As lenders expand their operations and take on more borrowers, they are also prone to more risks. In February 2025, for instance, the Bank of India declared loan fraud to the tune of INR 226.84 crore by an Odisha-based power Infrastructure business.
Such liabilities eat into the liquidity, stability, and profitability of lending operations.
Bank statements provide early clues to potential fraud. By scrutinising a potential borrower’s bank transactions closely and effectively, loan officers can identify red flags early on.
In this blog post, we outline six risks that loan officers must watch out for and how they can make the underwriting process more efficient, accurate, and speedier.
Why Focus on Bank Statements
Traditionally, lenders have focused on aspects such as credit history, assets that can serve as collateral, and the liabilities of a potential borrower.
However, these data points may not offer adequate insights as to whether the borrower will be able to repay a loan on time and in full, in the future.
While these factors play an important role in determining a borrower’s creditworthiness, additional factors can contribute to accurate underwriting.
These include:
- Determining cash flow
- Evaluating past credit behaviour
- Analysing transaction patterns
The best way to gauge these aspects of a borrower’s finances is to analyse bank statements in detail. The adoption of superior cloud-based loan management systems enables lenders to automate the process.
6 Red Flags to Watch for in Bank Statements
Here is a snapshot of the problematic signs that loan officers must watch out for:
1. A Negative Cash Balance
Borrowers need to maintain a positive cash balance, especially during crises. Cash balance refers to the value of cash accessible to the borrowers at any given time.
Borrowers with a positive average cash balance, calculated over a period of time, are more likely to survive any potential crisis, such as market downturns or revenue drops. During this period, for instance, they will also be able to repay their EMIs.
On the other hand, a negative cash balance over an extended time frame lowers their ability to meet EMI commitments.
2. Too Many Overdrafts
Bank account holders can access extra funds beyond the value of their deposits through overdrafts. Since the funds are pre-approved, there is not much paperwork involved. This facility benefits account holders during emergencies requiring a quick influx of funds.
However, if a borrower has taken too many overdrafts within a short time frame, it can be considered a red flag.
This pattern indicates that the borrowers are overly dependent on external funds to stay operational.
3. Multiple Bounced Cheques and Payment Issues
Other worrying signs of poor financial behaviour include:
- Too many bounced cheques, due to a lack of a cash balance.
- Non-payment and late payment of EMIs
- Non-payment, late payment, and minimum payment of credit card bills
These trends are typically reflected in the form of fines that appear in bank statements. Adopting AI-powered cloud-based loan management systems can automate data analysis. Lenders can get detailed reports that isolate such financial transactions.
4. Cash Inflow/ Outflow from Unknown Accounts
Lenders must scrutinise all transactions closely and determine the sources of cash deposits and transfers. Unknown sources can be a red flag for several reasons.
Today, bank accounts may be used for criminal activities such as:
- Money-laundering operations
- Financing terrorist activities
- Committing financial fraud
For instance, in a recent case, a Suspicious Transactions Report (STR) by the Financial Intelligence Unit-India (FIU-IND) led to an investigation of 25 proxy accounts at a bank in Bareilly.
The accounts are suspected of being used for money laundering, with a total value of several crores.
If lenders underwrite loans for such accounts, they risk being embroiled in criminal activity and subsequent investigations. These events can have a domino effect, resulting in the suspension of services and the shutdown of operations.
Using AI in loan management solutions can identify irregular patterns and isolate transactions connected to unknown/ suspicious accounts.
5. Circular Transactions
Sometimes companies use fraudulent methods to indicate revenues and a higher bottom line. One such method is to fudge the sales via circular transactions. This is a phenomenon where an enterprise sells products to another business and then purchases the same products back.
Such transactions do not translate into legitimate sales. However, they are challenging for the human eye to identify. AI-based financial analysis tools, however, can weed out irregular patterns and flag cases of circular transactions.
6. Too Many Withdrawals
Another sign of erratic financial behaviour is too many cash withdrawals, especially from business accounts.
If enterprises cannot explain the reason for withdrawal and indicate a legitimate money trail, it can be a red flag concerning expenditures.
Such cash withdrawals may be used to repay existing personal loans or fund exorbitant spending habits, which can eat into a business’s profits in the long term.
Takeaway
Bank statements are a valuable data source for loan officers. By examining the data in this document, they can understand a potential borrower’s cash flows, financial patterns, and in turn, their ability to repay a loan.
By adopting the use of a superior loan management system, lending teams can analyse financial statements accurately, efficiently, and quickly.
Finezza offers a comprehensive set of tools and solutions to manage your lending portfolio. Our end-to-end lending management solutions are trusted by brands like ftcash, Hiranandani Financial Services, gromor Finance, and UC Inclusive Credit, to name a few.
Finezza’s intuitive bank statement analysis software is geared to analyse bank statements with speed, and accuracy and detect potential fraud.
Book a demo to know more.
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