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Why do loans in India go bad?

Akhilesh Bhargava

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While there have been many instances of loans going bad, who are the ones who should be held guilty? Mr. Akhilesh Bharagava, Business Editor of HW Business and Finance shares his insights on the matter.

Business & Finance

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RBI
  • Former RBI Governor and current faculty member of the prestigious Chicago Booth School of Business – Raghuram Rajan, is one of the esteemed attendees at the annual World Economic Forum in the upscale ski resort of Davos Switzerland. Addressing a session on Strategic Outlook for South Asia, Rajan stated that India will eventually surpass China in economic size and will be in a better position to create infrastructure that is promised by the Chinese in the region, and further went on say that Indian economy will continue to grow, while growth rate in China is slowing down. Ever since he left RBI in September of 2016, Rajan has always maintained a good public profile and has not shied away from criticizing the BJP government on various fronts, most notably the failed demonetisation exercise, and has even gone on to write a book since. The fact that he has given frequent interviews and made himself available to the media at will, may have suggested that he has political ambitions if the BJP is overthrown and a UPA alliance comes to power. However, on being interviewed on the sidelines of the World Economic Forum, he flatly denied that he has any such aspirations and stated he is a technocrat and an academic and that he is simply trying to put ideas into the system. He also went to say that his strengths do not lie in politics thereby dispelling all rumours.

 

  • Kotak Mahindra Bank – the bellwether of the Indian banking sector seemed to be in a spot of bother when the RBI was going hammer and tongs behind it to reduce its promoter shareholding below 20%. The bank in a rather innovative way reduced its voting rights by the issue of an instrument known as perpetual non-convertible preference shares, which the RBI flatly rejected. The bank in an unprecedented move took the RBI, its regulator, to court in the first instance of its kind in history. Finally, many negotiations and few court dates later, the Bombay High Court adjourned the hearing to 12th of March this year. But, what is surprising is that RBI and Kotak Bank are said to be in talks with each other for an “out of court settlement”. If this is the case, Uday Kotak seems to have gotten the better of his regulator, in a case that could almost be made out to be like an over smart student getting his way with the principal. Let us recall that Bandhan Bank was penalised for the same action as Kotak Bank and finally had to give in to the demands of the RBI. So why this special treatment for Kotak Mahindra Bank?

 

  • From the bellwether of the banking sector to that of the pharmaceutical sector; Dilip Shanghvi led Sun Pharma is in the eye of the storm as it has been accused of a host of wrongdoings such as non-reporting of related party transactions, negligence of corporate governance standards, stock market manipulations and more. 2 whistleblower letters directed to SEBI had listed out in detail the wrongdoings of the pharma major. The effect of these allegations was felt by investors and Sun Pharma has lost roughly 30% or 42,700 crore Rs of its market value since September. Just recently, to allay the concerns of investors and arrest the fall in value of its shares, Sun Pharma gave details and clarified the status of its related party transactions, and on Tuesday gave further details and chalked out a road map to iron out the controversy, which included squaring up a loan of 2238 crore Rs to a Dubai based company suspected to be a related party, transfer the distribution of its domestic formulations business to a subsidiary, replace the auditors of another of its subsidiaries and has also firmly denied that it has given loans or stood guarantee to a firm promoted by Dilip Shanghvi’s brother in law, Sudhir Valia. This clarification seemed to have a soothing effect on the nervous investors as the stock surged 4.95% in Tuesday’s trade and is up a further 3% in today’s market.

 

 

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Why Forensic Investigation of Banks is a Must?

Akhilesh Bhargava

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As the government and the overall banking system struggles to resolve the gigantic NPA crisis that has crippled the Indian economy, it is clearly evident that these huge NPAs are brimming with frauds and criminal negligence/misconduct, that resulted in the loan accounts going bad, and the banks being duped. Investigation forensic audits are thus being conducted, as a part of the routine NPA recovery/resolution process, particularly where the default in repayment of bank loans has been found to be willful. Any forensic audit carries the implication of a crime and its purpose is to unearth the fraud, the criminals and the beneficiaries, because it is they who are the actual fraudsters, which generally happens to be the company promoters/directors, their auditors, consultants and key employees, as has been seen in many cases, including the likes of ILFS, Reid & Taylor etc.

 

Apart from unearthing incriminating facts, it also finds out regulatory violations and corporate malpractices, in addition to identifying the money trails that led to the syphoning of funds. The normal focus of a forensic audit is thus on related party transactions, bogus transactions, money laundering, tax evasion and the vanishing securities/assets of the borrower, whose overall beneficiaries are the men in charge of the borrowing entity. The normal and inevitable finding of such forensic audits is that the bank has been defrauded by syphoning/diversion of funds.

 

Take the case of Era Infra, wherein a number of  persons were booked by the CBI, including its promoters, auditors/consultants, as also the then chairman of UCO Bank, under charges of diversion/siphoning of bank loans, without using them for the sanctioned purpose, with the help of false end-use certificates provided by chartered accountants, as also fabricated audited financial statements.

 

It is clear from cases like Era Infra and many others, that such giant frauds do not happen merely because the borrower was criminal in his conduct. They occur also because the lending bankers necessarily collude, right from the sanction of funds, to their disbursement and continuous enhancement of loans on the basis of fraudulent financial statements. To state the very obvious, the control of funds under loans given, is always with the banker, who can at the very inception stop/prevent/object to any suspicious payment/transactions that represent the diversion of funds. But they deliberately collude with the fraudulent borrower and let the diversion go on. That is how, while banks have an exposure of over Rs.30000 crores on Alok Industries, a forensic audit reveals that its receivables to the tune of Rs.14000 crores are just not traceable and so is the case of Reid &Taylor, where against bank loans of over Rs.4000 crores, the assets available are a mere Rs.200 crores ie. 5% of the loan account.

 

A vigilant banker who does not collude with the fraudster can immediately spot and stop and illegal transactions, whereby funds are being diverted, the most popular of which are bogus purchases and related party transactions. So if banks, NCLT etc. conduct a compulsory forensic audit on the borrower, they must do so on the bankers too, because both were equally involved in this criminal game, which could not have been played without minimum two players ie. the bankers and the borrower.

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Business & Finance

Gold prices slip on weak global cues, muted demand; falls to 33,210 per 10g

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New Delhi | Gold prices on Wednesday fell by Rs 115 to Rs 33,210 per 10 gram at the bullion market, tracking a weak trend overseas and amid demand from local jewellers, according to the All India Sarafa Association.

Silver, however, staged a strong recovery of Rs 310 to Rs 40,160 per kg due to increased offtake by industrial units and coin makers.

Traders attributed the decline in gold prices to a weak trend overseas and muted demand from jewellers at the domestic markets.

Globally, gold fell 0.11 per cent to USD 1,284.30 an ounce but silver rose 0.16 per cent to USD 15.43 an ounce in New York.

In the national capital, gold of 99.9 per cent and 99.5 per cent purity moved down by Rs 115 each to Rs 33,210 and Rs 33,060 per 10 gram, respectively. The precious metal had gained Rs 125 Tuesday.

Sovereign gold, however remained flat at Rs 25,500 per piece of eight gram.

Meanwhile, silver ready bounced back by Rs 310 to Rs 40,160 per kg and weekly-based delivery by Rs 311 to Rs 39,1987 per kg.

Silver coins, however, held flat at Rs 77,000 for buying and Rs 78,000 for selling of 100 pieces.

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