC) customers. 

At Karza, we were able to identify the requirement for dependable diligence solutions early, and one of our flagship products, KScan, provides insightful diligence reports in seconds, with data collected from over 750 publicly available sources. We have created a unique identifier for each and every business registered in India. We track and provide alerts across hundreds of negative lists, identify shell entities, collate negative news, and analyse litigation and regulatory filings to offer a comprehensive diligence solution, with details of over 20 Million pre-profiled businesses readily available with us. 

Our solution is used by financial institutions to identify and reduce fraud, improve access to credit & assess the credit worthiness of entities, while larger corporates, law firms and firms specializing in diligence leverage on our services to run quick but detailed analysis into and diligence of any counterparties they may be dealing with, all in a fast, efficient and holistic manner.