After eight long months, the Reserve Bank of India (RBI) has finally shared its inspection report of City Union Bank Ltd under the Right to Information (RTI) Act with activist Subhash Chandra Agrawal. The report reveals poor management control and sanctioning of high-risk loans from senior officials to the top executives without following RBI guidelines.
In its inspection report for FY18-19, RBI says, "Several credit proposals (120 proposals in March 2019 amounting to Rs1,583 crore) were sanctioned or ratified by the managing director and chief executive officer (MD&CEO) or senior officials just near year-end, enhancing oversight lapse risk. Few of these accounts involved sanction of new facilities to the irregular borrowers to avoid being tagged as a special mention account (SMA) or non-performing asset (NPA). In few SMA-2 accounts (two out of a sample of five) upgraded (out of SMA) as on the date of present inspection (DPI). It was found that overdues were cleared through the sanction of fresh limits."
"During the previous year and the year under review, fresh sanctions aggregating Rs34.9 crore were made to nine borrowers which got classified as NPA as on DPI. Out of fresh sanctions as above, Rs29.9 crore was to cover the then existing overdues," the report says.
Commenting on RBI sharing the inspection report, Mr Agrawal says, "At last RBI has released inspection report of a bank under the RTI Act vide its letter dated 22 August 2022, though very late after more than eight months of filing RTI application dated 13 August 2021. Even if section 11 of the RTI Act for seeking comments of the Bank concerned was to be invoked, information must have been provided within 45 days of receipt of RTI application by RBI."
"It is pertinent to mention that 110-page inspection report was provided after unduly charging Rs220 as copying charges even though RTI Act provides free-of-cost copied documents under section 7(6) of RTI Act in case copying charges are demanded after 30 days of demand of copying charges," he added.
Coming back to the report, according to RBI, the risk culture of City Union Bank manifested itself in taking a calibrated risk as a calibrated model of lending was followed. However, it says short-term loans, adhoc or enhancement in some cases and utilisation of proceeds to recover overdues was not in sync with principles of sound credit discipline.
For example, the report says the Bank's internal policy stipulated a higher margin against book debt of non-banking finance companies (NBFCs) engaged in financing second-hand or used vehicles and machinery. However, the Bank sanctioned such loans at a lower margin.
"It was observed that the Bank had financed a chit company for the purpose of depositing margin money with sub-registrar of chit for running a chit scheme. Few accounts were regularised near the balance sheet date by providing new facilities to the irregular borrowers, to avoid being tagged as SMA or NPA," the report says.
During its inspection, the RBI team also observed that City Union Bank has a separate loan product for pawnbrokers. "However, it was observed that the Bank granted gold loans to an individual customer on more than 100 occasions within a short span of time without adequate due diligence. These were classified as agri-jewel loans without ensuring end use."
"It was observed that a few ex-staff accounts (54 accounts with outstanding of Rs79 lakh) were classified as NPA by the statutory auditor. These were non-superannuation exits, but the loan accounts were not settled before the exit. The risk management department (RMD) was not even made aware of such accounts," the report points out.
City Union Bank also displayed poor compliance with RBI guidelines on collateral management. According to the report, collateral management was ineffective as pendency was observed in charge creation in 94 cases, re-valuation of collateral securities of 19,370 properties and CERSAI registration of mortgaged or hypothecated securities in 97 cases. “Collateral securities for NPA accounts of 1,474 immoveable properties were also not revalued once in three years, contrary to RBI instructions."
Further, the report points out that three loans, each worth more than Rs25 lakh, were sanctioned to two borrowal accounts in which the chairman or director of another bank was interested as director or partner. This was done "without prior approval knowledge of the board, contrary to extant instructions. The information was later put up to the board, which ratified the same without giving any direction and guidance to put up such cases to the board for prior approval or knowledge".
City Union Bank’s inspection report for FY17-18 also highlights several instances of poor credit management and non-compliance with RBI guidelines. "In some cases (20% of a sample size of 50), the financial heads approved credit proposals involving enhancements despite unsatisfactory conduct and inherent weakness in the accounts like overdues, poor liquidity ratio, and very high leverage ratios. Further, the credit proposals recommended to the credit committee and board also did not have a balanced view of positive aspects as well as inherent or potential risks existing in the borrowal accounts."
Here is the copy of RBI's inspection reports of City Union Bank as obtained by Mr Agrawal under RTI...