Is anybody safe from arrest anymore? No. This column is not about the arrest of Shah Rukh Khan’s son Aryan and the vulture media’s carnival around it. It is about the sense of outrage and anxiety triggered in the banking circles at the arrest of Pratip Chaudhuri, former chairman of the mighty State Bank of India (SBI). The issue applies equally to scores of students and activists who have been jailed and have lost their freedom only because their arrest was ratified by a court order.
This column will limit itself to banks and bankers, without holding a brief for anyone and with full awareness that public sector banks (PSBs) have not run up bad loans of Rs20 lakh crore without rampant corruption, behest lending and bending over backwards to please political masters. The shocking tales of callous bankers riding roughshod over small and medium enterprises and ruthlessly grabbing assets pledged by hapless entrepreneurs, at the first sign of trouble, are legion in India and also a part of this story. The very same banks that doggedly refuse to disclose the names of large corporate defaulters (read: https://www.moneylife.in/tags/bankloot.html
) think nothing of humiliating smaller borrowers by publishing their photos in the media, even when businesses have failed for no fault of the entrepreneur. All these issues have come to a head in Mr Chaudhury’s arrest.
Consequently, while bankers accuse the media of irresponsible reporting, Mr Chaudhuri’s incorrect arrest has sadly generated very little public sympathy. WhatsApp groups of senior bankers, alarmed at the development, have shared details and are pushing for judicial restraint to avoid chaotic consequences if many more magistrates are in a hurry to jail retired heads of banks and corporate houses, on work-related civil matters.
The Jaisalmer police arrested Mr Chaudhuri on 1st November and the chief judicial magistrate (CJM) rejected his bail application and remanded him to 15 days of judicial custody. The matter pertains to 2013 and the charge is that SBI seized two hotels belonging to a company, declared them non-performing assets (NPAs) and sold them to an asset reconstruction company (ARC). Mr Chaudhuri, then the SBI chairman, retired soon after and, in October 2014, joined the board of the same ARC that bought the property. The allegation is that the company’s assets (one running hotel and another under construction, which defaulted on loan repayment) were worth Rs160 crore but were allegedly undervalued and sold to the ARC (read details here: SBI's Ex-chairman Pratip Chaudhuri Held for Selling Hotel Property Cheaper by Declaring It NPA
) and later went into the bankruptcy resolution process.
SBI has issued a press statement which said that all due processes were followed but the Bank had not even been asked for the details. The statement said that the court ‘does not appear’ to have been correctly briefed on the matter. It is this that is worrying and, unless rectified, will throw public sector banking into a greater mess than it is in now.
Let’s put things in perspective. Mr Chaudhuri retired as chairman of the 43rd largest bank in the world and the largest in India which accounts for a quarter of all loans and deposits in the country and assets of Rs50,33,914.35 crore and 24,000 branches. And he is arrested, eight years after retirement, on the charge of selling a bad loan asset (claimed to be worth Rs160 crore for a low Rs25 crore), following a legitimate and laid-down banking process.
Once the asset is transferred to the ARC, SBI has nothing to do with its eventual sale or valuation. There is nothing in the public domain to show that Mr Chaudhuri had any personal involvement in any of the decisions, including the alleged under-valuation, except that he joined the board of the ARC. Yet, his reputation has been ruined and he has spent a week in jail without giving him and SBI a chance to offer an explanation or give him proper representation.
According to bankers, SBI had followed the DRT/SARFAESI (debt resolution tribunal/Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act route in this case and assigning the project to the ARC ensured that SBI recovered its entire principal of Rs24 crore and more (while the total dues, including interest, were Rs34 crore in 2012 and nearly Rs40 crore in 2014, when the debt recovery suit was filed). Things came to a head when the ARC invoked the bankruptcy law in 2017 to sell the asset and the entrepreneur used the opportunity to file a criminal complaint against the resolution professional (RP) appointed in the case. He too has had to seek legal protection from arrest.
According to banking circles, the promoter in this case is powerful and has constantly delayed recovery action. The arrest of the former SBI chief has certainly focused national attention on the case and, as it unfolds, we will know whether this is a hapless entrepreneur deprived of a valuable asset or a borrower who knows how to game the system.
On the flip side, a dispassionate study of DRT cases would reveal that borrowers of this size are routinely steam-rolled by a draconian and one-sided DRT law which was engineered by the same banking industry and politicians who work overtime to protect large defaulters.
Bankers are disturbed at the arrest of Mr Chaudhuri and are rallying around in support. Former SBI chairman, Rajnish Kumar has called the arrest a ‘case of high-handedness’, while another banker, Sunil Srivastava, accuses the ‘defaulter’ of gaming the system. In a tweet, he calls for and “overhaul of judicial processes to improve transparency and introduce accountability.”
The last bit is crucial and, hopefully, this case will draw attention to it. “Many assets are sold to ARCs for 15% of the outstanding value with a promise to pay more if recovered.” But this does not happen; instead, the borrower is cheated. “So what is urgently needed is to probe all ARC settlements, at least after 2014 during which period the sales speeded up,” writes DT Franco (Arrest Of Former SBI Chairman Pratip Chaudhari Opens Pandora’s Box
), former general secretary All India Bank Officers Confederation (AIBOC). Dr Rajendra Ganatra, former head of an ARC, points out that at 15% of outstanding value, this project would be correctly valued at Rs160 crore in 2014 and would now be worth Rs200 crore.
If true, this only raises many more uncomfortable questions about our debt recovery and bankruptcy process. Consider this. Under the draconian new bankruptcy law, we have a committee of bankers allowing several large projects, which are 10 to 100 times this one, to be sold at a 95% to 99% haircut (read: Stop the Loot via Bankruptcy Code: Better Solutions Are Possible
As recently as in May 2021, IDBI Bank, which has been repeatedly bailed out using taxpayers’ money, had accepted a one-time settlement (OTS) of under Rs500 crore from the notorious C Sivasankaran, against over Rs5,000 crore owed by him. They were stopped by the National Company Law Tribunal (NCLT) from giving him a 90% write-off and the matter is now in appeal.
If C Sivasankaran (of Siva Computers and Aircel), who is under investigation by the CBI and has highly controversial dealings with Infrastructure Leasing and Financial Services (IL&FS), the Tata group and others, is allowed such a generous deal, can one really blame an entrepreneur if his Rs160 crore asset is sold off at 15% for a Rs40 crore gross outstanding?
Clearly, the system stinks. Bankers ensured that draconian laws like the DRT and the SARFAESI Act are effectively used against small entrepreneurs while big defaulters go scot-free. Corruption is rife throughout the lending process and also in bankruptcy. A country cannot do well if a cabal of accountants, bankers and asset reconstruction experts exploit a slow, broken and expensive judicial system. Hopefully, Mr Chaudhuri’s arrest, however unfair, will focus attention on the need to change, so that bankers are not wrongfully arrested, but genuine entrepreneurs, who are the backbone of any nation, are also not cheated. At the same time, bankers who are colluding with businessmen to give loans on inflated project costs without enforceable collateral, must also be held accountable for looting taxpayers’ money on such a gigantic scale.