Consistent delay in PF payment is a lead for deterioration in financials: FiND study

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Publically available data from Employees’ Provident Fund Organization (EPFO) is an important piece of information that can be consumed in risk assessment of corporate borrowers. In our view, deep-dive analytics on EPFO data can offer unique insights into the company’s functioning.

Through analysis of EPFO data, the banks can find out whether the companies in their loan portfolio are depositing employees’ provident fund (PF) on time or not; and whether there is any significant drop in the PF amount deposited by the company. At the same time, lenders can also identify companies which are downsizing the workforce.   

FiND Credit Risk Early Warning System (EWS) consists of 25+ business rules that analyze the EPFO data for the companies every month. One of the key business rules is a delay in PF payment for a given month. In our view, a delay in PF payment may imply liquidity crunch for the company and hence it is a red flag for the banks. 

Our hypothesis is that red flags related to PF payment can act as a leading indicator to the deterioration in the company’s financial performance. To test this hypothesis, we back-tested our engine on EPFO data for three months (Jan-17, Feb-17, and Mar-17) on the below-mentioned business rule:

Delay in monthly payment of PF by more than 10 days for more than 50 employees

From our EPFO data universe of 1,250+ companies, FiND EWS identified 35 companies who have delayed PF payment for all 3 months.

Then, we checked if there is any deterioration in the financial performance (captured by FiND Financial Risk score) for these companies post-March 2017 quarter. 

We found that: 86% of companies (30/35) witnessed a deterioration in Financial Risk score in the subsequent quarters.

We highlight 10 such companies below:
PF shortlisted cos
[Image 1: Financial Risk Score for 10 Companies with PF red flags]

Videocon Industries

Dena Bank was the first lender to consider outstanding loans of Videocon Industries as NPA for the quarter ended March 2017. The update regarding Dena Bank’s move to classify Videocon loan as NPA was out only in May 2017. Subsequently, Videocon lost 4/5th of its share price value by the end of June 2017.

Price Sentiment
[Image 2: Share price and News Summary chart for Videocon Industries]

However, our back-testing on EPFO data revealed several red flags on Videocon Industries for the delay in depositing employees’ PF payment during March 2017 quarter.

Videocon
[Image 3: Data highlighting delay in PF payment by Videocon Industries]

Our back-testing result validates the use case of EPFO data in credit assessment of corporate borrowers.

FiND Credit Risk Early Warning System (EWS) captures company-related red flags by applying a variety of business rules on structured and unstructured data sets. Our intelligent EWS application can help lenders to get an early warning about the deterioration in corporate borrowers’ financial profile ahead of time.

To know more about FiND Credit Risk EWS, email us at info@heckyl.com

 

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