CBI Booked Senior Officers Of Central Bank

CBI books Electrotherm for cheating Central Bank of Rs436 crore-Live mint

Company requested credit to enable it to supply steel and iron to an other firm in Tanzania, CBI says

 

New Delhi: The Central Bureau of Investigation (CBI) on Tuesday said that it had registered a case against the directors of Ahmedabad-based Electrotherm (India) Ltd and officials of state-owned Central Bank of India for entering into a “criminal conspiracy” and cheating the bank to the tune of Rs.436.74 crore.

 

The case was registered on a complaint filed by the Central Bank of India. “It is further alleged in the complaint that the company requested for credit to enable them to supply steel and iron to one other firm in Tanzania,” CBI said in a statement.

 

A CBI official identified the Tanzania-based company in question is Kamal Alloys Ltd. CBI said that one of the directors in Electrotherm was also on the board of Kamal Alloys.

The agency conducted searches at nine places on Tuesday in Ahmedabad, Gandhinagar, Vadodara and Kutch in Gujarat.

 

Electrotherm “did not submit any proof of delivery of the material and defaulted on the loans taken”, the agency said. CBI further said that “standby Letters of Credit (were) opened by the bank to facilitate trade in machinery and coal devolved.” The bank had to make payment when Electrotherm did not pay the company it had taken the material from.

 

CBI has also alleged that Electrotherm made “false representations” to “induce the bank to extend credit facilities” to itself.

 

A company spokesperson could not be immediately reached for comment.

This is the latest in a string of cases involving public sector banks that CBI has begun investigating in the recent past.

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De-stressing banks is no short-term process-Sri Anand Adhikari --Business Today

 

A week after the Central Bureau of Investigation (CBI) pounced on Syndicate Bank Chairman and Managing Director S.K. Jain, a branch manager of Central Bank of India in Jabalpur, Madhya Pradesh, was convicted by the CBI special court in a bribery case. The branch manager R.R. Das, who has retired now, has been sentenced to three years imprisonment and has been fined Rs 5,000. Das actually demanded a bribe of Rs 5,000 from a customer for clearing the 'Kisan Credit Card' loan of Rs 80,000. Das was caught red-handed by the CBI on receiving a tip off from the customer. Das' conviction came after seven long years. He has a right to contest the conviction in higher courts.

 

This is not an isolated case of bribery in a PSU bank. There are dozens of such cases handled by the CBI every year where the bribery amount is as low as Rs 5,000. The officers involved are often branch managers to senior managers. Imagine the waste of human resources and also of CBI's time in taking such cases to their logical conclusion. The arrest of Syndicate Bank 's Jain, however, is an exception. And it is not just a coincidence that the new government under Prime Minister Narendra Modi is now committed to wiping out corruption from the system. Modi, who often says Na Khaunga, Na Khane Dunga (neither will I take bribe, nor will I allow anyone to take it), has reportedly given a free hand to the agency (CBI) to go after the high and the mighty without any fear.

"A message has been clearly sent out that bribery and corruption are unacceptable, particularly with custodians of public money," says Nikhil Shah, Senior Director at Alvarez & Marsal India, a firm that specialises in turning around stressed cases.

 

There are some who smell political vendetta in all this. Jain's relative, who was also arrested by the CBI in the bribery case, is former Congress spokesperson Vineed Godha. " Syndicate Bank is a small bank-one-seventh the size of the SBI. CBI should have gone after bigger banks," says a banker on the condition of anonymity.

 

But whatever the critics may say, the arrest of a CMD of a PSU bank in a bribery case will act as a deterrent to those officers who take the depositors money for a ride.

 

The PSU bankers are already under scrutiny for a higher share of non-performing assets (NPAs) in their books as compared to their counterparts in private and foreign banks. With a 76 per cent lending share, the PSU banks contribute 85 per cent to the overall NPAs , as on March 2013.

Clearly, the disproportionate share of PSU banks points to poor governance structure, lax credit appraisal systems, near absence of concept of risk and also corruption. These systemic issues are directly linked to the way CMDs are appointed, the short tenures, musical chairs at top management, etc. While the government (be it the Congress or BJP) as a single largest shareholder of PSU banks will always play favourite to appoint a CMD, the stability at the top or fixed tenure will surely go a long way in bringing out a change.

 

The previous Congress-led UPA government had already made a beginning in the country's largest bank, the State Bank of India (SBI), by setting in motion a gradual road map for a five-year fixed tenure for Chairman. Arundhati Bhattacharya, who assumed the role of Chairperson last October, has a fixed three-year tenure. Bhattacharya's successor, in October 2016, will have a four-year tenure, while all chairmen thereafter will get five years.

 

"The new policy change will also allow all the four MDs to compete for the Chairman's post irrespective of their residual service on the date of the retirement of the Chairman," Bhattacharya told Business Today in an exclusive interview last month. The government should also replicate the fix tenure in all other PSU banks for effective leadership.

 

The P.J. Nayak Committee on reviewing the governance of PSU boards has suggested splitting the post of Chairman and MD. The bifurcation will allow an outside professional of eminence to come as a Chairman. "This change will improve the governance, board deliberations and bring fresh thinking to deal with risks," says M.D. Mallya, former chairman of Bank of Baroda. The private sector banks such as ICICI Bank and HDFC Bank have separate Chairman and MD. Take, for instance, K.V. Kamath, who is ICICI Bank's Non-executive Chairman, and Chanda Kochhar, who is the MD and CEO of the bank. Today, large borrowing proposals go to a credit committee at the headquarters where the CMD, executive directors and senior general managers take a call. "The splitting of CMD post will help in a focused role of a Chairman looking after the larger issues than sitting on a credit committee," says Mallya.

 

There are some banks such as SBI which are proactively reviewing the concept of risk in lending and also tightening, but the PSU pack as a whole needs a lot of prodding. The RBI has also come out with a new framework for containing NPAs to force banks to take early action. On his very first day, the new RBI Governor Raghuram Rajan had said: "The system has to be tolerant of genuine difficulty while coming hard on mismanagement or fraud." The RBI has introduced a new prudential framework from April this year for early detection of stressed assets. The regulator has asked banks to create a new asset classification called 'Special Mention Accounts' to identify early signs of stress based on stress indicators. The purpose is to increase the accountability of bankers.

 

There has been a shift in the banks's approach in addressing stressed assets. They are moving towards using the services of external professional management agencies who can provide transparent oversight and objectively drive operational improvements to increase the borrowers's cash flows. "While used extensively in markets like the US and UK, it is a relatively new concept in India. The banks who have used this route in India have seen tangible value created in their stressed assets," says Shah of Alvarez & Marsal. SBI had engaged the services of Alvarez & Marsal to help them in restructuring cases.

 

The RBI has also set up a credit central repository for information of large borrowers of banks. P. Rudran, MD & CEO at Asset Reconstruction Company (India) Ltd, says in a multiple lending, the credit information from a borrower doesn't come together-such as drawing power, utilisation of funds, monitoring of loans, default if any, non-fund facilities availed by borrower, etc. "The repository will help lenders to know all the credit information at one place. This will help in knowing the credit worthiness of a borrower," says Rudran.

 

Therefore, if a large borrower defaults, the information will be shared with other lenders on a quarterly basis. This measure will not only reduce the banks's leverage, but also keep the bad borrowers away from the banking system. A PSU banker narrates a case where a private sector bank took exclusive security (against the loan) from a corporate borrower, which the other bank didn't know. "We are now fighting with the borrower in a CDR (corporate debt restructuring) forum. The repository will help in knowing all the information well in advance," says the banker.

 

S. Ravi, a Non-executive director on the board of IDBI Bank, says: "The turnaround time for restructuring a stressed assets should be faster." Today, a lot of time is wasted as every lender in a consortium (lending) has to go back to head office for approval. "If the patient is on the death bed, you need to act fast," says a banker. The matter again lands at the doorstep of PSU bankers. And then there are limited DRTs (debt recovery tribunals), lack of faster bankruptcy laws, etc. A lot needs to be done to fix the structural issues at the PSU banks. "The positive action in the PSU space is happening too late. Don't expect any result too soon," remarks a private banker.

 

A Game of Shadows-Business Today-28th August 2014

The recent bribe-for-loan scandal involving Bhushan Steel and Syndicate Bank could just be the tip of the iceberg. The systemic rot runs much deeper.

 

 

Appearances can often be deceptive. A few months ago, all seemed well at Bhushan Steel. Indeed, in May, the steelmaker shifted its corporate office to a palatial building at Bhikaji Cama Place in New Delhi, an upscale commercial destination in the capital. It is a new 12-storey structure within the complex of the luxury hotel Hyatt Regency. But barely four months later, the company found itself at the centre of a storm that has rocked the banking sector.

On August 7, the Central Bureau of Investigation (CBI) arrested Bhushan Steel's Vice Chairman and Managing Director Neeraj Singal for allegedly offering a bribe of Rs 50 lakh to Syndicate Bank Chairman and Managing Director Sudhir Kumar Jain for extending its credit limit. Jain had been arrested five days earlier. Significantly, Bhushan Steel is already neck deep in debt and owes around Rs 40,000 crore to 51 banks, including State Bank of India (SBI), Punjab National Bank and others.

When Business Today visited the company's corporate office a few days ago, we were told that the senior management had stopped coming to work. A white Jaguar parked outside the main entrance to the lobby was in stark contrast to the nazar battu (a mask-like object supposed to ward off the evil eye) hanging about 15 feet above on the building façade. The huge visitors' lobby wore a deserted look. The silence at the corporate office was at odds with the hubbub at Bhushan's factory in Sahibabad Industrial Area, one of its three manufacturing units. Every two minutes, a big iron gate opens up to allow trucks to enter or exit the factory premises.

 The movement of trucks, mostly carrying scrap, is being supervised by security guards round-the-clock. "The incident is an aberration. The company has not defaulted so far," says a senior employee at the factory.
There is a dire need to strengthen the vigilance departments within banks, says CBI director Ranjit Sinha.Meanwhile, the company's lenders have planned to tighten the noose on the steelmaker. A consortium of banks last week decided to appoint three directors on Bhushan's board and conduct a forensic audit of its books, besides asking the company to sell its non-core assets to generate equity.

An email seeking an appointment with Bhushan Steel Chairman Brij Bhushan Singal went unanswered.

So how can a loss-making, debt-laden company manage to get additional loans? In the past three quarters till June 2014, Bhushan Steel has posted net losses. Its debt-to-equity ratio was 3.47 at the end of 2013/14; in contrast, the average debt-to-equity ratio of top five steel companies is just 1.7. "The Syndicate Bank CMD was extending credit limits to companies like Bhushan Steel even though it was not proper. Such cases appear to be quite rampant. There is a dire need to strengthen the vigilance departments within banks. If we come across more specific instances, we will examine them," says Ranjit Sinha, Director, CBI.

The CBI is also probing the role of middlemen in the scam. The involvement of Pawan Bansal, the mastermind in the Syndicate Bank scam and the man behind boutique investment bank firm Altius Finserv, has once again turned the spotlight on debt syndication agencies.
Indeed, for a long time, banks have not acknowledged the role of middlemen in manipulating the system. Following the recent incident, PSU banks such as Indian Bank and Andhra Bank have finally acknowledged their murky dealings and come down heavily on them. The Indian Bank has reportedly barred middlemen from entering its offices while Andhra Bank wants the borrower to accompany the middlemen during bank visits. Recently, Reserve Bank of India (RBI) Governor Raghuram Rajan said that "a good middleman acts as a broker. But if the point of a middleman is to pay bribes, that is obviously not okay. Its part of the whole set of governance issues that we need to look at."

This is a rare occasion when policymakers and bankers have accepted the presence of middlemen in the system. Last year, the CBI arrested a deputy managing director of SBI for colluding with a former official of the bank to sanction a Rs 400 crore loan to a Delhi-based company. Reportedly, the ex-employee was caught with Rolex and Omega watches, part of the kickbacks for the loan.

The [sensationalisation of the Syndicate Bank case] creates a pervasive kind of environment where trust is totally lost, which is not the right thing, says SBI chairperson Arundhati Bhattacharya.Former bank officials are generally employed by loan syndicate companies. Performing investment banking and consultancy functions and much more, these middlemen operate in a highly unorganised space, with no guidelines or RBI rules governing them. Even as the exact number of such companies is not known, observers point out that anyone who has any connections with bankers, secretaries or politicians and some financial background can pass himself off as a loan syndicator. "No licence, qualification or experience is required to set shop.

However, chartered accountants, former bankers from PSU and private sector banks and MBAs from low-rung institutes generally make the fit," says a mid-level officer working for a Delhi-based loan syndicate company. All interviews with executives of loan syndicate companies were off the record.

In most cases these syndicators scout for businesses looking to raise debt. With a large number of players in the market, the ones with a proven track record and connections to boast of, understandably, bag bigger deals. "The cut-throat competition among loan syndicators not only leads them to undercut their fees but also go to great extents to facilitate loans for clients," confirms another loan syndicator.

Click here to EnlargeThe promoter signs an 'engagement letter' with the loan syndicate company and pays a management fee, also called success fee, to the syndicator. The fee varies from 0.5 to 5 per cent of the loan amount after the approved loan sanction letter is facilitated by the middleman. Depending on the size of the syndicate company, roles of officials are well defined: some in the team solicit or scout for the business, others are masters at liaisoning with different departments, ministries and agencies. However, in some cases the roles overlap as well.

Industry insiders reckon that in three out of four loan approval requests, the services of middlemen are availed of and are especially sought after by companies with a turnover of Rs 500 crore to Rs 2,000 crore. From making plain-vanilla project reports mandated for every loan proposal to preparing intricate Credit Monitoring Analysis (CMA) reports that reflect the financial health of the company, the syndicates work in close association with the bankers to get the necessary approvals.

A mid-size promoter explains the dynamics. "The middleman unofficially shows the books to the banker and agrees upon a pre-decided amount for the loan, which the promoter eventually applies for," he says.
 

Loan syndicators point out that the policy framework is such that it leaves a lot of room for maneuverability. For example, portions of balance sheets are selectively highlighted to show the company in sound health while preparing the CMA report. There are a lot of grey areas and plenty is left to subjectivity. There are no RBI guidelines on the essentials of the CMA.

Collateral valuations can easily be manipulated even if they are prepared by external agencies. In the techno-economic viability (TEV) report for every new project, costs can be inflated, and loans can be taken against incorrect projections. Inflated project costs work to the advantage of promoters who avoid pumping in their own equity.
 

They are mandated to put in 30 per cent of the cost as equity in order to get 70 per cent debt from the bank. "Most promoters give an impression that they are utilising their share of 30 per cent equity whereas the entire project or operations is run on bank's money," says a middleman. CBI's Sinha also pointed to cases of siphoning off bank loans through over-invoicing of equipments, especially in the power sector. Eventually, a number of such loans turn into NPAs.

In lieu of speedy loan sanctioning, especially for over-leveraged companies, the middleman negotiates a percentage of kickback for the bankers. "No deal comes through without an obligation angle or kickback in case of an over-leveraged company," confirms a middleman. "We know where our file is, with which agency, officer and at what level. We accordingly network to move the file."

Kickbacks can range from cash, money transfer in foreign accounts via the hawala route to foreign holidays, luxury watches and solitaires. In the case of willful defaulters, the amount of kickback ranges from four to seven per cent of the loan amount as against 0.5-2 per cent in other cases.

 Depending upon the amount of the loan and the financial condition of the company, the middleman either pays kickback from his own success fee or seeks graft from the businessman. In a perfectly legitimate activity the promoter pays one time finance charges to the syndicate after he facilitates the loan. The cash kickbacks and gifts are shown as business promotion expense in his books. The big cash deals however happen in black.

Bankers often can't be blamed for sanctioning more than the due amount to promoters if TEV and CMA reports are manipulated. "These are all technical reports. How is the banker expected to know technicalities? He would go by the report and take a credit call on the basis of the papers presented to him," says a middleman." According to experts, the big problem is when the bankers, in order to show a good record, suggest ways to promoters to white-wash bad loans. "At one end, he has to deploy deposits to generate income. On the other hand, when such cases emerge and the bankers go slow on credit, they are pulled up," says a PSU banker.

The practice of paying off debt by taking fresh loans is common among overleveraged companies. This 'evergreening' of debt is rampant and the RBI governor has already voiced his concern about the practice. "The natural and worst way for a bank management with limited tenure to deal with distress is to 'extend and pretend' to evergreen the loan, hope it recovers by miracle, or that one's successor has to deal with it. The natural incentive for a promoter to deal with distress is to hold on to equity and control despite having no real equity left," Rajan had observed at a banking seminar last November. "Not all bankers and promoters succumb to these natural incentives but too many do," he added.

Bank loans are classified as non-performing when the borrower fails on repayments after 90 days. Gross NPAs for the banking sector rose to 3.85 per cent as on March 2014 from 3.26 per cent in the previous year, as per ratings agency Care Ratings. Even as there is no clear consensus on a direct link between corruption in banking and a jump in NPAs, it exposes the vulnerability of the banking system.

PSU banks, with a 76 per cent share of lending, contributed 85 per cent to the overall NPAs as on March 2013. "Ten per cent of NPAs are related to corruption," estimates a partner at a law firm. The government is worried. Finance Minister Arun Jaitley recently said "some recent incidences have been disturbing. I only hope that they are a drop in the ocean".

Arundhati Bhattacharya, Chairman, State Bank of India, says bribes-for-loans cases are exceptions. "The [sensationalisation of the Syndicate Bank case] creates a pervasive kind of environment where trust is totally lost, which is not the right thing," she says.

Naina Lal Kidwai, Chairman, India and Director, HSBC Asia Pacific, says graft cannot be the prime reason for growing NPAs. "In most cases, it is just used to speed up a proposal rather than getting a loan sanctioned. Most NPAs are on account of slowdown in the infrastructure sector which has been marred by bottlenecks," she asserts.

There are some who smell a political vendetta in the scandal involving Bhushan Steel. Jain's relative, who was also arrested by the CBI in the bribery case, is a former Congress spokesperson Vineed Godha. "Syndicate Bank is a small bank, one seventh the size of SBI. The CBI should have gone after bigger banks," says a banker on condition of anonymity.

The problem, according to experts, began during the 2008 downturn when stimulus packages were announced by the government to revive the economy. The banks began to lend generously resulting in piling up of NPAs and stressed assets. As per a PwC report, the total banking credit outstanding as on March 2013 was Rs 57.90 trillion (one trillion is 100,000 crore) out of which stressed assets (a combination of gross NPAs and restructured assets) are Rs 5.91 trillion - 10.2 per cent of the total credit outstanding. In other words, the rot on the Indian banking sector's books tote up to over 5.5 per cent of the country's GDP.

Some companies that have gone through corporate debt restructuring in recent time includes Hotel Leelaventure, Suzlon, HCC, Bharati Shipyard, GTL Group, 3i Infotech and KS Oils. Pankaj Agarwal, Vice President at Ambit Capital, says these stressed accounts can be classified into three categories. "Genuine cases impacted by the economic slowdown, diversion of funds by the promoters to other ventures which have been impacted by the slowdown, and promoters siphoning off the funds for personal use."

Analysts say the problem of stressed assets has swelled on account of promoters unable to raise fresh equity through the capital market to pay off their debts. Sources say the government is seriously considering implementing the P.J. Nayak committee report released in May this year. The report has called for an overhaul of state-run banks. It suggests splitting the post of chairman and managing director, and also points out how appointments to the board is a politicised process.

The Nayak committee report also picks holes in the law governing the public sector banks. It says that the Bank Nationalisation Act of 1969 is too primitive and irrelevant to cope with the needs of corporate governance. Private sector banks, on the other hand, are governed by the Companies Act, which stipulates stricter norms.

Senior banker Rana Kapoor, President of industry body Assocham, agrees that solutions to the current problems lie in strengthening the corporate governance structure. "Right now, the CMD takes care of both policy and implementation aspects. A single person should not become a power centre." Private sector banks such as ICICI Bank and HDFC Bank have separate chairman and managing director positions. At ICICI Bank, for instance, K.V. Kamath is the non-executive chairman and Chanda Kochhar is MD & CEO.

Even as some feel the splitting up of roles is a step in the right direction, it can only work well if the chairmen are not political appointees. "If the appointments are politicised it will not solve any purpose. The chairmen's post has to be in good hands. In private sector banks, chairman, MD and CEO are different with well defined roles," says Krishnamurthy Subramanian, Assistant Professor at the Indian School of Business and a member of the Nayak committee.

"Also, there are independent board directors. A lot of governance and processes comes through the board. If the board is not strong there is temptation to indulge in such practices."

Banks are now also using the services of outside consultants to restructure loans. SBI, for instance had engaged the services of Alvarez & Marsal. "It's a relatively new trend and Indian banks have been benefiting from it," says Nikhil Shah, MD, Alvarez & Marsal.

To minimise the risk for the banking sector, the central bank has also proposed to cut the exposure limits of banks to a group of borrowers from the present 40 per cent to 25 per cent of a bank's capital. The RBI has also set up a credit central repository for information on large borrowers of banks. However, a lot also will depend on the macroeconomic outlook as well. If the Indian economy revives, the business environment improves and the stock markets rally, it could come as a shot in the arm for indebted corporates.

Meanwhile, even as the government and the RBI plan to implement the Nayak committee's recommendations, businessmen are already sceptical about the move. A Delhi-based businessman says this move will only slow down the approval process and make securing of the loans costlier. "Now we will have to grease more hands. This certainly will not end graft."

 

 

 

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