Syndicate Bank scam: Criminality a major reason for current bad debt pile of lenders

A slowing economy and clearance delays for projects are the two commonly cited reasons for the spike in bad loans in the banking system, over the past few years in particular.

There could be a third - criminality among individual bankers and wrongdoing firms-which might have equally contributed to a sizable part of the sticky assets.

That’s something even the regulator hesitates to admit.

In the post monetary policy presser on 5 August, Reserve Bank of India (RBI) governor Raghuram Rajan cautioned against highlighting criminality as the reason for all bad loans ills of banking system.

“One should not extrapolate this (arrest of former syndicate Bank chairman S K Jain in bribe case by the Central Bureau of Investigation (CBI) to the entire public sector banking system and assume that all the problems in the public sector banking system are because of criminality rather than because of other factors,” Rajan told journalists to a question.

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Rajan is correct in saying that “all the problems” are not because of criminality rather than other factors. But a look at the bad loan scenario would tell you, reasons for a sizeable chunk of bad loans can be indeed attributed to the element of criminality.

A lot will depend up on what defines criminality in a banking transaction. If the definition of criminality involves diversion of funds borrowed from banks to a non-stated purpose, with or without the knowledge of the banker, then it makes a perfect script for bad loans in many cases.

Similalrly, if a rich promoter is hesitant to pay back his banks even when he has the money, the promoter should well be treated as a criminal because he is fooling the banking system, which handle public money. A number of cases have happened in the past, where the promoter is a willful defaulter. In state Bank of India (SBI) alone, outstanding loan amount involving willful defaulters exceed Rs 10,000 crore.

In the past 3-4 years, the number of cases involving fund diversion by corporations from the stated purposes, cases of unlawful activities involving public sector bank officials and number of willful defaulters have significantly gone up, giving enough reasons to suspect that reasons for sharp rise in the pile of bad loans in the country’s Rs 86 lakh crore banking system has come through criminal conspiracy and not necessarily attributable to the much hyped twin reasons.

A look at some of the cases, where there are elements of fund diversions or willful default, points to characteristics of criminality in the conduct of the borrower.

Vijay Mallya-promoted Kingfisher Airlines defaulted Rs 6,500 crore of loans to a 17-bank consortium led by SBI. After some repayments, the due are currently about Rs 4,000 crore. Banks are in the process of declaring Kingfisher as a willful defaulter.

The CBI has registered a case against the airline in connection with the loan exposure. Banks argue that they have a good case to declare on account as a willful defaulter citing evidences for fund diversion and ability of the promoter to mobilise funds.

Similarly, in the case of Winsome Diamonds, the CBI have begun a probe to the working of the company after it allegedly defaulted Rs 6,500 crore worth of loans to a host of banks, making it equal in size to Kingfisher. While the company claims that the default has occurred following non-payment of dues by its trading partners in the Middle East.

But the banks haven’t bought that excuse and have slapped legal notices against the firm.

In another case, in 2013, the CBI had filed case against Deccan Chronicle Holdings Ltd (DCHL), for alleged cheating, fraud. According to some of the bankers to DCHL, part of the reason the company faced the crisis was diversions of funds to expansion plans of the group, which was not stated to the lenders at the time of taking the loan.

Also, there were lack of coordination among the banks in the consortium and Listed above are only a few prominent cases. The list is long.

The fate of the Rs40,000 crore loan to Bhushan Steel is currently uncertain in the backdrop of serious charges of bribery by the firm to bankers. Even though the loan is at present standard, bankers fear that any possible slippages in the loan can have huge impact on the banks in the consortium.

In November 2010, the CBI busted a corporate loan racket in Mumbai involving the former chief of LIC Housing Finance and several other officials of public sector banks, where investigators found that middlemen bribed bankers to facilitate loans to their corporate clients in violation of norms.

Indian banks are already reeling under the pain of stressed assets. The amount of bad debt of 40-listed banks in the country stood at Rs 2.5 lakh crore in the banking system as of end June.

Among the banks with high level of gross non-performing assets (NPAs) are United Bank of India (10.49 percent), Dhanlaxmi Bank (7.17 percent), Central Bank of India (6.15 percent), Andhra Bank (5.98 percent) and Indian Overseas Bank (5.84 percent).

Besides the bad loans, a huge chunk of loans are being restructured, which is estimated to be between Rs 5 lakh crore to Rs 6 lakh crore. A sizeable chunk of such loans could turn bad too in the absence of significant economic revival. Banking system is the backbone and a proxy to the economy, hence damages caused to it can have serious ramifications on the overall economic stability.

The fact is that criminality is a major reason for the current bad debt pile of Indian banks. The asset quality scenario could worsen if the regulators and the banks do not recognize the root causes of the bad loans of Indian banks.

The element of criminality in a banking transaction, whether it comes from any of the three parties involved in the transaction-the banker, the borrower or the mythical middleman- ultimately hits the banks, which are guardians of tax payers’ money.

The first task of the central bank is to have the courage to acknowledge the problem, see the larger picture and not ignore the recurring signals.