Expert Speak India Matters
Published on Mar 23, 2016
Why are Indian banks increasingly getting infected?

There is a new Sheriff on Bank Street. With the moniker of SDR - Strategic Debt Restructuring - this RBI mandated scheme gives beleaguered  banks keeling over with non performing assets the option to convert the defaulting company's debt into 51% equity and take control of the company. The scheme was launched in July 2015, almost a year after (June 2014) another RBI scheme with the nomenclature 5/25 which allows a corporate to restructure its debt over a 25 year period with terms to be reset every five years.  SDR works differently though. Over an 18-month period, the lender consortium can sell the company with distressed assets to a new promoter and recover the dues. In the eventuality that they fail to comply with this 18-month window opportunity, then lenders have to treat these assets as non performing assets and make 100 per cent provision for the same on their own books. It is believed that as many as 17 companies have seen banks take majority control in order to recover loans amounting to Rs 85,000 crore. Alok Industries (Rs 15,350 crore), Gammon India (Rs 14,810 crore), Monnet Ispat (Rs 12,500 crore), Electrosteels Steel (Rs 10,990 crore) and IVRCL (Rs 10,340 crore) are the leading lights in this A List (or should one call it D for debt list). On Monday Adhunik Power (Rs 3120 cr) became the latest casualty.

Now this is a dangerous game to play for careening out of control banks. The reason being that the rapidly debilitating banks themselves have been going down in flames. Poor judgment and weak managements have seen banks stumble. If they can't run themselves effectively, imagine how they will identify new promoters for industries which require focus and bandwidth. Very clearly, this new plan is fraught with danger and will only complicate matters further. Ruthless expansion using bank balance sheets has been the credo of India's corporate sector. With no stringent bankruptcy laws, and only debt recast models using the debt recovery tribunal vehicle, industrialists and businessmen have roiled PSB profit and loss accounts. Governance, management, cronyism and transparency issues have bedevilled PSBs because of their opacity when it comes to loan disbursal and sanction. An element of arbitrariness has crept into these disbursals, more so if finance ministry mandarins are backing the loan seeker. The entire credit process food chain is  rife with massive translucence. Like an iceberg, which reveals only 10 per cent of itself — given that the balance 90 per cent is under water — the shadowy world of hi-jinks finance, where the chairman of the PSB has the casting vote to give mid to big-sized loans is now under question.

Take Syndicate Bank which has been in the news again and again. In 2014, Bhushan Steel, makers of top-of the-line auto grade steel, wanted their credit limit enhanced. What did they do? They forked out a Rs 50 lakh bribe to the chairman and managing director of a public sector bank — Syndicate Bank. The CBI, listening in on phone intercepts, decides to move in and snare both the CMD S K Jain and Neeraj Singhal, vice chairman and MD of Bhushan Steel. Cut to earlier this month. In a bizarre but typical case of human ingenuity, four businessmen allegedly managed to open 386 accounts in three branches of Syndicate Bank in Rajasthan in collusion with five of its executives and defrauded it of Rs 1,000 crore using fake cheques, letter of credits and LIC policies. CBI has since named the executives and the businessmen in an FIR. Subsequently it carried out searches at 10 locations spread in three cities--Delhi NCR, Jaipur and Udaipur. CBI registered the case against Satish Kumar Goyal, General Manager (then posted at Jaipur), Sanjeev Kumar, DGM, Regional Office, Deshraj Meena, Chief Manager, MI road Branch, Adarsh Manchanda, Malviya Nagar, all in Jaipur and Avdhesh Tiwari, AGM, Udaipur. Systemic failure of all security protocols and firewalls is commonplace in public sector banks.

Now let us come to Bank of Baroda. Ditto here too. In October last year, for 14 months, Bank of Baroda functioned without a full time chairman and managing director. The last CMD being S S Mundra who was made RBI deputy governor in July 2014. Breaking convention, the government lately has been appointing private sector executives as CEOs of big public sector banks. BoB being one such beneficiary got S Jayakumar in October last. Till recently a Citibank executive, he was selected in August from private sector firm VBHC Value Homes, where he was MD and CEO. The new man had his task cut out, his bank's credibility and reputation was in tatters. A catalogue of high profile scandals having emasculated it completely. Most notable being the Rs 6000 crore foreign exchange scam which hit its Delhi office.

Why is it that Indian PSU banks are being engulfed in scandals with increasing regularity? How is it that failsafe mechanisms and firewalls are breached so easily? Are the faults systemic or is subversion from the top responsible? Look at the forex scandal. On the surface it is so simply crafted, its architecture blighting the system. CBI's preliminary investigations has revealed that most of the addresses given by the firms were either false or the companies did not exist at the said addresses. So, how was overseas remittance of foreign exchange amounting to Rs.6000 crore redirected to Hong Kong which became the epicentre of the fraud?

The methodology was ingenious, each transaction or remittance would be kept under $100,000.  It operated under the radar which I find impossible to believe in a world where software and algorithms are king. The amount was remitted as advance for import and in most of the cases, the beneficiary was the same.  Most of the foreign exchange related transactions were carried out in newly opened current accounts wherein heavy cash receipts were observed but the branch did not generate Exceptional Transaction Report (ETR) and did not monitor the high value transactions. This is unpardonable. No ETR was generated and Rs 6000 crore was whisked out through this procedure. Payments for non-existent imports were made without anybody in the bank waking up to the reality.

The gargantuan forex scam came on the back of a Rs 350 crore bill discounting scam in its Ahmedabad branch involving a top functionary in the first week of last October. Apparently, an established textile company was involved and the bank's antennae came up only when a few bills bounced. One of the bank's offices in Ahmedabad ended up discounting bills against which the underlying trade transactions were fake. And as if all this wasn't enough, September last saw the Government shunting out BoB executive director KV Rama Moorthy, after an investigation by the Reserve Bank continued into granting a 70 million dirham loan to the troubled Atlas Jewellery Group, when he was heading its Dubai branch. In an unprecedented move, Moorthy was summarily shifted (he should have been sacked) to a smaller state-run lender United Bank of India (UBI). He assumed his new job on August 29, 2015 as executive director. The Middle East-based Atlas Jewellery Group is promoted by the Kerala-born M Ramachandran and its founder is in judicial custody in Dubai following the default of around Rs 1,000 crore (520 million Dubai dirham) loan drawn from nearly 20 banks, including four domestic lenders. Appears to be Kingfisher redux. At 70 million dirham, BoB has the largest exposure to the jewellery retail chain while others include ICICI Bank (50 million dirham), IDBI Bank (30 million dirham) drawn from their Dubai IFC branches, and State Bank of India which has an exposure of 11 million dirham extended from its Bahrain branch. The transfer came after RBI ordered a probe into the operations of BoB's Dubai branch after Atlas Group's default case came to light in August. The jewellery chain owner’s daughter, who manages an insurance company affiliated to her father’s group, was also arrested after police received at least 15 complaints against her in bounced cheque cases worth several millions of dirhams.

Despite repeated attempts by governments at the Centre to ring fence India's state owned banking system, bulwark of the nation's financial main farm, what makes it so porous and easy game for scallywags is the question that begs an answer? Between SDR and 5/25, expect more of the unexpected to turn up.

The author is a senior journalist and commentator based in New Delhi.

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Ritika Prasad

Ritika Prasad

Ritika Prasad Student Tata Institute of Social Sciences (TISS)

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