How To Loot the Public Sector Banks
More than two years ago, I wrote about the case of C&C Towers Ltd, (CCTL) which had signed a 20-year concession agreement with Greater Mohali Area Development Authority (GMADA) in April 2009 for an inter-state bus terminal, three multi-storied towers with retail and office spaces, multiplex, five-star hotel, banquet hall, hypermarkets, and a helipad on top of one of the towers. The project turned bankrupt, went into liquidation and was admitted for debt resolution. On 19th October, the Chandigarh bench of the national company law tribunal (NCLT) passed an order which, once again, shows how scandalous the whole process of bank lending to debt resolution is, despite grand claims that the Insolvency & Bankruptcy Code (IBC) launched in 2016 would lead to a significant change in bankruptcy resolution.
Consider the case of CCTL. The 19th October NCLT order says that, against an admitted claim of over Rs579 crore, the resolution plan could provide for only Rs81.5 crore or just 14.08%.
Commenting on the meagre recovery, a bankruptcy expert says: “I have not come across such loot in an urban infrastructure project.”
How did this happen? The same way thousands of other projects have been bankrupted: collusion between bankers and borrowers.
The moment CCTL bagged the large multiplex project, it immediately gave an advance of Rs110.78 crore as pre-construction advance and Rs63.30 crore as mobilisation advance to a group company, C&C Construction Limited (a listed firm which is also bankrupt). The bankers did not stop this. As always, a bunch of public sector banks: State Bank of India, State Bank of Hyderabad, State Bank of Patiala, Punjab National Bank, and Punjab and Sind Bank sanctioned money in November 2010. CCTL also collected Rs490 crore from 400 property-buyers. Construction was inordinately delayed, leading to GMADA issuing a termination notice in April 2016 and invoking bank guarantees of Rs11.90 crore. A corporate insolvency resolution process (CIRP) started on 10 October 2019.
Daylight Robbery
The initial aggregate claims of all creditors admitted were Rs580.12 crore while capital work-in-progress was put at Rs399.89 crore. However, the actual allocation to the creditors (fixed deposit-holders, allottees, GMADA, statutory dues, etc) under the resolution plan turned out to be just 14.05%. What were bankers doing? What were the engineers of GMADA doing? The answer is crystal clear in all such bankruptcy cases (especially in real estate involving PSBs), but it is one that we don’t want to see: rampant fraud and corruption by everybody involved.
Consider these details of related-party transactions. CCTL had extended an advance to the extent of 35% of the contract price to C&C. The transaction auditor has pointed out that the general business/ industry practice is to advance 15% to 20% of the contract value. As much as Rs25.93 crore of the advance is still unadjusted against construction. CCTL had also made an excess payment of Rs40.87 crore to C&C over and above bills and mobilisation advances allowed. No lender approval has been sought for this payment, says the NCLT order.
As per the terms of the contract, CCTL had a right to impose and levy liquidated damages of 0.25% of the contract value per week or part of a week, a maximum of up to 5% of the total contract value, i.e. Rs15.82 crore in case of default by the contractor (C&C). The work was scheduled to be completed within 18 and 30 months from 16 December 2009, for ISBT and the hotel & commercial complex, respectively. Despite inordinate delay, CCTL has not imposed any liquidation damages on C&C.
When IBC was operationalised, there were strident assertions that it would lower bad debt and lead to faster resolution. Some even hoped for significantly higher recoveries. I have argued many times, since 2016, that these are false expectations. The fact is that creditors have only been able to realise 17% of claims through the IBC process. A reply to a Right to Information (RTI) query reveals that the government has written off Rs10.41 lakh crore as bad loans since 2014. The reason for this is rampant fraud and corruption involving PSBs, leading to IBC cases. Fraud is pre-planned so that there is very little realisable value. CCTL promoters crafted a contract to drain substantial amounts of money and have got away with it. The bankers and 'independent engineers' of GMADA did not monitor the project and did nothing to prevent money from being drained off to group companies. They are primarily responsible for this fraud, but they got away too.
CCTL is one more example of my central point about IBC, which I have repeatedly made since 2016: the source of humungous bad loans that are written off periodically has nothing to do with poor bankruptcy laws, as claimed by bankers such as Arundhati Bhattacharya, former SBI chairperson. Yet, there is widespread opposition (even articulated by former governor Raghuram Rajan) to criminal action against bankers because they would like to label these as normal 'business failures'.
Meanwhile, the resolution process itself is a big mess. Orders are arbitrary and contradictory. All cases are way behind deadlines. The Supreme Court (SC) even had to issue notices to two members of the national company law appellate tribunal (NCLAT) in a possible contempt proceeding against them, for ignoring SC’s instructions and pronouncing a judgement in a Finolex Cables case. The root cause of all this mess lies with PSBs. If they are made accountable, bad loan cases will shrink dramatically, recoveries will rise and the NCLT process will be more manageable. Strangely, the government seems uninterested in fixing the way PSBs work.
(This article first appeared in Business Standard newspaper)
1 month ago
Very well articulated on the Video talk and in the BS article. I chanced upon it late. But such things are still happening. Real Estate financing and Infrastructure financing are going to be the next timebombs waiting to tick. RBI should renew its branch inspections on selective banks and cases and take evidence-based action within a fortnight's notice. Corruption is endemic in the banks and it has to stop without which economic growth is going to be mstery.
1 month ago
Hindus are the world's greatest mother Fu6kingly corrupt & dishonest ppl on the world
Banks are looted by industrialist and corporate all the time and the loan amount are never returned
MLAs and MPs accept monies from rival parties and switch sides
Everyday Indian face corruption whether is it from the traffic police or in the municipality office or in the state or central govt offices and it’s widespread
A truck driver has to pay several times at each crossing to reach his destination!
BJP-RSS have conceptualized and implemented electoral bonds to receive bribes secretly
Independent media is constantly being harassed and journalists are arrested if they expose corruption
RTI act are constantly amended every few months to deny info
Even the judiciary has hopelessly detoriated
Only Lord Ram knows when will better days come
1 month ago
What will not be enquired in to is the corruption that must have greased so many palms. The corrupt bank officials never seem to get caught. How blessed are we the tax payers whose money is shared by the borrower and some bankers
1 month ago
Thank you for an interesting Article but you should also bring to the notice of the FM and the PMO and the Finance Ministry must come out with some preventive measures otherwise we tax payers are penalised for no fault. How did such a large loan amount got sanctioned is a mystery?
1 month ago
The root cause of all this mess lies with PSBs. If they are made accountable, bad loan cases will shrink dramatically, recoveries will rise and the NCLT process will be more manageable. Strangely, the government seems uninterested in fixing the way PSBs work. The Govt too is manned by corrupt vested interests.
1 month ago
There should be a mechanism to shame these people to arrest them under PMLA or other laws so that people working in banks will be careful
Meenal Mamdani
1 month ago
Is it possible to publicly shame these bank officials?
Maybe subjecting the official and her/his family members to public anger may produce some effect.
1 month ago
MAJOR cause of such NPAs is the people IN PSB (Managers or Boards) are in cahoots with these LOOT COMPANIES (at expense of Taxpayers & Common Depositors money)!

Accountability of SANCTIONING such LOOT should be punishable, even after these people leave or retire from Banks, to stop this LOOT gangs!

Retired Bank people, also act as Consultants (& earn mire money) to settle such NPAs at much lower amounts with the Banks where they earlier worked!
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