Syndicate Bank fallout: Corporate lending to take a hit as fear grips state-run banks

Bank lending to the corporate sector is likely to witness a significant slowdown as a fear psychosis is gripping officials at state-run banks after the Central Bureau of Investigation’s (CBI) crackdown on Syndicate Bank chairman S K Jain last weekend.

Jain was arrested on Saturday on charges of taking bribes to extend credit facilities to Bhushan Steel and Prakash Industries in violation of lending norms. The agency is probing the case further.

The arrest could result in a significant slowdown in bank lending to corporations in the coming months, at least two senior bankers at large state-run banks told Firstbiz.

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This is logical given the fact that the CBI has extended the probe to other state-run banks and all transactions involving large amounts of money to companies are likely to come under scanner, bankers said.

“We don’t know which transaction will come under investigation. It is natural that decision making getting slowed a bit,” said a senior executive at a government bank.

None of the bankers FirstBiz spoke to wanted to be identified as the matter is sensitive.

“The loan flow (for corporates) will come down at least for the next six months as officials will think twice before sanctioning a large loan,” said another banker.

Loan flow to industries have been sluggish in the recent years due to the combined impact of a slowing economy and clearance roadblocks that impacted project executions and clampdown of various investigators into loan transactions.

Bank lending to large companies stood at Rs 20.35 lakh crore as on 27 June, as compared with Rs 18.57 lakh crore in the year-ago period, while that to medium-sized companies shrank to Rs 1.25 lakh crore from Rs 1.32 lakh crore in the year-ago period, according to the latest RBI data.

In the recent years, either the Central Bureau of Investigation (CBI) or Central Vigilance Commission (CVC) has charged several top executives of banks with bribery.

To name a few, State Bank of India Deputy Managing Director (DMD) Shyamal Acharya was charged by CBI in November 2013 for alleged graft in disbursing loans of above Rs 100 crore. In November 2010, R R Nair, former CEO of LIC Housing Finance, was charged with multiple wrongdoings, including overlooking regulations while sanctioning loans, changing rules for appointments and extending loans to defaulters.

In November, 2010, CVC alleged severe norms violations against former Corporation Bank CMD, Ramnath Pradeep for similar charges.

The common thread of all these cases is the role of middlemen. Bankers accepted money for wrongdoings through middlemen.

In all these cases bankers either offered loans to corporations violating prudential norms or facilitated illegal transactions involving huge amounts.

Meanwhile, the Reserve Bank of India (RBI) will not initiate a probe in connection with the Syndicate bank bribery case, a senior official at the RBI said. “This is not in our domain,” the official said.

Reacting to the development, shares of the bank plunged more than 7 percent in morning trade on Monday, Bhushan Steel also declined 7 percent and Prakash Industries about 19 percent. The BSE Sensex was trading up 0.6 percent.