Banking sector's worrisome woes continue

BRP Bhaskar
Gulf Today

India’s largest public and private sector banks are grappling with problems arising from systemic weaknesses and their unhealthy consequences.

The State Bank of India, with a customer base of 420 million and balance-sheet of more than Rs 30,000 billion, is the only bank from the country among the world’s top 50. It reported a net loss of Rs 65.47 billion for the financial year that ended on March 31 as against a net profit of Rs 104.84 billion in the previous financial year.

It attributed the loss to “an increase in provisions for non-performing assets (NPAs) and mark-to-market investment portfolio”. In plain language, this means the bank had to take into account possibilities of non-recovery of some loans and fall in market value of securities.

NPAs, always a source of worry, have become a cause for increased concern in view of the ease with which high-profile borrowers like playboy-businessman Vijay Mallya and diamond merchants Nirav Modi and Mehul Choksi have been able to slip out of the country.

Of the 21 state-owned banks, 19 were in the red when the last financial year closed. Their total loss was about Rs 873.57 billion.

The Punjab National Bank, which is at the centre of the Nirav Modi-Choksi scam topped the list with a loss of Rs 122.83 billion, followed by IDBI Bank with Rs 82.38 billion. SBI was in the third place.

At the end of 2017, the gross NPAs of all banks stood at a whopping Rs 8,409.58 billion. Industrial loans accounted for Rs 6,092.22 billion in NPAs, the services sector for Rs 1,105.20 billion and the agricultural sector for Rs 696 billion.

According to information provided to Parliament, the industrial sector led in delinquency with 20.41 per cent of the advances turning into NPAs, as against the agricultural sector’s 6.53 per cent and the service sector’s 5.77 per cent.

SBI, the largest bank, has the highest NPA figure of Rs 2,015.60 billion, and is followed by the Punjab National Bank with Rs 552 billion and IDBI Bank with Rs 445.42 billion. 

Among private sector banks, the ICICI Bank has the most NPAs: Rs 338.49 billion. A large loan it gave to Videocon Industries, a home-grown consumer durables company, is now under investigation for suspected quid pro quo as that company pumped money into NuPower Renewables, a firm owned by Deepak Kochar, husband of ICICI Bank CEO Chanda Kochar.

Videocon, which was once a highly profitable company, filed an insolvency petition before the National Company Law Tribunal last week. It owes about Rs 200 billion to a consortium led by SBI.

The steady rise in the growth of NPAs over the years raises the question whether the Reserve Bank of India has been diligent in the performance of its role as the central bank. 

Last February, while going through SBI’s documents relating to the financial year ending March 31, 2017, RBI found that it had understated its NPAs by 21 per cent and overstated its profits by 36 per cent. The standard RBI practice is to publicly report the divergence if it exceeds prescribed limits, which are quite liberal, with a view to naming and shaming the bank. No one is punished for misleading the regulator and the general public.

In April, RBI reportedly put 11 state-owned banks under its prompt corrective action framework which entails restriction on their lending activities.

Three days ago Piyush Goyal, who is officiating as Finance Minister, announced the setting up of a committee with instructions to submit recommendations for the formation of an asset reconstruction company for quick resolution of stressed bank accounts in a transparent manner.

When gross irregularities are investigated, bank officials get caught and are charged with corruption. But bankers do not always bend the rules for personal gain. Sometimes they do so at the behest of politicians who want to help their financiers.

Former RBI Governor YV Reddy has said that the government is pressing banks to lend to infrastructure projects, which are not an area in which they have competence, and to make depositors share the burden of bank frauds. 

A lasting solution to the banks’ woes cannot be found until the political overlords learn to respect the professional judgment of bankers.--Gulf Today, Sharjah, June 12, 2018

Banks fail to check fraud

BRP Bhaskar
Gulf Today

Two bank frauds that came to light in the past month have exposed the weaknesses of multiple regulatory mechanisms which make it easy for unscrupulous businessmen to take state-owned institutions for a ride.

The central figure in one of the two fraud cases which the Central Bureau of Investigation is pursuing is “Diamond King” Nirav Modi (no relation of Prime Minister Narendra Modi), who has been on the Forbes list of billionaires since 2013. He slipped out of India with his family and his uncle Mehul Choksi, also a diamond merchant, in January before the public sector Punjab National Bank (PNB) lodged a complaint against them to the CBI.


He, however, turned up at Davos, Switzerland, to join the large delegation of businessmen which was with the Prime Minister at the World Economic Forum. 

The other businessman in the spotlight is Vikram Kothari, promoter of a firm that makes a well-known brand of pens. The complaint against him was filed by the Bank of Baroda (BoB), which too is state-owned.

Vipul Ambani, president of one of Modi’s diamond firms, and Kapil Khandewal, CFO of a diamond firm owned by Choksi, and serving and retired PNB officials are among those whom the CBI has arrested. Vikram Kothari and his son Rahul are in custody in connection with the BoB case.

The PNB puts the amount involved in the dubious Modi transactions at Rs114 billion ($1.8 billion), making it the biggest bank fraud. The amount involved in Kothari’s allegedly fraudulent BoB deals is said to be about Rs 37 billion.

A farmer seeking a loan for agricultural purposes or a parent seeking a loan for his son’s higher education in India or abroad will be required to provide collateral security to cover the loan amount. On the basis of the bank’s assessment of the borrowers’ credit-worthiness, limits are set on the borrowing.

A billionaire seeking a loan to make business deals abroad has an easier route. He gets the bank to issue a guarantee, in the form of a letter of understanding (LoU), for cheap short-term foreign currency loans from banks abroad. Ordinarily the bank providing the guarantee secures from the borrower a fixed deposit, the return from which will be higher than the amount of the foreign loan.

Nirav Modi is reported to have secured loans from about 35 foreign branches of various Indian banks using PNB’s LoUs in the last seven years. As the guarantor, PNB has to reimburse the lending banks in case the borrower defaults.

PNB officials issued LoUs to Modi’s firms without obtaining collateral in some form. Ignoring the Reserve Bank of India’s directive to limit the validity of LoUs to 90 days PNB issued documents with a year’s validity.

The investigations so far indicate that Modi used an LoU of 2011 to raise money from banks abroad to buy diamonds. On selling the diamonds, he was required to remit to PNB the money he owed to the lending banks. He did not do so. Instead he siphoned it off the money to build assets and obtained a fresh LoU and raised more loans with it. Part of the money so raised was used to pay off the old loans.

The process went on for seven years without being detected. Since all previous loans were repaid with interest when new loans were raised, on the PNB’s books he looked like a good customer who promptly paid the dues. It did not get wise to his modus operandi until the loan amount reached the whopping figure of Rs114 billion.

Ten days ago, the Enforcement Directorate said it had seized diamonds and other valuables worth more than Rs57 billion in raids on firms owned by Modi and Choksi. The raids were said to be continuing at that time but no figures of seizures have been released since then.

In fleeing the country Nirav Modi followed a path shown by businessmen like liquor baron Vijay Mallya who had skipped to London two years ago as a consortium of banks initiated steps to recover more than $1 billion he owed them. He is now facing extradition proceedings there.

Bank accounts are audited at three levels — first by the bank itself, then by its external auditors and finally by the Reserve Bank of India. The failure of the triple audit system to check frauds points to collusion between bankers and businessmen. 

The RBI’s immediate response to the PNB fraud, which some have dubbed Niravgate, has been to set up a committee to study the issue of frauds and bad loans dogging the banking sector. It is headed by Yezdi Hirhi Malegam, an octogenarian chartered accountant who was a member of the RBI board for many years. While his credentials are sound, critics point out that his connection with certain rating and auditing firms raises issues of conflict of interest. - Gulf Today, Sharjah, Febriary 27, 2018

Troubled banking system

BRP Bhaskar
Gulf Today

How healthy is India’s banking system, especially its large public sector component? The question has assumed significance following reports that state-owned banks wrote off bad debts to the tune of Rs 2,110 billion between 2004 and 2015.

Based on material provided by the Reserve Bank of India, the country’s central bank, in response to a Right to Information query, the Indian Express said the banks had written off as much as Rs 1,141.82 billion in the last three years alone. Bad debts which stood at Rs 155.51 billion in March 2012 had shot up to 525.42 billion by last March, it added.

Public sector units dominate India’s banking sector. The British-owned Imperial Bank of India, which the government took over in 1955 and renamed State Bank of India, is the country’s largest commercial bank. It now has more than 16,000 branches, including 191 abroad. Its assets stood at Rs 20,480.80 billion a year ago. Banks set up by former princely states function as its associates.

Fourteen large private banks were nationalised in 1969 and six more in 1980.

The SBI topped the list with write-offs of Rs 400.84 billion in the last three years. The Punjab National Bank, the second largest bank, stood next with a write-off of Rs 95.31 billion.

Responding to media reports, the Finance Ministry, the RBI and the SBI said loan write-off was basically a technical exercise to cleanse the balance sheet and achieve taxation efficiency. It was done at the head office level and did not preclude the branches from continuing recovery efforts.

However, many financial analysts voiced concern over the rise in bad debts and the recent fall in bank share prices. RBI Governor Raghuram Rajan accused critics of making claims bordering on scare-mongering. He attributed the fall in share prices to the turmoil in the world markets but conceded that the performance of some banks, particularly public sector units, was not pretty.

There may be no need for panic, as Raghuram Rajan says, but there is certainly cause for worry. The RBI recently put the value of banks’ stressed assets (including restructured loans) at Rs 7,400 billion. This means 10.9 per cent of all loans is stressed. Standard and Poor’s has forecast an 11-to-12 per cent growth in stressed assets during the year.

The issue of bad debts was a well-kept secret until the All India Bank Employees Association released a list of top defaulters in 2014. It contained names of 406 account holders who owed the banks Rs 703 billion.

Liquor king Vijay Mallya’s Kingfisher Airlines headed the list with debts of Rs 26.73 billion. The Winsome Diamond and Jewellery Company was a close second with debts of Rs 26.60 billion.

Among the other big defaulters was a construction company owned by KS Rao, who was Textile Minister in the Manmohan Singh government at that time. Raghavendra Rao and Deepak Puri, two businessmen whom the government had honoured with Padma awards, also figured in the list.

The AIBEA said bad debts of public sector banks had risen from Rs 390 billion in 2008 to 2,360 billion in 2013.

It alleged that banks, including private and foreign ones, had written off loans totalling Rs 2,040 billion between 2001 and 2013 under political pressure. It asked the RBI to publish the names of defaulters and demanded enactment of legislation to improve the recovery process and to make wilful default a criminal offence.

Raghuram Rajan, professor of finance at the University of Chicago and a former chief economist at the International Monetary Fund, took several steps to help the banks deal firmly with defaulters immediately after he took over as RBI governor in 2013. Guidelines issued by the RBI allowed banks to convert debt into equity and take control of defaulting companies if debt restructuring failed. The banks could then find new promoters to run the companies.

The Modi government, which assumed office the following year, announced a seven-point programme to revive public sector banks. It has only been implemented partially.

The latest debt figures indicate that the steps taken by the RBI and the government have not yielded anticipated results. The government told Parliament last year that 30 top defaulters owed public sector banks Rs 951.22 billion. This was more than one-third of their non-performing assets.

The name-and-shame policy adopted by some banks also does not seem to have had any effect on the defaulters.

The RBI and the government must urgently come up with foolproof measures to ensure the good health of the banks with a view to safeguarding the interests of the depositors and honest borrowers. --Gulf Today, Sharjah, February 16, 2016.

Two-faced banking reform

BRP Bhaskar
Gulf Today

A seven-point programme to revamp the banking sector, unveiled by the Government last week, has enthused domestic and foreign interests seeking accelerated economic reform but it overlooks the chronic problem of corporate default afflicting the public sector institutions.

Finance Minister Arun Jaitley outlined the programme shortly after the end of the monsoon session of Parliament. The government’s plan to push through some important reform-related legislation had fallen through due to continuous disruption of the two houses by the opposition.

Global rating agencies Standard and Poor’s and Fitch Ratings had recently pointed out that banking reform was necessary to achieve Prime Minister Narendra Modi’s growth targets. Large corporates were holding back new investments pending action by the government, they said.

India’s major banks are government owned. They were brought under the state in stages. The British-owned Imperial Bank, which handled government accounts during the colonial period, was nationalised in the eighth year of Independence. Banks floated by the former princely states were later made its subsidiaries.

With the takeover of 14 private banks in 1969 and six in 1980, as much as 80 per cent of the industry came directly under the central government.

At the government’s instance the public sector banks expanded rapidly into the countryside. They also tuned their lending policies to meet the needs of priority sectors identified by the government. There was political interference in their working even as they played their part in promoting government programmes aimed at inclusive growth.

When the country took the first steps towards economic reform in 1991, it recognised the need for a competitive banking system. The main issues were the small capital base and low profitability of the banks.

The government infused additional capital of about Rs 200 billion and allowed the banks to raise more from the market subject to the condition that the government’s holding should not go below 51 per cent.

New laws were enacted to improve the health of the finance sector and banks were asked to adopt global standards. At that time more than 23 per cent of all bank advances were classified as non-performing assets (NPAs). As a result of the measures that followed NPAs came down to 16 per cent by 1998.

In the wake of the East Asian financial crisis, the government initiated more measures to strengthen the banks. It also brought in a new law to regulate credit information companies.

By 2008, NPAs were down to 2.4 per cent. However, they soon started rising again and stood at 4.5 per cent last year. Also, as much as 12.9 per cent of public sector banks’ advances was classified as “stressed advances,” a term which includes NPAs and restructured standard advances. The corresponding figure for private banks was only 4.4 per cent.

The public sector banks certainly need to bring down NPAs. This is a task which can be accomplished without deviating from the policy of increased financial inclusion.

There is enough material in the public dominion to establish that the rise in NPAs is not a result of policies meant to help the disadvantaged sections of the society.

Public sector banks have been coming under stress from two sources. One is the ever expanding demands of infrastructure development, particularly in sectors like power, steel and transport. The other is wilful default by unscrupulous businessmen.

While announcing the reform programme, Jaitley noted that there was improvement in the highways, steel, power distribution and sugar sectors. He studiously avoided the issue of corporate default.

Last year the All India Bank Employees Association made public a list of 406 defaulting borrowers of 24 public sector banks. It said the top 30 bad loan accounts stood at Rs 703 billion..

Heading the defaulters’ list was an airline company floated by a liquor baron which owed the banks Rs 26.73 billion. Two jewellery firms in the list had a combined loan liability of Rs 31.57 billion.

The AIBEA said the public sector banks had written off Rs 2,040 billion in 13 years, restructured loans to the tune of Rs 3,250 billion, and run up fresh bad loans of Rs 4,950 billion. Demanding that the government release the names of the major defaulters and lay down stringent loan recovery norms, its general secretary, CH Venkatachalam said, “If there is a political nexus, let it come out. The people should not be punished for corporate default.”

The government has decided to bring in personnel from the private sector to head some public sector banks. The theory promoted by some circles that the private sector banks are good commercial models stands on questionable grounds. One or two of the successful private banks are known to have been involved in illegal transfer of funds to foreign locations. - Gulf Today, Sharjah, August 18, 2015.

Another scandal to ride through

BRP Bhaskar
Gulf Today

Governmental and business circles, inured to periodic breaking of scandals, are seeking to brazen out the unearthing of several hundred offshore accounts of Indians in the British Virgin Islands and other tax havens by an international team of journalists.

Scions of old industrial houses as well as nouveau riche of the era of globalisation are among the 612 Indian nationals who form part of the 2.5 million individuals and entities in over 170 countries, whose names have been revealed by the International Consortium of Investigative Journalists (ICIJ) in the first batch of reports yielded by a continuing probe.

Launched in 1997 as a project of the Washington-based Center for Public Integrity, the ICIJ is a network of 160 journalists in more than 60 countries engaged in investigation of corruption and cross-border crime. The team is led by Irish-born Gerard Ryle whose award-winning investigative reports on use of orphaned babies for medical experiments and the Firepower fraud in Australia had attracted attention worldwide.    

The ICIJ offshore operations probe was made possible by more than 260 gigabytes of data which Ryle received by mail while investigating Firepower which was said to cut petrol consumption and vehicle emissions. It included about 2.5 million files and more than two million emails that helped chart offshore activity over several years.

Responding to queries, Finance Minister P Chidambaram said, “Inquiries have been put in motion in respect of the names that have been exposed.” Such pronouncements were made by government spokesmen after information about secret bank accounts of Indians in Switzerland and Liechtenstein came to light but they did not lead to any action.

Opening offshore accounts is not a crime but their structures are designed to conceal actual ownership and they are often used for illegal purposes like tax evasion. Interestingly, almost all the Indian accounts uncovered by ICIJ were opened during the economic boom of the last decade.

The Indian Express, which published information about the account holders, contacted them to find out what they have to say. Some responses suggest that they have something to hide. 

While the ICIJ report named several persons with high political connections in Azerbaijan, Colombia, France and the Philippines, no Indian politician of consequence figures in it. The two MPs in the list, Vijay Mallya and Vivekanand Gaddam, are political lightweights.

Some including Vivekanand Gaddam, Sonu Lalchand Mirchandani of the Onida group, Teja Raju, son of Satyam Computers founder Ramalinga Raju who was jailed in a fraud case, and Gurbachan Singh Dhingra of Berger Paints pleaded ignorance about the accounts in their names.

Some others like Samir Modi of the KK Modi group, Chetan Burman of the Dabur group and Thiagarajan Murugesan of the Paramount group said they had opened offshore accounts to attract investments or boost exports but the plan did not work out. Lankalingam Murugesu, known as ‘papad’ king, said his firm set up an offshore operation for better tax planning but did not use it. “We just thought it is better to pay full taxes,” he told the newspaper.    

Mallya’s firm, Ravikant Ruia of the Essar group whose name has come up in the telecom spectrum scam and Maitreya Vinod Doshi of the Premier Ltd said the Indian authorities had been informed about their offshore accounts. Radhikaraje Samarjitsinh Gaekwad of the erstwhile Baroda royal family and Rahul Mamman Mappilai of the MRF group did not respond.

Two years ago the authorities had received from a foreign government the names of 782 Indians with accounts in the Hongkong and Shanghai Banking Corporation’s branches outside the country. They refused to reveal the names on privacy grounds. The promised investigations did not lead to any action.

Cobrapost, a website, came out with a sting report alleging  the ICICI Bank, the Axis Bank and the HDFC Bank helped in money laundering. The Reserve Bank of India was said to be “seriously looking into the matter” but the Finance Minister gave the banks a virtual clean chit saying, “On the face of it, no real money was transacted and no real money laundering deals took place with any real person.”

When a financial scandal involving private players breaks out, the government goes through the motion of conducting an investigation but it does not result in action against the wrongdoers. The Supreme Court recently remarked that the government’s failure to control black money was indicative of its weakness and softness. -- Gulf Today, Sharjah, April 9, 2013.