New loan scam brews: Uttarakhand Coop Bank's Rs 165-cr NPAs in loans for liquor contracts, kin of board members

Massive irregularities have emerged in the operations of the Uttarakhand State Cooperative Bank Limited (USCB). Ranging from lending for liquor contracts and sugar mills in violation of the very charter of a rural bank — to finance small and medium farmers for crops etc — to doling out loans to relatives of board members without any collateral, the bank seems to have broken every rule in the book to run up non-performing assets (NPAs) worth Rs 165 crore.

The National Bank for Agriculture and Rural Development (NABARD), the regulator for rural and agricultural banking, is looking into the scam. It pointed out that the loan applications from the prospective borrowers were accepted directly by the on the day of board meetings. Sanctions were accorded without proper appraisal of loan by the branches or head office. Most of these loan proposals were put up between March 2016 and May 2017 by the general manager (banking), who was elevated to the post of managing director of the bank in April 2017.

NABARD alerted the Reserve Bank of India (RBI) in September 2017 to dissolve the USCB board and replace it with a management committee consisting of banking professionals. NABARD’s chief general manager DN Magar, also wrote to the state government calling for action: "The board had not taken up the issue of default by the following relatives of existing board members and had not initiated any action against as per Uttarakhand Cooperative Societies Act/Rules 2003. Reeta Pant wife of Naveen Pant (director of the bank) owes Rs 4.42 crore and entire outstanding amount is overdue. The bank had wrongly classified it as Standard. Rajesh Pant, brother of Naveen Pant (director of the bank) amount Rs 5.97 crore classified under Standard category as on 31.03.2017 instead of Sub-Standard since the account was overdue from 06.12.2016. I request you to kindly conduct investigation into the activities of the Board and Chief Executive Officer and take appropriate action."

Representational image. Reuters

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Rajendra Prasad, who served as managing director of the bank between 2009 and February 2017 told Firstpost that all the loans were sanctioned when he was at the helm of affairs. However, he blamed the then general manager (banking) Deepak Kumar, who is now managing director, for the irregularities and sanctioning loans for liquor contracts. Prasad also said Kumar misled him and the board.

"He gave me the appraisal reports to put up before the board. Then I asked him in writing whether he ensured the guarantee of the loans and his response was affirmative, however, at least six members of the board objected to the loan proposals for liquor. Subsequently, I ordered an inquiry into proposals put up by the general manager and a report revealed that loans were sanctioned without ensuring security and some relatives of some board members were also beneficiaries, which is a clear conflict of interest. In October 2016, I issued him a show cause notice seeking his response but he did not reply. A rejoinder was sent to him in January 2017 but he chose not to reply. Subsequently, I wrote to the registrar of societies, Uttarakhand, asking the state government authorities to recall Kumar's services. The state machinery and board sided with him and even NABARD tried to cover up the scam, as all the loans sanctioned would eventually turn NPA. I also wrote to NABARD chief general manager (Magar) with documentary evidence as late as on December 2017, for immediate action but he didn’t do anything and I am still awaiting justice in irregularities at the bank that I had built from scratch," Prasad alleged.

NABARD's Magar refused to speak to Firstpost citing statutory obligations. Magar also refused to comment on Prasad's letter, saying he had already submitted his observations. Kumar, incumbent managing director of the USCB (who as general manager had put up all these loans directly to the board) countered the charges levelled against him by his former boss. He said not a single loan was sanctioned by him in his individual capacity. He said all the proposals were put up before the loan committee and were subsequently taken up by the board involving then managing director.

He (Kumar) merely issued a sanction letter in his capacity as general manager after getting final approval from the top. Kumar, however, admitted that loans to relatives of board directors and for liquor contracts were wrong and in violations of banking rules. But on lending for liquor contracts in violation of the rural banks charter, he argued that they had no option since agriculture activity is marginal in the hilly state of Uttarakhand. USCB couldn’t have sat on idle funds and needed to diversify, he claimed.

"Definitely, our primary responsibility is to provide agriculture loans and help the farmers, but the agriculture scenario in Uttarakhand has worsened and farmers are migrating to the cities. This forced us to act like any other commercial bank. Since we had surplus cash, we started diversifying and giving loans to various industries like real estate etc. Liquor contract loans were part of those loans, however, it could have been avoided," Kumar said, adding that since he took over as managing director, they had decided not to give any more liquor loans.

"I have prepared a list of 54 NPAs and by next week we are going to publish the names with the guarantor in the newspapers," Kumar said, clearly preparing to secure the stables after the horses have bolted.

Surendra Singh Negi, one of the directors on the USCB board had also objected to the loans for liquor contracts and had sought explanations, but he has alleged that the proposal was cleared in connivance with the bank officials. Negi is still serving on the USCB board and is now chairman of the NPA committee of USCB. Negi said in spite of his reservations and complaints, the state government took no action.

"The entire scandal was buried by the bank and state machinery because all top bank officials were involved in sanctioning the loans. Since I became chairman of NPA committee, I have been consistently asking bank officials to recover bad debts but they don't listen to me because I don't have the power to punish. Despite being on the board as the director, I feel helpless because the state is turning a blind eye to the whole scam," he said.

The bank, as per documents accessed by Firstpost, did not file any recovery case in 2016-17. The total recovery during the financial year was merely Rs 3.11 lakh. Documents said: "The revenue department returned the cases to the bank without assigning any reason. The bank had not taken cognisance of the returned cases for further action. The registrar of cooperative societies should prevail upon the concerned staff to give priority for settlements of recovery cases so that the level of NPA in the bank may be kept under permissible limits."

Kumar admitted that recovery was a bit slow that particular financial year but since April last year, he has been trying to recover outstanding loans and tackling defaulters through legal means.

Dodging the primary banking objective

The primary objective of cooperative banks is to assist the agriculture sector in the economic upliftment of rural India. However, NABARD has alleged that the USCB did just the very opposite. A NABARD internal report observed that the bank failed to extend a helping hand to farmers and forced them to seek loans from moneylenders. The note sent to the state government on 21 September, 2017 exposed the rot within the banking system.

The report said that even as they were lending crores to liquor contracts, "there were different caps on maximum lending to individual farmers by primary agricultural cooperative societies in the state ranging from Rs 50,000 to Rs three lakh irrespective of their crop loan eligibility, depriving them of benefits of interest subvention and interest incentive available for crop loans up to Rs three lakh from the Central government and forcing them to approach moneylenders or other sources for their full credit requirements".

NABARD further noted that the Pradhan Mantri Fasal Bima Yojna and personal accident insurance scheme — the flagship programmes of the NDA government — were not being properly implemented by the cooperative bank. "The coverage of loanee farmers by DCCBs (district braches of the bank) in the state was very poor. Being the apex bank of the state, the bank was not monitoring the implementation of the scheme in the state and not collecting any data from DCCBs. Although the personal accident insurance scheme is compulsory for all the borrowers, the DCCBs in the state were not implementing the scheme for eligible Kisan Credit Card holders," NABARD’s special inspection report that was carried out between 31 July and 24 August, 2017 said.

In a confidential recommendatory note, NABARD’s inspecting officer Jugal Kishore observed that USCB violated directions issued by the RBI in sanctioning the loans. "The bank had violated Section 18 of the Payment and Settlements Systems Act, 2007 (Act 51 of 2007). The bank did not comply with the provisions of Section 11(1) of Credit Information Companies (CICs) Regulation Act, 2005. The bank had not complied with Rule 207(4) of Uttarakhand Cooperative Societies Rules, 2004, as it had financed sugar mills without obtaining government guarantee."

A confidential note from NABARD's SN Chalia said, "The bank's internal check and control system were weak." Chalia further pointed out that USCB had not complied with provision of sections 18, 19 and 27 of the Banking Regulation Act, 1949 related to cash reserve, restrictions on nature of subsidiary companies and submitting monthly returns to the RBI.

Who will clean up the mess?

A NABARD letter said: "The USCB Board had constituted various Committees vide its resolution No 24(27) dated 03.05.2017 out of the board members without specifying the functions and powers of such committees. The committees failed to work in effective manner on account of lack of knowledge, adequate experience of the members and lack of clarity in the functions and duties of the committees. The board had constituted various loan committees like HO Loan Committee, Branch Loan Committee with one of its directors as its members, thereby directly influencing and interfering in the day-to-day functioning of the bank.”

A senior NABARD official on the condition of anonymity said the state government has to step in to clean up the mess in the USCB and to ensure that co-operative rules are strictly followed. Registrar Uttarakhand Cooperative Society that monitors functioning of USCB said it is investigating into the irregularities and will soon crack the whip. The present registrar BM Mishra told Firstpost that inquiry is being conducted on various levels to examine the loans for liquor contracts, NPAs and loans to the relatives of office bearers.

"In certain cases, I have already recommended the state government to take appropriate action against those responsible. We will act in other cases after the final reports are in," Mishra said.

There is another interesting twist to this entire scandal. The NABARD team that went to examine the books of USBC from on 31 July, 2017 to 24 August, 2017, received an anonymous threat letter on 19 August. The letter in Hindi reviewed by Firstpost revealed that messenger warned NABARD officers that any adverse report about the USBC would have dire consequences for them. A NABARD note subsequently sent to the state government in November 2017 said: "This (threat letter) resulted in much tension and worry regarding the safety of the team during the inspection of the USCB."