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  • How Legal entity identifier will help banks and credit providers monitor the exposure of corporate borrowers

    Published on January 23, 2022

    -by Mr. Rahul Jha, Chief Executing Officer at LEI Register India

    Undoubtedly, technological advancements make it easier to provide customers with a seamless experience. However, it has also increased the risk of fraudulent activities through unauthorized transactions, phishing, theft, etc. In order to counteract the threat of fraud, demand for security and transparency is becoming increasingly important.

    Currently, banks and financial institutions are confronted with difficulties while monitoring high-risk businesses. Furthermore, borrowers living outside of a state or country who have taken out a large loan are becoming a high-risk entity for banks, since they lack a unique identification, making it difficult to trace them. As a result, Legal Entity Identifiers (LEIs) are implemented to integrate transparency into the system and aid the onboarding of a clean customer base, enabling financial institutions to know exactly who they are dealing with.

    So, let’s take a look at how the LEI helps banks and credit providers monitor corporate borrowers’ exposure.

    What is the purpose of LEI?

    LEI is a 20-character alpha-numeric code developed by the International Organization Standardization (ISO). It acts as proof of identity for a financial entity and aids in compliance with regulatory standards. LEI code facilitates the identification and linkage of parties to financial transactions. Its goal is to make systemic risk measurement and monitoring more accessible and cost-effective and help companies comply with regulatory reporting obligations more cost-effectively.

    The benefit of LEI for banks and credit providers

    LEI Registration is a measure to improve the quality and accuracy of the financial data system for insurers and lenders. In addition, IRDA regulations that involve insurers and loaners aid in risk management during the current global financial crisis. It prevents banks from extending multiple loans against the same assets and allows them to learn about their clients’ histories and activities in order to reduce the risk of future non-performing assets (NPAs)

    Increased usage of the LEI by banks could result in augmented efficiency and cost savings in cross-border bank remittance. LEI assists financial service providers in lowering financial risks and expediting data validation. It also makes assessing aggregate borrowing by corporate groups and tracking an entity’s financial profile easier. The ultimate goal of implementing this approach is to manage the risk better and handle the global financial crisis by monitoring high-volume financial transactions and identifying the parties involved on a worldwide scale. It’s a valuable tool for growing the international business.

    What the RBI has to say about LEI?

    The Reserve Bank of India (RBI) claims that the LEI system assists in boosting financial data system transparency and averting financial crises in the country. It has decided to use the LEI system for all payment transactions worth more than Rs 50 crore made by entities (non-individuals) through the its Centralised Payment Systems. In India, LEI can be issued by Legal Entity Identifier India Ltd. (LEIL), which is also recognized as an issuer of LEI by the Reserve Bank under the Payment and Settlement Systems Act, 2007.

    Conclusion

    LEIs have the potential to eliminate possible pitfalls and simplify entity identification across various lifecycle stages, including onboarding, transacting, compliance reporting, and risk monitoring, hence improving the entire customer experience. In the future, banks will likely use LEIs and organizational identities to speed up onboarding, enhance efficiency, and get a clear grasp of the transactions they are requested to undertake. This will result in a more robust support system for both parties: the bank and its customers.

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