RBI proposal reveals the magnitude of bulging NPAs

The forthcoming regime of corporate debt restructuring –CDR may be more lethal, and borrowers may only shudder at the prospects of their account having to be restructured

The RBI’s just-released discussion paper on  Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy is, right perceived, a frank admission of the mammoth problem that Indian banking industry is currently sitting on – the spectre of lots of actual and potential non-performing assets (NPAs). Actual NPAs may still be manageable, but the potential NPAs may be a huge problem.


The discussion paper was described as a carrot and stick, but on balance, it is more of a stick against the borrower, rather than any carrot. The forthcoming regime of restructuring of corporate debt may be more lethal, and borrowers may only shudder at the prospects of their account having to be restructured.


The following are main proposals of the RBI:


Special Mention Accounts

The Discussion Paper proposes that in addition to non-performing or substandard accounts, banks will identify a new category of Special Mention Accounts, called SMA. SMA itself is further classed into 3 classes – SMA-NF, SMA-1 and SMA-2. While classification into SMA-NF is based on non-financial information such as sales/operating profits dropping by 40% or more, return of three or more cheques over a period of 30 days, and so on, SMA-1 is based on principal/interest overdues of 31-60 days, and SMA-2 based on principal/interest overdues of 61-90 days.


The RBI will set up a Central Repository of Information on Large Credits (CRILC) – an entity to keep track of “large credits”. The RBI’s definition of “large credits” is not really large, as accounts with a fund and non-fund exposure of Rs5 crore, and current accounts with an outstanding balance of Rs1 crore will be covered by the CRILC system. Where an account reaches SMA-2 status, banks and larger NBFCs (systematically important NBFCs) will report the account to CRILC.

Joint Lender’s Forum

The reporting of an account to CRILC by more than one bank/NBFC will also trigger the formation of a Joint Lenders’ Forum, if the total fund-based and non-fund based exposure is of a size of Rs100 crore or above. Banks/NBFC do have the option of forming a JLF even for exposures of less than Rs100 crore. The JLF will work under a JLF agreement, either under the leadership of the consortium leader, or the lender having maximum exposure, and will try to work around ways to ensure that the borrower comes out of the stress.


Corrective action plan

The JLF will frame the corrective action plan (CAP). The CAP may include case-specific solution to the problem – rectification, recovery or restructuring. Rectification is the corrective action taken by the borrower, without either a restructuring or recovery action. If the JLF comes to a view that additional equity investment may have to be brought in to keep the account performing, the JLF may prevail upon the borrower to do so.


The next alternative is restructuring. This seems to be the replica of the existing CDR mechanism, and one of the downsides of the Discussion Paper is that duplicates the CDR mechanism with the JLF mechanism. Restructuring under the JLF works exactly on the same basis as in case of CDR – with an inter-creditor agreement, debtor-creditor agreement, recovery of sacrifice, non-disposal of assets by the promoters, and a stand-still clause whereby the lenders agree not to take any coercive recovery action during a certain period. Presumably, all lenders will anyway be a part of the JLF – hence, subjecting the restructuring to a decision by the CDR Cell seems to be further burdening the already-burdened CDR framework.


Not only has the Discussion Paper retained the overlapping roles of the JLF and the CDR cell, it has mandated an independent evaluation committee, called IEC, to assess the techno-economic viability of CDR proposals involving debts of Rs500 crore and above.


If restructuring fails, recovery follows. The JLF may decide upon the best and most effective recovery action. The recovery action is to be decided by a vote of creditors forming 75% in value, or 60% in number.


The JLF has a time-bound brief.  It has a maximum time frame of 60 days for finalising and signing off on the corrective action plan.


Sting attached to corporate debt restructuring

Corporate debt restructuring may, henceforth, not just be a breather to the company – it may come with coercive covenants such as transfer of promoters’ equity to the lenders, lenders causing issue of shares to themselves to the extent of their sacrifice, and so on. In essence, we may be back to the era of “convertibility clause” where lenders could cause their loans to be converted into equity and thus dilute the stakes of the promoters. The RBI sites the principle of skin-in-the-game to justify the forced sale or dilution of promoters’ equity – how would conversion of a loan or loan sacrifice into equity ensure any skin-in-the-game on the part of the promoter is not coming clear at all. On the contrary, when a loan is converted into equity, the very obligation to repay the loans gets erased.


Hang the auditor

The current regulatory mood of hanging the auditor, when things go wrong with a borrower, seems to prevail upon the RBI in the Discussion paper as well. The discussion paper says that banks must strictly adhere to RBI instructions about filing complaints against auditors where auditors seem to have engaged in falsification of accounts, stock statement or end-use statement etc. However, it does not seem to trust the disciplinary mechanism of the ICAI. It says, even while the disciplinary proceedings before ICAI are pending, the names of the CA firms against whom many complaints have been received from different banks may be flagged for information of all banks. Banks should consider this aspect before assigning any work to them. The names may also be shared with other regulators/MCA/CAG for information. In essence, the auditor is penalised by the banking system merely based on complaint, and not based on actual establishment of a case of breach of discipline by the auditor.


Strengthening the ARCs and the DRTs

The two of the legal institutions currently available to banks for coercive recovery action are – sale of NPAs to asset reconstruction companies (ARCs), or recovery action through debt recovery tribunals (DRTs). The discussion paper proposes several reforms of the current regulatory framework applicable to ARCs as well as DRTs.



nagesh kini

3 years ago

I entirely agree with Mr.Gopalakrishnan.
The RBI remedy is a shade worse than the ailment - it seeks to cut the head to cure a head ache!
The menace of NPAs is essentially man-made - all the wilfull defaulters are big ticket politically powerfull who are granted large limits based on fudged accounts and unattainable projections - they dio not contemplate repaying from day one. The branches know this for certain and it simply goes on and on. The CDR is another massive fraud to provide them with an extension by not classifing them bad by calling the exercise 'evergreening' the first step at back dooor write off.
The only solution is a massive shot gun treatment! Nothing short of it! Or less God help Indian Banking!


Peter Armand Menon

In Reply to nagesh kini 3 years ago

Dear Mr. Nagesh Kini & Mr. Gopalakrishnan TV,

Pardon the trite idiom, but "it takes two hands to clap". In this case, the NPA is the result of
A. A Bank Officer who demonstrates (1) Carelessness (2) Due Diligence and
B. A Borrower who (1) Has dishonest intentions at the outset (2) Who is honest and diligent but the victim of difficult or impossible circumstances.

This leads to a vast variety of NPA Contexts and unless an Independent Agency examines the NPA genesis, no correct action can be taken.

The core issue is that when and if necessary, both the careless Bank Officer and the Dishonest Borrower must face some form of legal/punitive action.

Gopalakrishnan T V

In Reply to Peter Armand Menon 3 years ago

I request MR Menon to go through the book on Management of Non Performing Advances published by Indian Institute of bankers in the year 2004. The book based on a well appreciated thesis on a study of NPAs in public Sector banks carries a foreword by Dr Rangarajan,the presnt Chairman, PMEAC. The book carries a statistical model by way of a solution to discipline the banks and borrowers simultaneously without giving any scope for manipulation by the usual ttrade off between the Banks Board and Auditors.The solution if implemented will help the prevention of formation of NPAs through proper sanction, regulation , monitoring and supervision. Mr Menon can have a copy of the book from Indian Institute of Bankers, Mumbai.

Peter Armand Menon

In Reply to Gopalakrishnan T V 3 years ago

Mr. Gopalakrishnan,

My observations are not relating to the loan application and the process that leads to granting of the loan. What you advise will reduce the incidence of NPA's.

My observations relate to after the NPS has been created. What does the system do then ?

Dayananda Kamath k

In Reply to Gopalakrishnan T V 3 years ago

i would like to narrate a small episode of recovery at rural branch in kanataka during 1980s. the branch had a advances in irdp dir schemes the govt sponsored schemes.the manager used to give a small lecture to the borrower before the loan proceeds is disbursed to the borrowers. this a loan and not charity this has to be repaid. it is given out of the deposits from fellow villagers and if it is properly utilised and paid back everybody will benefit and he too can get higher loans. we used to keep track of borrowers through personal contacts as well as their friends. so if one instalment or interest is delayed every staff who evr meets him or his friends will remind him about repayment due. and we had a good recovery in these schemes also. when the due is small you persuade him to pay whatever he he can they will pay. but if you do not follow up and when the amount has become huge he will not be able to pay at one go. and he thinks already so many months they have not bothered and they may not bother for another two three months even if i dont pay. and bank as borrower will be the looser in this process. this personal touch is missing now. that is why npa andgovt too have contributed through its policies.

nagesh kini

In Reply to Peter Armand Menon 3 years ago

Mr. Menon you seem to have overlooked the chronic wilfull defaulters who use the top managements to pressurize the lower echelons to disburse the loan.

Peter Armand Menon

In Reply to nagesh kini 3 years ago

Agreed. That means there is one more possible culprit class to add to the culprit list. Thanks for pointing this out.

Gopalakrishnan T V

3 years ago

The present proposal of RBI to contain the menace of NPAs is expensive, cumbersome, time consuming and will prove to be a remedy worse than the disease. In fact the willful defaulters will welcome this as they will get more time to dodge and enjoy. Further, this remedy does not intend to discipline the banks in any way.NPAs are basically the creation of banks and they entertain such borrowers who have no creditworthiness, competence, character and the required credentials to run some business is a well known fact. Some of the NPAs are
ab -initio NPAs,approved by the Banks Board and they are eventually written off after some lapse of a reasonable period.The RBI should ensure that both the Banks and borrowers adhere to some discipline to have a healthy Credit portfolio and in case they violate and banks' economy's get affected by the poor performance of the borrowers, they deserve to be penalised. A self correcting mechanism under the supervision of RBI without expecting other stake holders of banks and economy is what is required and it should be possible by introducing a levy from banks and borrowers for their lapses in building up a very healthy credit portfolio. The present system of cross subsidisation of bad borrowers by depositors, good borrowers and tax payers should come to an end.Bad borrowers cannot be allowed to have banks money for their luxury and comforts.


Dayananda Kamath k

In Reply to Gopalakrishnan T V 3 years ago

restructuring can be done on their own by the banks when they observe tends of npa.a bank entereda consortium at the request of the customer. other bank agreed because they thought their npa will be reduced. but the borrower used the money of both the banks. and he was in real trouble because of riots during indira gandhi murder and he is aumotive spare parts manufacturing company and most of his customers were sikh. when as an auditor when we visited his factory we discussed with the situation and his plans for repayment/ regularisation of the account.he said if his usance bills are allowed to be discounted which are drawn on his other firm which is acutally marketing his products and his entire production is sold through them. he can reduce the iablity gradually. his benefit is he will save on overdue interest of 2% on the loan. and 1% lesser interest on bill discount limit. even if the bill was not to be honoured on due date bank will not loose anything as the overdue bill will be debited back to loan account. but it is honoured you have recovered the amount he offered rs.2lks every month when proposal was put to higher authorities is it violates rbi norms of related concerns. but we emphsiised that since goods are sold diretly to the firm as since beginning it is a genuine transaction. and now our concern is reovery and we will allow it on trial basis. and they approved it. and you may not believe for six months the arrangment went well and rs. 12 lakhs recovered and the regional manager as wll as branch manager changed/transfered and new incubents discontinued it quoting rbi regulations of copanies of same groupe. and repayment stopped and finally bank wrote of a huge amount after 4 years. if you have the will you can recover.

Peter Armand Menon

3 years ago

Let us say that there has been a "System Failure" and all due processes have created a situation where there is an NPA. What then? What about the people who took the money and created an NPA?? Do they go scott free?? because that is what happens today. Might it be worth penalising borrowers who created NPA's with serious financial/criminal stringent punishments? How do we make the borrowers more responsible? After all, the banks are lending on "The borrower's demonstration of confidence in the productive use of the funds".


Dayananda Kamath k

In Reply to Peter Armand Menon 3 years ago

today the maphsis is given in lending than recovering because lending will increase your balanse sheet size. and govt through various schemes of debt relief has made the borrowers recalstrient hoping they will get the relief.because in these schemes who pays promptly will be the looser. banks also grant reclessly to such schemes. only when regulator, govt is serious about these issues and book the guilty the system will improve.

Yerram Raju Behara

3 years ago

The suggestion of mr K. Venkataraman, an experienced banker himself deserves immediate consideration by the RBI and the Ministry of Finance who shed tears over the bleeding NPAs in the banking system. Second, there are various types of audits prevalent now: internal audit by the department officials within each institution, vigilance audit; concurrent audit; statutory audit and regular inspections and management audits among the larger banks. Why the CAs who annually audit alone should take the blame when the whole system of audits perpetrate it? How these NPAs originated deserves to be looked at for making corrections instead of making a wild goose chase. In fact banks' due diligence process took a beating with the arm chair and system based lending initiation. Banks would be well advised to go back to the basics to correct the malady instead of aping the western models of credit risk management.


Dayananda Kamath k

In Reply to Yerram Raju Behara 3 years ago

when auditors are hounded and punished with active connivance of cvc, rbi, ministry of finance, primeministers office,presidents office who actually holds the equity in nationalied banks in trust on behalf of people of india for bringing out irregularities, and the karnatka high court uphelds and allows the bank to terminate the service for being stickler for rules.what you can expect in this country.

nagesh kini

In Reply to Yerram Raju Behara 3 years ago

Agreed Mr. Behara, the auditors after all conduct a post mortem pure and simple. The rot is more deep rooted - beginning to stink the moment the loan is processed under top level - incl.MOF pressures - without due dligigence on fudged accounts and projections and the same pressures preventing the banks to initiate action on defaults.


3 years ago

Six decades of Social and Capital Engineering has left its inevitable mark on this as every other field of Indian "endeavour". The rentiers of India's Neta-Babu, Quota-Corruption Raj continue to triumph over India's serfs as they loot, plunder and rape with remarkable persistence and consistency! India's inexorable and grotesque Constitution and laws that slice and dice "justice" by community, religion, caste, tribe, gender, station in life, distance from power and station in life may keep it so for all time. I resigned from State Bank of India in 1983 as Officer on Special Duty (Long Range Planning) when the depredations of the UPSC trade Union represented by the Pillai Committee and quotas for recruitment and promotions turned SBI into another Sarkar ki Sampathi PSU Latifundia and the piracy of the Khangress Party fomented by Indira Gandhi with storm troopers led by Janardhan Pujari began to destroy the vitals of the Banking in India.


nagesh kini

In Reply to SuchindranathAiyerS 3 years ago

Read "Barons of Indian Banking" how SBI decline started withSanjay Gandhi interference.

venkataraman k

3 years ago

NPAs are the talks of the day. the institutions are carried away by the press reports who indirectly induce the lenders to part with the money. if you analyse the financials of these SPVs of large projects, the stake of the promoters are minimum. for example take telecom sector, look at the revenue generated by these companies. 40 crores mobiles users and just one call/mobile/day. 40x30x12? for the past 10 years.14400 crores, but these companies default. Just like TDS mechanisam if 10 paise is recovered per call there will not be any default. so in the HIGh WAY PROJECTS, the recovery for every toll collection along with service tax, there would not have mbeen any default. so with the powerm generation. consumers are not defaulters and it is only the service provider defaults. if the recovery mechanism is linked to the source of revenue, i think there will not default. As a banker i tried this with the loans given to small vendors and the recovery is made daily, recovery was to the extent of 90%. the default percentage is less than 1%. if the recovery is linked to the source of revenue which has the element of profit with which the repayments are made, then where will,be the default. as most of the business is cash and carry the procedure can be very well implemented. will the authorities have the guts to implement?
venkataraman k

nagesh kini

3 years ago

It is not just merely 'hang the auditor'. It is a fact that NPAs primarily arise out of fudged financial statements and feasibility studies or projections intentionally attested by the auditor, is a party to the fraudand ought to be issued a show cause along with the promoters. ICAI mechanism are long winded.

Peter Armand Menon

3 years ago

NOTE: There is absolutely no action defined with respect to the Directors or the Decision Makers who were responsible for creating the NPA. This is plain bad management. If the chap creating the problem does not get a serious rap across the knuckles or his sweet batooties - there is no question of reforming or remediating his/her actions. This sounds clearly like a Banking Bureaucrats notion of "Taking Action" :))))

Peter Armand Menon

3 years ago

NOTE: There is absolutely no action defined with respect to the Directors or the Decision Makers who were responsible for creating the NPA. This is plain bad management. If the chap creating the problem does not get a serious rap across the knuckles or his sweet batooties - there is no question of reforming or remediating his/her actions. This sounds clearly like a Banking Bureaucrats notion of "Taking Action" :))))

Dayananda Kamath k

3 years ago

it is measure to drive out genuine borowers from bank finance.when dhabol project zoom builders, diamond merchants accounts are managed npa by rbi itself by changing norms.what these additional measures will do except may be giving new products to be developed by it companies.when audit reports are ignored and brought to their notice if rbi is not acting then what is the use of such actions. it is only playing to the galery and nothing else.i have a complaint registered with disciplinaery authority of indian institute of chartered accounts and all the auditors who audit banks for their dreilection in duty. pending since last 8 years.

Uncertain gas production making us to depend on imports

For the time being, until the new wells start gushing out the gas, we have no alternative but to continue our dependence on imports

Although systems are in place for continuous exchange of information on

actual production of natural gas on a daily basis, the fall in production, and the lack of adequate action to drill new areas to discover oil & gas have been explained away as a geographical surprise. But there is more to the story.


Sashi Mukundan, regional president and country head, BP India, has mentioned that two significant discoveries had been made in the deep waters and exploration effort was underway to unlock the next major hub for development in the east coast. He expects that this new discovery should be able to get anything between 40 to 60 mmscmd of gas.


According to the Petroleum Ministry, the new gas discovery in the Krishna-Godavari (KG) basin is the "biggest ever" and it has been named as D-55, which was announced in May this year. At least $7 billion worth of investment by Reliance has been approved in these new fields, as stated by Minister Moily. He felt that this discovery will easily offset the falling output in KG-D6 block.


In the meantime, Reliance Industries Ltd (RIL) has also shown its willingness to give the bank guarantee to get higher gas price from April 2014. Currently, the supplies are being priced at $4.2, while from April 2014 this is likely to increase to $8.4 per mmscmd. The bank guarantee option will eliminate the prospect of litigation and will also help in selling the gas at the revised price, so that neither party loses by selling at a lower price.


In any case, an appropriate formula has to be worked out with regard to the outstanding supplies of the previous contract, when the new discoveries come into full production.


In the meantime, both Reliance and Cairn are also looking at the prospects of getting the relinquished blocks, though the Petroleum Ministry official Vivek Rao stated that for getting these blocks, both will have to make bids like any other operator. It is expected that through NELP X the government will hope to obtain investment commitments worth $5 billion.


All said and done, for the time being, until the new wells start gushing out the gas, we have no alternative but to continue our dependence on imports.


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)



Dr Anantha K Ramdas

3 years ago

In response to Mr Gosavi, I may mention that in Banglore, for example, where it is generally cold in the mornings, most houses have solar water heaters, and there is a price cone cession for actual electricity consumption, if you have one.

as for solar power to replace electricity as such, at the moment, the investment costs are high; you are right that it will take a few more years when solar power panels will be affordable by one and all.

In fact, if the Government truly wanted, they could instal solar panels on the top of all houses and form a solar grid; obtain the power and distribute it at cost. In many places, solar power is also used for electrifying street lamps. On the whole, for a country like India, this is a mammoth exercise that only a government with means can do and save millions, sorry, billions of dollars in replacing other forms of imported fuel consumption.

But the trouble is that we need some State government to start this on a war footing and create competition between all the political parties, so that
"aam aadmi" gets the benefit in the long run.... thanks for your concern.


Abhijit Gosavi

In Reply to Dr Anantha K Ramdas 3 years ago

Thank you very much for this info., Dr. Ramdas! I didn't know about solar panels in Bangalore. It appears that internal parts of Maha, Rajasthan, MP and most of the South could also use these solar panels. And you are so right about the role of govt.! In Europe, a lot of power is generated via renewable means (non-fossil-fuel), and that's happened only because of government involvement.

Middle-class Indians use very little energy compared to their counterparts in the West, which makes the Indian energy crisis less acute than it is in the West. It is sad that so many live in great poverty surviving with very little energy, but as the nation progresses, many of the poor will enter the middle class, and the problem will need some sort of long-term planning.

shadi katyal

In Reply to Abhijit Gosavi 3 years ago

If the said Indian energy crisis is less than Europe than how come one finds generator are a common sight and wastage of Diesel and atmosphere is not being considered. What about some of the area.
s in the nation where they have no power in this century
We should try to make progress and not look for state of GOI for any help but let the entrepreneurs do it

Abhijit Gosavi

In Reply to shadi katyal 3 years ago

Entrepreneurs need some form of subsidies to embrace challenges of this magnitude. Those diesel generators are not as efficient as power plants, making them very expensive. You are right that there are parts where there is no electricity, and there is at least one state where they have power 24 hours a day. In that state, it is the govt. that has worked to ensure power 24 hrs a day. No prizes for guessing which state that is :)

shadi katyal

In Reply to Dr Anantha K Ramdas 3 years ago

My question is that why we need GOI or state Govts to be involved in it. Have not learned anything from all the PSU??
Like the solar power water heaters let some entrepreneur do this and be sure that he doesnot have to go through any kinds of Babus who will hold such a license.
Time to stand up against Permit Raj.

Dr Anantha K Ramdas

3 years ago

Thank you for your comments. I do not think that Reliance would do anything that stupid as hoarding; initial enthusiasm was probably carried too far and nobody wanted to really check into details.

No that they have discovered another great field in D-55, and the Govt has approved $ 7 billion in investment, let us hope for the best.

What we need to do is not to rest on one area of fossil fuel. Let it be Reliance, ONGC,
Cairn, GSPC or any other; these do exploration is definitively unknown areas. What we need to do is to seriously work on Coal exploration and development. Coal methane gas is simply "evaporating" and we need to obtain the technology to ensure that no more CBM is lost in inter-departmental rivalry and one-up-man ships. We need to investigate and correct our mistakes on "environmental clearances" and other "clearances" from various state bodies. These have to be brought under "one window". We have too many hurdles to cross in this fashion and this must stop if we want to make some headway.


Abhijit Gosavi

In Reply to Dr Anantha K Ramdas 3 years ago

Has India made any serious investments in wind/solar energy? We keep hearing about solar panels in Gujarat, but I haven't seen a proper analysis of the proportion of energy derived from renewable sources there. It certainly is true that India has lots and lots of wind and sun. Further, I believe even middle class Indians don't consume as much energy per capita as their equivalents in most developed nations.

shadi katyal

In Reply to Abhijit Gosavi 3 years ago

India has no planning of any kind and talk is cheaper. Where is any new technology of any nature. Look at USA who now producing more oil and gas than imports.
China with industrial development and having trillions to spare has gone into Africa for gas, oil and other minerals but our corrupt bureaucracy has not done anything.
Reiance is holding gas for higher prices while nation suffers. who has the power to investigate as most are on company payroll. This is how business is done .

Abhijit Gosavi

In Reply to shadi katyal 3 years ago

If India burns fossil fuels at China's rate (China is not a good role model for ANY nation), we are soon going to lose all ice in the poles, and there's going to be havoc in the climate worldwide!

Two winters back when I went for an early morning jog in Pune, I could hardly breathe, and my white shorts had turned grey in just about one hour! Business as usual and burning more and more of those fossil fuels is not the solution --- just my thoughts.

shadi katyal

3 years ago

We must open up this exploration field to the world if we want to meet our requirements.
Reliance monopoly is similar to GOI and is it possible that Reliance is purposely holding the gas production to get higher prices and let the industry and nation suffer.
Why is nation being made a target of GOI and a single firm

How fraud flourishes in Medicare’s drug plan

The US government does little to stop schemers from stealing from Medicare Part D, the program that provides prescription drugs to more than 36 million seniors and disabled people

This story was co-produced with NPR.

With just a handful of prescriptions to his name, psychiatrist Ernest Bagner III was barely a blip in Medicare's vast drug program in 2009.

But the next year he began churning them out at a furious rate. Not just the psych drugs expected in his specialty, but expensive pills for asthma and high cholesterol, heartburn and blood clots.

By the end of 2010, Medicare had paid $3.8 million for Bagner's drugs — one of the highest tallies in the country. His prescriptions cost the program another $2.6 million the following year, records analyzed by ProPublica show.

Bagner, 46, says there's just one problem with this accounting: The prescriptions aren't his. "All of that stuff you have is false," he said.

By his telling, someone stole his identity while he worked at a strip-mall clinic in Hollywood, Calif., then forged his signature on prescriptions for hundreds of Medicare patients he'd never seen. Whoever did it, he’s been told, likely pilfered those drugs and resold them.

"These people make more money off my name than I do," said Bagner, who now works as a disability evaluator and says he no longer prescribes medications.

Today, credit card companies routinely scan their records for fraud, flagging or blocking suspicious charges as they happen. Yet Medicare’s massive drug program has a process so convoluted and poorly managed that fraud flourishes, giving rise to elaborate schemes that quickly siphon away millions of dollars.

Frustrated investigators for law enforcement, insurers and pharmacy chains say they don’t see evidence that Medicare officials are doing much to stop it.

“It’s kind of a black hole,” said Alanna Lavelle, director of investigations for WellPoint Inc., which provides drug coverage to about 1.4 million people in the program, known as Part D.

Lavelle said her team routinely refers doctors and pharmacies to the contractor Medicare hires to pursue fraud. "Oftentimes we never hear back, positive or negative."

Since it started in 2006, Part D has been lauded for its success in getting needed medications to more than 36 million seniors and disabled enrollees.

But over the past year, ProPublica has detailed how Part D is beset by weak oversight. Medicare doesn’t analyze its prescribing data to root out doctors whose inappropriate drug choices endanger patients. Nor has it flagged those whose unchecked devotion to name-brand drugs, instead of generics, adds billions in needless expense.

For this story, ProPublica again scrutinized Medicare’s data, this time to identify scores of doctors whose prescription patterns bore the hallmarks of fraud. The cost of their prescribing spiked dramatically from one year to the next — in some cases by millions of dollars — as they chose brand-name drugs that scammers can easily resell.

Sometimes the doctors claimed they were unwitting victims of identity theft. In other cases they were paid for writing bogus or inappropriate prescriptions.

A reporter initially contacted Bagner to ask about the high cost of his prescribing, then learned that his flood of prescriptions had already drawn the attention of law enforcement, the fraud units of at least two insurers and Medicare's fraud contractor by as early as mid-2010.

All these entities knew that Bagner claimed his identity had been stolen, documents and interviews show. Some of the investigators suspected he was not being wholly truthful about his involvement. Still, Medicare never blocked his national provider ID, which is used to fill prescriptions, Bagner said. The same was true with other physicians ProPublica identified.

The Centers for Medicare and Medicaid Services, which runs Part D, declined to make an official available for comment and would not answer specific questions. Instead, a spokesman sent a brief statement saying the agency “actively works to detect and prevent provider fraud” and refers cases to law enforcement if appropriate.

Law enforcement investigators and insurers say a marked increase in tips, complaints and cases suggests that Part D fraud is rising, but because pursuit of it is scattershot, gauging the extent is impossible.

Criminals are "coming up with new schemes, and drugs that are being diverted every day,” said Michael Cohen, an investigator with the inspector general of the Department of Health and Human Services (HHS).

Bagner’s case and others like it show how fast a single doctor can be used to run up a staggering tab.

Part D is vulnerable because it requires insurance companies to pay for prescriptions issued by any licensed prescriber and filled by any willing pharmacy within 14 days. Insurers generally must cover even suspicious claims before investigating, an approach called "pay and chase." By comparison, these same insurers have more time to review questionable medication claims for patients in their non-Medicare plans.

Fraud rings use an ever-evolving variety of schemes to plunder the program.

In one of the most popular, elderly, broke, disgraced or foreign-trained doctors are recruited for jobs at small clinics. Their provider IDs are used to write thousands of Medicare prescriptions for patients whose identities also may have been bought or stolen. Once dispensed, the drugs are then resold, sometimes with new labels, to pharmacies or drug wholesalers.

In other schemes, investigators say, pharmacies are active participants, billing Medicare multiple times for prescriptions they never fill.

Doctors can readily disavow the prescriptions as forged, investigators say. And because the schemes don't always involve painkillers, a law enforcement focus, they can escape notice.

Stymied by Medicare’s inaction, the task of pursuing such cases sometimes falls to local agencies such as Los Angeles County's Health Authority Law Enforcement Task Force.

Sheriff's Sgt. Steve Opferman, who heads that task force, said he doesn’t understand why Medicare does not make fraud more of a priority. Part D is “icing on the cake" for crooks, he said.

“Why is the government so reluctant to stop this?” he asked.

‘A Deal With the Devil’

In September 2006, federal officials called a meeting in Los Angeles to brief law enforcement on Medicare’s freshly launched prescription drug program.

When it was over, Opferman announced to a colleague: “Let the crime spree begin.”

Sure enough, Opferman said, it did.

From a beat-up office in a county building in downtown Los Angeles, his team now spends about half its time chasing down Part D scams in one of the country’s Medicare fraud hot spots.

Opferman has the pony tail, tattoos and scruffiness that go with working undercover and an impressive ability to recall the intricacies of dozens of such scams. He said it didn’t take long for local organized crime rings to suss out Part D’s weaknesses.

The scams he works are usually tied to Armenian organized crime rings. They depend, in large part, on a steady supply of doctors who are either oblivious or corrupt enough to look the other way.

“These people aren’t very bright,” Opferman said. “They’ve made a deal with the devil.”

Some doctors get hooked in after answering Craigslist ads seeking “Medical Director for clinic.” One doctor who did so got suspicious, but by the time she backed out, prescriptions already were being billed in her name, one of Opferman's team members recalled.

In some cases, Opferman and others say, the doctors are paid a flat fee to review a small percentage of patient charts once a week, while dozens, even thousands of prescriptions, are churned out under their names and filled at local pharmacies.

When one doctor's identification becomes "hot," the scammers simply find another.

In a locked room deep in the bowels of Opferman's building, boxes of drugs seized in raids are stacked to the ceiling. Gallon-sized plastic bags of pills. Piles of bottles with labels soaked off with nail polish remover, ready for new ones. Even a baby stroller used to peddle pills in a local park.

The painkillers, including such drugs as Oxycontin and Vicodin, are sold on the street to addicts, Opferman said. Expensive drugs for other conditions are resold back into the supply chain — to other patients, pharmacies or drug wholesalers.

Among the most popular are drugs such as the antipsychotic Abilify, which costs upward of $750 or more for a 30-day supply, or the heartburn pill Nexium, which runs at least $240.

In some cases, drug wholesalers repackage expired medications, which are ultimately dispensed to unsuspecting patients.

Opferman said Medicare is of scant help to local agencies trying to combat Part D fraud. It can take "months or years," he said, to get basic information, such as a physician’s prescribing or billing data, from the program.

“It’s like pulling teeth,” he said.

In contrast, Opferman said, Medi-Cal, the state-run insurance program for the poor, is quick to share its data. Medi-Cal can move to restrict a doctor’s ability to prescribe certain drugs if fraud is suspected and, in some cases, it suspends them from the program, state officials said.

Opferman and other investigators say Medicare could stanch much of the fraud by ensuring that doctors and pharmacies are legitimate and by quickly shutting off provider IDs associated with fraud. In many cases, the doctors' clinics turn out to be little more than rooms with a telephone, while the pharmacies are simply storefront pill mills, they said.

At the very least, WellPoint’s Lavelle suggests, Medicare or its fraud contractor could use Google Earth to see if the pharmacies even exist.

In the years since his first meeting about Part D, Opferman has come up with his own presentation about the program for his fellow fraud investigators. One slide is titled “An Invitation to Steal $$.”

His Dream Went South

At the beginning, when an Armenian woman offered to open a clinic for him, Bagner said he could see no down side. She'd set up the site, find the patients, handle the billing. And when the Medicare reimbursements rolled in, he'd get paid.

“My office. I risk no money. I see patients," Bagner recalled thinking. "Sounds good. Something I dreamed about as a kid.”

At first, all was well, Bagner said. He’d see about 10 patients a day, usually older Armenians and Hispanics, at an office on an overstuffed stretch of Hollywood Boulevard. About three months in, he said, his dream went south. Two investigators — he can't recall from which agency — showed up with a stack of prescriptions and patient records. They said he'd ordered more than $3 million worth of wheelchairs, neck braces and drugs since the clinic had opened.

They brought medical records that were copies of his actual files, Bagner said, but with different patient names written in. The prescriptions bore a fake signature that closely resembled his, he said, and they were written to patients he didn’t know.

“I wrote my signature. I showed them," he said. "They saw the difference.”

The investigators told him he was likely a victim of a scam, Bagner said, and promised to get back to him.

About a month later, the woman who ran the clinic abruptly closed it before he’d ever been paid, Bagner said. He never had a contract, he said, and couldn’t recall her last name. Soon after, an investigator from CVS Caremark began calling.

“He was insinuating I was getting kickbacks for writing expensive drugs,” Bagner said. “I called him back and said those patients were not mine.”

At that point, Bagner said he didn’t know how he could prove he hadn’t been party to the fraud. “Theoretically, hypothetically, I could sign my name a weird way and say, ‘No, it’s not mine,’” he said. “I could give my charts to the Russian mob.”

Bagner blames horrible business sense for falling prey to the scam. He rose from a childhood in gritty East Oakland to attend UCLA for his undergraduate degree and medical school. Nowhere in his training, he said, did anyone teach him how to run a business. He said he had previously lost $30,000 that he loaned to another clinic.

“I've never talked about this because it’s embarrassing,” he said. “I know medicine. I know psychology. When it comes to business, I'm like a retarded person.”

Bagner said he doesn’t even know what Part D is or how much drugs cost. “If you told me you’d give me a million dollars right now if I could tell you how much a month of Prozac costs under that program,” he said, “I have no idea what Part A or B or C or G is.” (There is no Part G.)

Over the course of several interviews, Bagner’s story changed somewhat. He initially insisted that no one had asked about his prescribing other than the CVS staffer and the investigators who visited him. But later he recalled that he had also been contacted by at least one other insurer and by a detective with Opferman’s task force.

Opferman said he came across Bagner in January 2011, when a pharmacist called about suspicious prescriptions someone had dropped off. When a driver brought patients to pick up the drugs, officers met them. They found that the “patients” were not the people named on the prescriptions, and the driver had been paid by a woman working at a strip-mall pill mill, according to a search warrant affidavit.

A follow-up search turned up a stack of prescriptions supposedly signed by Bagner in the woman’s purse, Opferman said. The case is still under investigation, but at this point Bagner is considered a victim, Opferman said.

Bagner plays in poker tournaments and fancies himself good at reading his opponents. He said he still doesn't know why the scammer chose him.

“I’m grateful and amazed that I haven’t gotten in trouble with this,” he said.

How Most Cases Die

When criminals plunder Part D, justice is rarely swift. Investigators from so many agencies are involved that chasing down fraud often seems like a relay race in which someone fumbles the baton—or stops well short of the finish line.

Unlike other parts of Medicare, Part D is entirely run by private insurance companies, which are paid by the government to process the bills. According to their contracts, the insurers are supposed to look out for fraud.

Cases typically begin when insurers notice spikes in a doctor’s prescribing or are tipped off by a patient, pharmacy or disgruntled employee.

If insurers suspect fraud, Medicare encourages — but does not require — them to notify its Part D fraud contractor, a private firm hired to review complaints and recommend cases for investigation. The insurers, however, are not allowed to block a suspect doctor's prescriptions.

Moreover, insurers can see only the fraction of a doctor’s prescribing record that involves their members — they have no insight as to whether the pattern extends to other companies. Only Medicare and its fraud contractor can see that information.

When tips from insurers reach the contractor, they join those coming in from patients and others. But the contractor can’t directly access patient medical charts to assess whether the patient actually saw the doctor or had a condition that warranted the medication. It must go back to the insurers, which then request the records from doctors or pharmacies.

Most cases die at this level. Between April 2010 and March 2011, the contractor started 1,800 Part D reviews, but forwarded only about 220 for further investigation, according to a report released earlier this year. Nearly all of those cases went to the Health and Human Services inspector general, which has a team of special agents that investigate fraud.

There, the Part D cases compete for attention with an array of other Medicare frauds, from kickbacks for lab referrals to unnecessary spinal surgeries. Of the 7,800 entities investigated for health care fraud — not just Part D — by the inspector general in 2010, just 14 percent were referred for prosecution.

The rest were dropped, "mainly due to lack of resources or insufficient evidence," a 2012 report from the Government Accountability Office found.

Even when the inspector general believes cases merit criminal charges, prosecutors don’t always pursue them. Each U.S. attorney’s office around the country sets its own priorities, which may not include health-care fraud.

At every stage, Medicare continues to allow prescriptions written by suspect doctors to be paid for by Part D. It only blocks them after a doctor is formally excluded from Medicare by the inspector general, an action that can take months, even after a conviction and sentencing.

In interviews, investigators at various levels deflected blame to others or cited a lack of funding to explain why so few cases are pursued.

Regardless of who is at fault, inattention to fraud has a steep price, they acknowledged.

“It costs the nation, beneficiaries and plan sponsors hundreds of millions of dollars — if not billions — each year,” said Jo-Ellen Abou Nader, who runs the waste, fraud and abuse program at Express Scripts, a pharmacy benefit manager that runs its own Part D insurance plans and manages those of 50 others.

She said Express Scripts prowls its claims for fraud on a daily basis using dozens of indicators that include a physician's prescribing history and drug mix.

But not all insurers do this, and some have been faulted for failing to alert Medicare to suspected fraud.

Abou Nader said every entity in the chain lacks the resources to get the job done. “You try to get as much through as you can,” she said.

There are ways to change the system.

Congress could, at Medicare's urging, change laws to give insurers more time to weed out fraud before paying claims. It could also give them more discretion to suspend doctors and pharmacies.

Currently, insurers must pay Part D pharmacy claims electronically within 14 days. Private plans have up to 30 days. Congress added the quicker turnaround in 2008 at the urging of pharmacies, which complained of payment delays. The change took effect in 2010.

“They’re public policies that actually promote fraud,” said Mark Merritt, CEO of the Pharmaceutical Care Management Association, which represents pharmacy benefit managers. “There’s zero upside for consumers.”

‘The Case Really Blew Up’

In early 2011, federal investigators wiretapped the phones of Babubhai Patel, the owner of several Detroit-area pharmacies. They suspected him of improperly dispensing narcotics and other controlled drugs.

The investigators learned that Patel wasn’t just peddling painkillers.

The 51-year-old pharmacist had a stable of doctors willing to write Part D prescriptions for any drug he wanted, any time he wanted. In return, the doctors got cash, a flock of new patients and, in at least one case, a down payment for an office building, federal prosecutors claim.

“The case really blew up,” said John Neal, an assistant U.S. attorney who prosecutes health care fraud in Detroit.

Over several months, investigators unraveled one of the largest prescription drug scams ever prosecuted -- and much of the fraud came at Medicare’s expense.

According to court records, Patel’s pharmacies billed Medicare and other insurers for the doctors’ prescriptions, then got paid a second time when the drugs were resold. Some patients who allowed Patel to process phony prescriptions in their names received painkillers as kickbacks, as did people who recruited patients for the scheme.

In all, Patel’s 26 pharmacies billed Medicare for more than $37 million from January 2006 to August 2011. They billed another $23.1 million to Michigan’s Medicaid program, court records show.

Unlike other jurisdictions, the U.S. attorney’s office in Detroit has made Part D fraud — and the doctors who play a role in it — a priority. The office ranks among the country’s leaders in prosecuting Medicare fraud.

“I think as a general matter, that Part D fraud is a significant problem here,” said Neal. “And billing for medically unnecessary and/or never dispensed Part D drugs is a problem here.”

So far, 39 people have been indicted in the Patel scheme, including eight doctors, a podiatrist and a psychologist. Of those, 31 have pleaded guilty or have been convicted by a jury, and two more are scheduled to enter guilty pleas. Two doctors are set to go on trial early 2014. A jury found Patel guilty in 2012; he is serving a 17-year prison sentence. those who pleaded guilty is psychiatrist Mark Greenbain, now 71, to whom Patel allegedly paid $500 every week for prescribing expensive antipsychotics. Witnesses said the two would sit together in Greenbain’s house. “Patel would direct Greenbain what medications to write, and Greenbain would demand cash in exchange,” prosecutors wrote in their sentencing memo.

Greenbain’s prescriptions cost Medicare $2.3 million in 2011, ProPublica’s analysis of Part D data shows. He was recently sentenced to four years in prison. He still has a clear license, according to Michigan’s medical board website. jury found another medical professional, podiatrist Anmy Tran, guilty of steering patients and prescriptions to a Patel-owned pharmacy in her building. Tran, 42, was caught on wiretap discussing her prescriptions with Patel, who said: “Your end is tremendously OK, excellent,” court records show.

When Tran was arrested in 2011, she told an investigator for the HHS inspector general that in return for referring patients, Patel helped cover the down payment on her office building, paid her tax bill and provided support to the Vietnamese community, according to court testimony.

Years before she caught the attention of prosecutors, Tran’s prescribing stood out starkly from that of her peers, data obtained by ProPublica show. In 2011, her Part D spending was higher than any other podiatrist’s in the country, costing Medicare $756,000.

Neither Medicare nor state regulators have taken any action against Tran, who still has the ability to write prescriptions.

Tran’s lawyer is seeking to overturn her conviction, calling it a “miscarriage of justice.” All her prescriptions were written for legitimate medical reasons, and she didn’t know Patel was corrupt, attorney David Steingold wrote in a motion to the U.S. District Court in Detroit. Tran is scheduled to be sentenced in January 2014.

Neal said it’s important to pursue doctors involved in these schemes to alert the community that this kind of behavior has consequences.

“Patel’s empire could not have existed or certainly sustained itself for as long as it did without the active cooperation of doctors,” he said.

Hiding in Plain Sight

A misdirected fanny pack alerted Dr. Carmen Ortiz-Butcher that something was wrong. She'd asked a staffer to mail it to her brother a couple months ago, but it never arrived. Instead, he got a bunch of prescriptions ostensibly signed by Ortiz-Butcher, said her attorney, Robert Mayer.

Ortiz-Butcher, a Florida kidney specialist, suspended one of her employees and alerted authorities. But it wasn’t until ProPublica contacted Ortiz-Butcher, 59, for this story that she learned just how extensive the fraud was, Mayer said.

According to Medicare data, the scam appears to have started two years earlier. In 2011, the number of prescriptions Ortiz-Butcher wrote more than quadrupled from the previous year, to 16,000. And the cost of her drugs to Medicare spiked from $282,000 to $4 million.

The cases of Ortiz-Butcher and other doctors identified by ProPublica show how easy it is to spot potential fraud in Medicare’s own data.

“At no time had anyone contacted her about the frankly amazing increase in her prescriptions in the last two years,” Mayer said.

In some instances, when ProPublica asked doctors about the huge spikes in their prescribing, they recounted multiple situations in which someone appeared to be using their identity for suspicious activity.

It isn’t hard to spot Miami physician Aurelio Ortiz in Medicare’s Part D prescribing data. He’s the one whose prescription tab ballooned from $2.1 million in 2010 to $8.7 million the next year — the fourth-most in the country.

The 70-year-old doctor’s most-prescribed drugs read like a shopping list of the pills that are most valued in scams.

When ProPublica called him up, Ortiz (no relation to Ortiz-Butcher) couldn’t recall whether the prescriptions were his: “Right off the bat, I couldn’t say yes I did or I did not.”

He later said he’d been aware that some bogus prescriptions had been written using his name. At one clinic, “I found two or three prescriptions forged,” he said. “I resigned from the clinic, and I didn’t go there anymore.”

At another clinic, he said, “They had a gentleman who said he was a physician assistant … but this guy also forged my signature for medications.”

“If something has been going on,” Ortiz said, “no one has called me like you to tell me that there’s over-prescription of medications.”

Often doctors caught up in such scams have records of disciplinary action or financial difficulty. In 2006, Ortiz was placed on probation for three years by the Texas medical board, and he was subsequently disciplined by the Florida board, for falsely claiming to have examined a patient. Ortiz said he has resolved these issues and has had no problems since.

Another doctor whose prescriptions spiked one year, then virtually disappeared the next, maintained that she had fallen victim to more than one fraud.

Anesthesiologist Ruth Fontaine said she was “bankrupt and bereft” after her holistic medicine practice failed. Then a colleague told her about an Armenian man who ran an outpatient clinic near Los Angeles, she said.

It was the first of three clinics Fontaine, 64, would work at during the next three years, each entangling her in suspicious activity or fraud.

The first closed abruptly in 2007 after the owner declared he was out of money then disappeared, Fontaine said. The next morning, she found the lock sawed out of the clinic’s front door, she said.

Undeterred, Fontaine joined a second clinic. There she was visited by fraud investigators who asked about her prescriptions for motorized wheelchairs, Fontaine said. Half of them, she said, were not for her patients. Then pharmacists began calling about prescriptions for Oxycontin she hadn’t written, she said.

When Fontaine refused to write any more prescriptions for pain pills, the second office also suddenly closed, she said.

Nonetheless, Fontaine joined a third in 2010. This one was open for less than a month. Fontaine said she wasn’t hired to see patients, but rather to oversee the work of a physician assistant, who could prescribe under her name. But she said she never met the assistant and later discovered prescriptions were being attributed to her before she even learned the clinic’s address.

“I started asking too many questions,” Fontaine said. And then one day, the clinic’s phone was turned off.

The FBI later visited Fontaine and said she’d likely been the victim of identity theft, she said. The FBI declined to verify her claim.

Medicare data show her short stint at the final clinic in 2010 resulted in prescriptions worth more than $520,000.

Jennifer LaFleur, ProPublica’s former director of computer-assisted reporting, contributed data analysis to this report.



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