IDBI Bank’s Bumbling Exposes Everything That Is Wrong with Our Loan Recovery Processes
On 20th December, the wire agency IANS put out a sensational report which suggested that yet another diamantaire, like Nirav Modi, had squirreled away a whopping Rs6,710  crore from IDBI Bank. This was based on an advertisement published by the Bank on 19th December (see picture) with the photograph of eight promoter-directors of Sanghavi Exports International Pvt Ltd, proclaiming them, the company and 12 other related persons and entities as wilful defaulters. 
 
 
The Bank rushed to clarify—in a statutory filing no less—that the default was, in fact, just Rs16.72 crore of principal outstanding and the news report contained ‘factual inaccuracies’. It turns out that the Bank’s claim itself had ‘factual inaccuracies’ or half-truths. So, a second correction was made, in a ‘corrigendum’ advertisement on 21st December, where the Bank said the amount outstanding was Rs67.13 crore. IANS, in its follow-up story, points out that there is no mention any more of a sum of US$161,088 as amount outstanding, which figured in the first advertisement. 
 
A wilful defaulter is one who does not pay back loans and is suspected to have diverted funds. It is punishable with imprisonment, but no big businessman has ever been punished so far. My feedback indicates that Sanghavi Exports is undoubtedly a defaulter and its annual accounts indicate a diversion of bank loans to group entities. One of the promoters, based in Surat, was also arrogant enough to email an outright denial and threat of legal action against the news agency. While holding no brief for Sanghavi Exports or any other defaulter, it is important to examine this case, to understand how public sector banks (PSBs) follow different recovery tactics against smaller borrowers vis-à-vis large wilful defaulters. 
 
IDBI’s Antecedents
The problem with IDBI Bank began at inception when it was wrongly classified as a ‘private bank’, despite its public sector parentage of a development finance institution and all the baggage that came with it. Axis Bank (then UTI Bank) had similar antecedents but was fortunate to get a great start under the leadership of the no-nonsense Dr PJ Nayak. IDBI Bank, on the other hand, lurched from one controversy to another. The turning point was in 2013 when United Western Bank was merged with it and the Bank never recovered from that operation. Since then, it has been propped up with bailouts by the exchequer in the form of repeated recapitalisation. Finally, Life Insurance Corporation (LIC) was asked to start pumping in capital and it now holds 51% of the Bank. 
 
A PTI report of 22 December 2019 quoted finance minister (FM) Nirmala Sitharaman saying Rs21,157 crore had been infused into IDBI Bank since 2015. She further said, “after we came back to power, LIC infused Rs21,624 crore.” Together, this adds up to a stupendous Rs42,781 crore, to bring it out of prompt corrective action (PCA) that is ordered by the Reserve Bank of India (RBI) to keep failing banks afloat.
 
The finance ministry’s future plans for this Bank are more relevant to us because this entire mess will, eventually, land in the laps of retail investors (either directly or through mutual funds) through a mega initial public offering (IPO) by LIC. 
 
As part of the government’s disinvestment plan, LIC was to make a mega IPO, which would have helped compensate for the big bailout of IDBI Bank and others. FM Nirmala Sitharaman also announced that she proposes to sell the government’s 46.5% stake in IDBI Bank to “private, retail and institutional investors through the stock exchange.” This would have allowed the government to recover the money it had infused to bailout out the Bank. This was proposed in February 2020. Two years down the line, neither of the plans has materialised, while the capital market has turned turbulent and the silly-season of crazy IPO valuations may also be coming to an end. 
 
After being forced to roll back farm laws, the government also appears to have turned cautious about ramming through a Bill for privatisation of PSBs, titled the Banking Laws (Amendment) Bill 2021. If IDBI Bank gives the government an exit with LIC remaining a 51% owner and no change in accountability and transparency, then retail investors (either directly or through institutional investment) would bear the risk and pay the price of all the Bank’s lapses. Ideally, IDBI Bank’s outrageous ‘typo’, and the processes leading to it, need to be questioned. Unfortunately, the only questions so far have come from union leaders and a few opposition politicians. 
 
Big vs Small Defaulters
In the context of Sanghavi Exports, it is important to contrast how the Bank has treated this firm and how it deals with large defaulters. The advertisement with photographs and details of the Sanghavi family was aimed at publicly humiliating them. Would IDBI Bank have done this, if the loan outstanding was actually Rs6,710 crore? Have you ever seen any of the mug shots and public notices about really big defaulters? On the contrary, banks across the board zealously refuse to part with any information on defaults above Rs100 crore to the point that they also stonewall Right to Information (RTI) queries, despite an explicit order from the Supreme Court.
 
The case of C Sivasankaran and IDBI Bank’s eagerness to settle the Rs5,000 crore default of this notorious promoter is the best example of its policy of different strokes for different folks. As reported by us in June this year (NCLT Grills IDBI Bank over Settlement with Siva Industries: Report), the National Company Law Tribunal (NCLT) bench of Chennai had grilled IDBI Bank for the alacrity with which it wanted to accept a 95% haircut and a one-time settlement of just Rs323 crore. Importantly, this had been declared a fraud account, which is a step worse than being a ‘wilful defaulter’.
 
The lop-sided recovery process and favoured treatment to large defaulters is also clear from the fact that Videocon Industries was never classified as a wilful defaulter, in complete violation of RBI guidelines. The oil and consumer products group had an admitted outstanding debt of Rs64,838 crore and banks want to give it away to the Vedanta group at a 95.85% haircut.
 
A top banker tells me, this happens because banks tend to genuflect before large defaulters, while squeezing and humiliating small borrowers. Another view is that they are fully complicit with the loot. A 15th December press release of the income-tax (I-T) department indicates that asset reconstruction companies (ARCs) are also a part of the crooked cabal. 
 
The I-T statement said that raids across 60 premises of the four ARCs had uncovered ‘an unholy nexus’ where assets purchased by ARCs far below the value of collateral securities, are sold back to the borrowers after layering them through a ‘maze of shell / dummy concerns’. ARCs were complicit to the point where one of them was caught maintaining a separate set of accounts for these dubious transactions. Allegations of a nexus between a bank and ARC were also made in the case of a Jaisalmer hotel, Garh Rajwada, which made headlines when the magistrate over-zealously ordered the arrest of State Bank of India’s former chairman, Pratip Chaudhuri, for such an undervalued transaction by an ARC, where he is the chairman. The combined outcome of such genuflection and complicity was tabulated by the All India Bank Employees Association (AIBEA) as part of the protest against bank privatisation. 
 
 
Things will begin to change only when banks are made to treat every corporate default with far more seriousness and equity. The IDBI Bank episode shows we are far away from it. 
 
 
Comments
sundar.pks100
11 months ago
In this hard hitting article and another one on the same page lambasting RBI and SEBI, the author has not taken into account one important aspect which leads to this so-called 'genuflecting' before big borrowers while being hard on small borrowers. The political and bureaucratic interference influencing the decision making process is the single most important factor for things going'wrong' in banks and financial institutions. Sometimes even small borrowers are treated with leniency because of such interference. The merger with United Western is a classic example. It was purely a political decision if there is one. No man in his right senses would have touched UWB even with a barge pole. That the North Block is the headquarters of all Banks and financial institutions is perhaps the worst kept secret. Autonomy to lending institutions is an Utopian dream.
lvbasker
11 months ago
When I first read that 6716 Cr default and fraud I was shocked and thought that it was a clear stupid erroneous reporting as the entire country knows the top defaulters now by heart. Will the press simply print a news item if someone in the govt said 250 cr vaccinations have so far been given in India. Anyone would question that statistical piece.
sucheta
Replied to lvbasker comment 11 months ago
Well. all one can say is that both Nirav Modi and Satyam burst on the scene -- as have many major scams.
manishdadajain
11 months ago
Yes there should be a watch on how IDBI is working, even after the merger with LIC is thier a value addition or it will be working the same.??
Heard of the sangvi family a lot if they are the same of the cow rakshak in rajasthan district of sirohi, If this is the same family then surely god will come for their help, as their should be some problem otherwise this family will pay to the bank as far as i know.
yerramr
11 months ago
It is time that the government takes a clear stand on closing down such banks after protecting depositors and investors' interests. Merger is no solution for the banks nor will the injecting of additional capital. Legacy plays a role and it's time that such bad legacy is put an end to.
S.SuchindranathAiyer
11 months ago
I can personally certify that IDBI bank, ICICI bank, Reserve Bank and Government of India, like India's judiciary are woefully lacking in knowledge of Banking law and practice as well as accountancy and statistics.
r_ashok41
11 months ago
I think FM needs to look at this article and strengthen the basic system than simply talking and all these are exchequer money who have paid tax diligently whereas big tickets take the load and siphon the same and banks and big ticket are partnering in this activity whereas if a common man takes a small loan which also he gets after so much diligency and if he does not pay he is made to pay whereas these big tickets people escape easily .Fnancial system needs to be further strengthened an rbi and fm need to address this at the earliest than simply talking
dravinash23porwal
11 months ago
So it would be better if some big buisness house or financial company take it into its fold
gogularamakrishnarao
11 months ago
All others were reverse merger with new banks becoming big in book size. In this case the other way is true in both respects. Sincerely gets rewarded both by government and its entities. Does it get factualized at least now is the Q.
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