Stumbling upon a scandal-India Tody
Stumbling upon a scandal: An LIC Housing Finance case probe led CBI to Syndicate Bank's Sudhir Kumar Jain
By Rahul Tripathi August 28, 2014
Luck favours the persistent could be the takeaway for the CBI in the bribery scandal involving Syndicate Bank Chairman and Managing Director (CMD) Sudhir Kumar Jain. Jain's arrest for allegedly favouring two companies-Bhushan Steel and Prakash Industries-and enhancing their credit limits in violation of rules is the outcome of the agency's probe into the 2010 LIC Housing Finance (LICHF) loan-for bribe scandal.
The tip-off in that case came from Pawan Bansal, the MD of financial services firm Altius Finserv. Bansal is alleged to be a middleman in that case and his information led to the arrest of senior LICHF officials. Over time though, CBI found that one of its joint directors (JD) was hand in glove with Bansal and began tracking them. While the JD was transferred to his parent cadre with a strong warning, investigators allegedly found that Bansal was a conduit trying to fix a deal for Bhushan and Prakash with a nationalised bank.
Investigators put Jain's phone under surveillance and allegedly found that he was in constant touch with Bansal. Jain was also allegedly instructing a junior to raise the credit limits of the two companies for a bribe of Rs.50 lakh.
But Jain's lawyer Varun Tankha says the CBI does not have anything incriminating against his client. "If someone is talking to someone, it does not mean you are a criminal. They will have to explain what these conversations pertain to," he says. CBI sources say the case has once again brought focus on the role of middlemen who operate as debt planners or financial advisers and connect borrowers and lenders.
"Senior officials at PSU banks often get away by arguing that bad loans are the result of a business decision gone wrong or by blaming it on recession," alleges a senior officer in the CBI's Economic Offences Wing. "Malpractices in the appointment of CMDs of banks is also responsible for this."
This claim is said to be substantiated in a letter from CBI chief Ranjit Sinha to Finance Minister Arun Jaitley, highlighting the events leading to Jain's appointment. Investigators are said to have found that Jain was given 62 marks out of 70 in his annual confidential report and 29 marks out of 30 in the selection board interview. Following the letter, Jaitley asked the RBI governor and cabinet secretary to take a fresh look at all such appointments over the last two years.
The CBI could also question previous RBI governor D. Subbarao and former revenue secretary Rajiv Takru, who were part of the board that interviewed Jain. But Takru says the CBI and the Central Vigilance Commission (CVC) were also involved in the process as they had given clearance to the appointment. "The selection committee was headed by D. Subbarao and not me. It consisted of five people including a director of IIM and a retired CMD of a public sector bank. The merit list was sent to the CBI and CVC for vigilance clearance," says Takru.
This case could well make more demands on the CBI's persistence.
- By Rahul Tripathi
Bracing for change | PSU bank reforms: The elephant in the room
The biggest potential change in the banking sector could come in the form of governance and shareholding reform of public sector banks
Mumbai: State-owned banks have been in the news in recent months for all the wrong reasons. The generally understated public sector bankers suddenly find themselves in the spotlight over issues ranging from bad debt to corporate governance, past loan decisions to rising provisions, and capital constraints.
It wasn’t always like this. In the mid-2000s and in the years following the global financial crisis, public sector banks were being liberally complimented for the stability they provided to the Indian banking sector and the role they were playing in helping build the much-needed infrastructure for the country.
Ironically, today it’s those very decisions—to lend to infrastructure—that have dragged public banks into the mess they find themselves in.
One-fifth of all the infrastructure advances are stressed and the share of infrastructure loans in overall stressed assets is at nearly 30%, according to Reserve Bank of India (RBI) data.
The problem is clearly centered within public sector banks, which have higher gross and net bad loan ratios than industry average and accounted for 92% of restructured assets, according RBI’s annual report.
To be sure, part of the story playing out in public sector banks ties in to the state of the Indian economy, which has seen growth slip to below 5% for two consecutive years. A large part of this slowdown is due to delay in project clearances and raw material linkages, which brought investment in the economy to a near standstill.
But not all of the troubles being faced by these banks can be passed off as second round impacts of the economic slowdown. The genesis of some of these issues goes back years, if not decades. Other issues link back to the broader problem of corruption and lack of governance.
When it all started
To understand what went wrong, we need to think back a decade to 2003-04 when infrastructure lending started in earnest.
Post liberalization, when India started to shake off the so-called Hindu rate of growth of 3-3.5%, increasing access to finance became vital for the economy. To meet this demand, new private banks were licensed but most of them chose to focus on retail lending. As a result, the onus of lending to core infrastructure remained largely on government banks, which did not have enough expertise.
A further push for infrastructure came in the early 2000s when the central government started to focus on core sectors such as roads, ports, power, iron and steel, textiles and aviation. The government extended sops to the private sector and also chipped in with its own finances. Public-private tie-ups became the buzzword.
Encouraged by this government push, a number of companies, many of them inexperienced in infrastructure development, jumped in to bid for large projects. However, when it came to financing these projects, public sector banks were the only real game in town as India does not have a deep corporate bond market.
“Public sector banks did not have enough expertise in evaluating infrastructure projects. We all learned through trial and error process,” said Hemant Contractor, former managing director of State Bank of India (SBI), who experienced the credit expansion to the infrastructure sector during his years at India’s largest lender.
This period of infrastructure development also coincided with a time when interest rates in India were low. In August 2003, RBI lowered its policy rate to a decade’s low of 4.5%. Banks soon followed suit. The result was a boom in loans to the core sector. The yearly credit growth rate in 2002-03 was 21.21%, which dropped to 14.86% the next year, but by 2005-06, credit growth zoomed to 34.27%.
Lending to the infrastructure sector, which was at Rs.3,200 crore in 1997-98, reached Rs.31,300 crore in 2002-03, Rs.2.05 trillion in 2007-08, Rs.7.3 trillion in 2012-13 and Rs.8.4 trillion in the year ended March. On a compounded annual growth rate (CAGR) basis, the rate of growth of credit to infrastructure was more than 40% in the past 13 years, against an overall CAGR of about 20% to all industries in the same period, RBI data show. The share of infrastructure loans in total bank credit, which was only 1.63% in 2000, had increased 13.37% by 2013.
Bankers who were at the helm of affairs lending to the infrastructure space back in early 2000s have all retired now, but their version of the story is straightforward. Infrastructure was the key sector in the early 2000s and banks that did not take exposure to the infra sector were dumped by investors.
“Infrastructure was giving the highest return at that time and the business case was very clear. We all thought infrastructure assets can never go wrong in a rapidly expanding India. We were encouraged by the China model,” said a former public sector bank chairman, who also witnessed the unprecedented growth in infrastructure lending in the early 2000s as deputy general manager and then general manager in charge of corporate lending. He declined to be identified.
“Banks who did not take part in giving loans to the infra sector were criticized by the media as someone who is not contributing to the economic growth of the country,” said the banker. The infrastructure bet, however, went horribly wrong. The global financial crisis was the first knock which pushed down economic growth and demand, both in local and global markets. At the same time, domestic factors like a slowdown in project clearances due to a multitude of factors also hit companies operating in the sector.
What made it worse was the fact that banks weren’t particularly discerning in who they had given out the loans to. Loans to infrastructure firms were sanctioned even though banks were aware that many of the companies had limited experience in infrastructure.
“Barring a few, nobody in the private sector had any experience in the infrastructure space. Some of them have become big names now. Owing to their limited experience in infrastructure lending, banks were not as selective in taking up projects as they should have been,” said Contractor, who retired as SBI’s managing director a few months ago. “When you pursue growth aggressively, your appraisal process may become lax, and some bad decisions may result.”
This lax decision-making has meant that even if the economy recovers and the government makes efforts to try and get stalled projects back on track, the bad loan problem may not go away.
“It is also true that even when the general economic outlook is healthy, the asset quality of banks could still suffer due to inadequacies in credit management. There are no short-cuts for proper credit appraisals and monitoring. Recognizing early warning signals and taking timely measures to take care of the weaknesses observed are very important,” RBI deputy governor H.R. Khan told a conference on 12 June.
Other challenges
The pile-up in bad debt has also been linked to poor governance at government-controlled banks. Recent instances such as the arrest of Syndicate Bank chairman S.K. Jain in an alleged bribe-for-loan scam have come as a grim reminder of the ad hoc system followed for appointments to top posts in public sector banks. A shortage of well-trained mid-level bankers has also been cited as a reason for poor appraisal process in public sector banks.
“Governance difficulties in public sector banks arise from several externally imposed constraints. These include dual regulation by the finance ministry in addition to RBI; board constitution, wherein it is difficult to categorize any director as independent; significant and widening compensation differences with private sector banks, leading to the erosion of specialist skills; external vigilance enforcement through the CVC (Central Vigilance Commission) and CBI (Central Bureau of Investigation),” said the report of an RBI-constituted committee to review governance of boards of banks in India in May.
The key recommendations of the committee included the setting up of a bank investment company (BIC) to hold equity stakes in banks which are presently held by the government. The autonomy of BIC should be ensured and the chief executive officer of BIC should be a professional banker, the panel said, adding that the government should stop giving any regulatory instructions to banks applicable only to PSU banks as dual instructions are discriminatory.
The committee also recommended that the government should consider reducing its holding in banks to less than 50% to enable a level playing field for public sector banks in matters of vigilance enforcement, employee compensation and the applicability of the right to information.
Splitting the post of chairman and managing director in PSU banks was also suggested and is currently under consideration.
Compounding the problem for PSU banks is capital. According to RBI, to meet the 12th Five Year Plan, the banking system business will need to grow to Rs.288 trillion by 2020 from about Rs.115 trillion in 2012. However, to grow the business and to meet the global Basel III banking norms, Indian banks will require an additional Rs.5 trillion of capital by 2019. Out of this, non-equity capital will be Rs.3.25 trillion and equity capital will be Rs.1.75 trillion, then RBI governor D. Subbarao said in June 2013. Raising this capital will be a mammoth task both for the government and the banks.
“Indian banks’ hands are tied. They need capital but, unfortunately, nobody is there to give them capital. Even with a cheap valuation, banks are not able to raise capital from the market,” said another banker who did not want to be named.
State-owned banks also need to be more nimble-footed in managing their portfolio.
“Private sector banks started diversifying their portfolio much earlier. Some private sector banks also started getting rid of their stressed accounts by downselling them, often to PSU banks,” said the banker.
“Some PSU banks are more affected than the others. Under political and bureaucratic pressures, PSU banks swallowed more than they could chew,” said the banker, adding that leadership plays a critical role in how these banks are run.
CBI registers preliminary enquiries against two public sector banks for connections with Pawan Bansal-DNA
The controversial corporate middleman, Pawan Bansal continues to be at centrestage of the Central Bureau of Investigation probe as two more public sector banks — UCO Bank and Bank of Maharashtra — are in trouble for their dealings with his Altius Finserv Private Limited.
The CBI has registered two preliminary enquiries against UCO Bank and Bank of Maharashtra for alleged irregularities in extension of loan facilities through Altius Finserv Private Limited.
Bansal, a chartered accountant, is currently in custody for Syndicate Bank alleged bribe for loan scandal along with suspended Bank CMD, SK Jain. The CBI has initiated the probe against the two banks after disclosure of Bansal, his phone intercepts and documents seized from his company, Altius Finserv. Interestingly, website of the company is not functional since the time of his arrest. The CBI is probing role of Bansal for allegedly bribing the officials of various public sector banks to get loans for big corporates.
Bansal allegedly uses Altius Finserv as front to collect money from various companies he helps and then passes on the money to bank officials. Bansal, as per CBI claims regularly meets bank officials to process loans proposal he prepares on behalf of of his corporate clients.
The investigators are looking into the allegations that Bansal has facilitated loans of over Rs8,000 crore from various banks to different private companies. According to sources, Bansal has managed to get loans worth more than Rs5,000 crore from UCO Bank and Bank of Maharashtra for different companies.
According to preliminary estimates and documents CBI has recovered, a few loans Bansal has facilitated from UCO Bank were Rs600 crore to Era Infra, Rs500 crore to Tayal Group, and Rs1,300 crore to Arshiya International. From Bank of Maharashtra Bansal, through Altius Finserv, has facilitated Rs200 crore to Era Infra, Rs400 crore to SEL Manufacturing and Rs200 crore to Shiv Vani Group. However, agency as of now has officially remained tight lipped about the amount of loans Bansal facilitated.
The scope of investigation is likely to widen as CBI would investigate Bansal's connections with other public sector banks. The agency is also probing the role of other directors of Altius Finserv, who hold positions in several other companies. The directors of Altius Finserv and their relatives, as per the financial statements of year 2013, hold 100% equity shares in the company.
Bansal himself holds managing directorship in Altius Global Finance Private Limited and directorship of BT Divine Power and Mining Corporation Limited. Earlier, he has also served as director of Altius Properties Private Limited. According to ministry of corporate affairs, he has also served as additional director of Capri Global Capital Limited for one day in 2009 and managing director of Capri Global Investment Advisors Private Limited.
CBI registers preliminary enquiries against two public sector banks for connections with Pawan Bansal-DNA
The controversial corporate middleman, Pawan Bansal continues to be at centrestage of the Central Bureau of Investigation probe as two more public sector banks — UCO Bank and Bank of Maharashtra — are in trouble for their dealings with his Altius Finserv Private Limited.
The CBI has registered two preliminary enquiries against UCO Bank and Bank of Maharashtra for alleged irregularities in extension of loan facilities through Altius Finserv Private Limited.
Bansal, a chartered accountant, is currently in custody for Syndicate Bank alleged bribe for loan scandal along with suspended Bank CMD, SK Jain. The CBI has initiated the probe against the two banks after disclosure of Bansal, his phone intercepts and documents seized from his company, Altius Finserv. Interestingly, website of the company is not functional since the time of his arrest. The CBI is probing role of Bansal for allegedly bribing the officials of various public sector banks to get loans for big corporates.
Bansal allegedly uses Altius Finserv as front to collect money from various companies he helps and then passes on the money to bank officials. Bansal, as per CBI claims regularly meets bank officials to process loans proposal he prepares on behalf of of his corporate clients.
The investigators are looking into the allegations that Bansal has facilitated loans of over Rs8,000 crore from various banks to different private companies. According to sources, Bansal has managed to get loans worth more than Rs5,000 crore from UCO Bank and Bank of Maharashtra for different companies.
According to preliminary estimates and documents CBI has recovered, a few loans Bansal has facilitated from UCO Bank were Rs600 crore to Era Infra, Rs500 crore to Tayal Group, and Rs1,300 crore to Arshiya International. From Bank of Maharashtra Bansal, through Altius Finserv, has facilitated Rs200 crore to Era Infra, Rs400 crore to SEL Manufacturing and Rs200 crore to Shiv Vani Group. However, agency as of now has officially remained tight lipped about the amount of loans Bansal facilitated.
The scope of investigation is likely to widen as CBI would investigate Bansal's connections with other public sector banks. The agency is also probing the role of other directors of Altius Finserv, who hold positions in several other companies. The directors of Altius Finserv and their relatives, as per the financial statements of year 2013, hold 100% equity shares in the company.
Bansal himself holds managing directorship in Altius Global Finance Private Limited and directorship of BT Divine Power and Mining Corporation Limited. Earlier, he has also served as director of Altius Properties Private Limited. According to ministry of corporate affairs, he has also served as additional director of Capri Global Capital Limited for one day in 2009 and managing director of Capri Global Investment Advisors Private Limited.
No comments:
Post a Comment