It’s raining bank scams. We were just digesting the implications of the double blow: that of Vijay Mallya fleeing the country with unpaid debts of over Rs 7,000 crore followed by Page 3 charmer Nirav Modi and Uncle Mehul Choksi disappearing with Punjab National Bank’s (PNB) of Rs 13,000 crore. But before indigestion could go away, the sordid tale of nepotism has unfolded involving ICICI Bank’s CEO & MD Chanda Kochar.
Videocon chief Venugopal Dhoot lent ICICI Bank’s chief’s husband Deepak Kochhar Rs 64 crore to develop a solar power business, but inexplicably transferred the lending entity to Kochhar later for just Rs 9 lakh. Six months earlier, Dhoot had helped himself to a loan of Rs 3,500 crore from ICICI Bank, 86 per cent of which remains unpaid and had been declared a non-performing asset last year. The Central Bureau of Investigation (CBI) is now investigating the contours of the quid pro quo.
These are not the first in the long chain of bank scams the country has seen; and, given the level of systemic malaise it will not be the last! There are two genres of bank scams: one, those that involve rogue operators in high places; and, second, those that have continued for months and years because of poor regulation.
SYSTEMIC FAILURE
The Syndicate Bank case is one of pure corruption. In August 2014, the CBI arrested Bhushan Steel MD Neeraj Singhal for offering a bribe of Rs 50 lakh and Syndicate Bank Chairman and MD Sudhir Kumar Jain for taking the bribe to extend credit limits to the steel company. Bhushan Steel is currently facing liquidation after defaulting on accumulated debt of over Rs 40,000 crore owed to 51 banks.
But what happens when there is the internal regulatory system of the bank itself is rotten? Nirav Modi acquired letters of undertaking (LoUs) or bank guarantees from the Brady House branch of the bank for drawing overseas credit from other Indian banks, presumably to finance his jewellery trade. LoUs are normally issued for 90 days as short term working capital. However, whenever the LoUs came close to maturity, they would be rolled over into fresh guarantees.
PNB said these LoUs were not detected as they were not routed through the normal CBS system. However, the normal digital ‘SWIFT’ system was used by the bankers to advance the credit, and the fraud went on for all seven years. Why did the PNB system not red-flag such a large $2 billion debt overhang? The scam was obviously a huge systemic failure. It was only detected when the old PNB staff retired and the new team demanded 100 percent cash margins for issuing LoUs.
THE MADHAVPURA CASE
There has obviously been little learning since the days of Ketan Parekh and the Madhavpura Mercantile Cooperative Bank scam. In the days of the stock market boom of 2001, Ketan Parekh rode the bull-run and made hundreds of crores with the help of pay orders worth Rs 1,200 crore borrowed from the Madhavpura Bank. When the dotcom bubble burst and the market tanked, Parekh was unable to pay back his debt. Madhavpura Bank collapsed wiping out over Rs 1,000 crore of 50,000 depositors.
The bank had violated every rule in the book. No collateral was sought. The guideline that stockbrokers cannot borrow more than Rs 15 crore was wilfully flouted. But the Reserve Bank, even after the Madhavpura Bank’s board was superseded in 2001, allowed a 10-year reconstruction window. When there was no recovery, it was only in June 2012, more than a decade later, that the bank was finally liquidated. In any other developed market it would have been shut down in weeks. Why did the RBI allow a fraudster bank so much indulgence?
It’s all about insisting on good corporate governance; and about a system of checks and balances. The P J Nayak Committee report of 2014 has pointed out that corporate governance of state-run banks is inhibited by the primitive Bank Nationalisation Act, 1969. Instead, like private banks PSBs should be administered by the Company Act which has stricter norms.
It hurts to see on one hand small, individual borrowers made to sweat to get survival loans; and on the other, big corporate groups with thousands of crores in defaults continue to draw loans they have no intention to return.
Some banks have shown tight governance. HDFC Bank has maintained gross NPA ratio at 1.26 percent of its total loan book size. On the other hand, we have an inkling why ICICI Bank has the largest NPAs among private banks at over Rs 44,000 crore.