Oriental Bank reveals loan exposure to Nirav Modi, Choksi
For the first time, the public sector Oriental Bank of Commerce (OBC) has come clean on its loan exposure to the absconding diamantaires Nirav Modi and his uncle Mehul C. Choksi, here on Friday.
 
The development comes ahead of the OBC's upcoming merger with the Punjab National Bank (PNB) which - in February 2018 - had admitted to a massive fraud perpetrated by Nirav Modi and Choksi running into over Rs 13,500 crore, sending the entire banking industry in a spin.
 
The OBC has now issued notices declaring the duo and their companies as 'Willful Defaulters' for varying loan amounts, totaling to around Rs 289 crore, at their Large Corporate Branch, Cuffe Parade, Mumbai.
 
Nirav Modi's companies Firestar International Pvt. Ltd. and Fire Star Diamond International Pvt. Ltd. failed to repay the OBC's loans of Rs 60.41 crore and Rs 32.25 crore, respectively.
 
Similarly, Choksi's companies Gitanjali Gems Ltd. and Nakashatra World Ltd. have defaulted on OBC's loans worth a total of Rs 136.45 crore and Rs 59.53 crore, respectively.
 
Days after the scam erupted in February 2018 and it dawned that Nirav Modi and Choksi, along with other accused family members, had sneaked out of the country, the OBC promptly declared their accounts as 'NPAs' on March 21, 2018.
 
Furthermore, the OBC has warned the masses to desist from entering any kind of deals with the (aforementioned) and appealed to the people to provide information of assets of Nirav Modi-Choksi or their transactions to enable the bank recover the 'public money' due from them.
 
Banking circles question why it took the OBC a long period nearly 18 months to cough out is exposure in the matter, and just before its proposed merger with the PNB, along with United Bank of India, announced last month by Finance Minister Nirmala Sitharaman.
 
"Besides OBC, other banks also have exposure to Modi and Choksi, and their group companies. What prevents them all from coming together and take necessary legal action to recover their dues," banking expert and Maharashtra Trade Unions Joint Action Committee (TUJAC) Convenor Vishwas Utagi told IANS.
 
Utagi said the other bigger questions are: what action has been taken against the departments and officers dealing in foreign exchange in Reserve Bank of India and other affected banks, how much of the outstandings from (Nirav Modi-Choksi and others) accused have been recovered so far and whether the details emerging now are aunder pressure' before the upcoming mergers.
 
Incidentally, in March this year, the OBC had got a life-saving dosage of Rs 1,186 crore capital infusion and more is expected after the mergers are completed.
 
Earlier this year, the State Bank of India (SBI) had first bared its chest on a Rs 405 crore outstanding loan from Choksi and his family members.
 
The SBI's disclosure came barely two days after it became public that Choksi had surrendered his Indian citizenship in favour of the nationality of Antigua & Barbuda Islands, in West Indies.
 
In March this year, a relaxed and well-dressed Nirav Modi was seen sauntering down a street in London, sparking off a furore in India after which he was arrested by the UK authorities.
 
Currently, India is making all-out efforts for getting both the uncle-nephew extradited to India and face the laws here.
  • Like this story? Get our top stories by email.

    User

    COMMENTS

    TIHARwale

    2 weeks ago

    Arundati did not get post retirement assignment not for nothing

    TIHARwale

    2 weeks ago

    OBC board members were under impression Nirav has the blessings of uncle Apna Mehul Bhai enjoys support of elder brother so Nirav may also get a bail out

    mahendra kumar

    2 weeks ago

    Well drafted press release.

    mahendra kumar

    2 weeks ago

    OBC used to be very prompt in reporting fraud in certain cases even when any anonymous complaint comes but what happens when such big things happens? The release shows their eagerness to take steps in a NPA account. It does not show keen ness to declare the fraud in time as other banks did. They did not inform when whole country knew about Nirav and Choksi. Good work.

    Bidyasing Engti

    2 weeks ago

    Please give me loan
    In your company thanks,

    Linking Lending Rate to External Benchmark Must for New Loans; Old Borrowers Can Switch To the New System
    The long struggle to get the banks to charge customers of floating rate loans appropriately and transparently has now come to a happy end. Under severe political pressure to ensure that policy rate cuts are reflected in the new lending rates, the Reserve Bank India (RBI) has now made it mandatory for banks to link their loans to retail and small businesses, to an external benchmark. 
     
    This will bring in transparency and is expected to lead to a decline in lending rates for home, car and personal loans, etc, when repo rates fall. 
     
    Most importantly, millions of borrowers who have been denied the benefit of lower rates so far, will no longer be short-changed. They can demand that they be shifted to the externally-linked benchmark along with the new borrowers.
     
    Of course, it remains to be seen how banks actually react to such requests.
    The RBI circular says, “All new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans extended by banks to Micro and Small Enterprises (MSEs) from 1 October 2019 shall be benchmarked…”
     
    RBI circular also says, “Existing loans and credit limits linked to the marginal cost of funds based lending rate (MCLR_/base rate/ benchmark prime lending rate (BPLR) shall continue till repayment or renewal, as the case may be. Provided that floating rate term loans sanctioned to borrowers who, in terms of extant guidelines, are eligible to prepay a floating rate loan without pre-payment charges, shall be eligible for switchover to the external benchmark without any charges/fees, except reasonable administrative/ legal costs. The final rate charged to this category of borrowers, post switchover to the external benchmark, shall be the same as the rate charged for a new loan of the same category, type, tenor and amount, at the time of origination of the loan.” 
     
    According to RBI, "In order to ensure transparency, standardisation, and ease of understanding of loan products by borrowers, a bank must adopt uniform external benchmarks within a loan category; in other words, the adoption of multiple benchmarks by the same bank is not allowed within a loan category.” 
     
    The RBI has been trying for many years to ensure that its interest rate cuts get transmitted to the borrowers. For this, it has experimented with the benchmark prime lending rate, the base rate and finally MCLR which was based on the cost structure of the bank which was not audited by RBI for compliance. 
     
    Each of these experiments failed because not only were these formulae flawed but RBI allowed banks to dictate terms to borrowers, no matter what its policy stated. 
     
    Because of this attitude of the banking regulator, Moneylife Foundation has been relentlessly campaigning against arbitrary and opaque bank policies with respect to floating rate loans. We have estimated that banks have gained tens of thousands of crores of rupees in higher interest by not reducing rates in sync with policy rates.
     
    Borrowers, who have taken loans on a floating rate basis, suffer an immediate increase when interest rates are hiked by RBI but do not get much relief when rates go down. This makes a mockery of the very concept of ‘floating’ rates. 
     
    An RBI-owned internal study had highlighted how banks deviated in an ad hoc manner from the specified methodologies for calculating the base rate and the MCLR, to either inflate the base rate or prevent the base rate from falling in line with the cost of funds. 
     
    It says, “Banks have been quite slow in migrating their existing customers to the MCLR regime. Most of the base rate customers are retail or small and medium enterprise (SME) borrowers. Hence, the banking sector’s weak pass-through to the base rate is turning out to be deleterious to the retail and SME borrowers in an easy monetary cycle.” 
     
    Moneylife Foundation wrote to Dr Urjit Patel, the then governor of RBI, requesting him to direct banks to calculate the excess interest they have charged (through arbitrary and ad hoc calculations of base rate or MCLR) and refund the money to borrowers, especially retail borrowers and SMEs. (See Excess Interest Charged by Banks under Base Rate and MCLR Regime) Since RBI refused to act on it, we then had to file a public interest litigation in the Supreme Court.
     
    The Supreme Court, on 8 October 2018 directed RBI to respond within six weeks to representations made by Moneylife Foundation on the unfair practice of banks regarding floating loans.
     
    RBI did not comply with this order but in December 2018, it suggested that banks should use an external benchmark such as 91-day treasury bill yield or 182-days treasury bill yield.
     
    Dr Patel had said, "The spread over the benchmark rate—to be decided wholly at the banks’ discretion at the inception of the loan—should remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract.” This, in other words, means that, with the spread remaining fixed, banks will have to adjust interest rates as per the changes in external benchmark. 
     
    While the RBI policy was supposed to turn operational in April 2019, Dr Patel resigned and the new governor Shaktikanta Das decided to postpone it, as banks were opposed to it.
     
    However, it seems that the political pressure to transmit lower rates was too much and RBI had to fall in line.  
     
    So, if you have a floating rate loan, ask your banker to move you from MCLR to the new system. 
     
  • Like this story? Get our top stories by email.

    User

    COMMENTS

    VIVEK SHAH

    2 weeks ago

    I have an education loan with HDFC CREDILA will this RBI directive be applicable to us ?

    REPLY

    DEBASHIS BASU

    In Reply to VIVEK SHAH 2 weeks ago

    No. This is applicable to only banks, not NBFCs

    VIVEK SHAH

    In Reply to DEBASHIS BASU 2 weeks ago

    Thank you Sir. Nonetheless your good work would still be a lot of help for millions. Maybe some day it would be applicable to nbfcs too. My regards to the Moneylife team for their relentless efforts.

    Bipin Kochar

    2 weeks ago

    Home loans are typically taken for a 15-20 year duration - hence, the rate of these loans should be linked to an interest rate of a similar duration.
    To avoid an asset-liability mismatch, banks should be providing these from deposits of a similar duration.

    Today, most of the long term savings are in Government Saving schemes like NSC, PPF, EPF - with EPF accounting for bulk of the long term savings -the rates that banks offer for long term deposits have to be competitive with these Government Savings Schemes - hence the EPF interest rate is an ideal benchmark to link home loan rates to.

    The repo rate is a short term interest rate and is subject to sharp fluctuations - which could lead to EMIs ballooning to a level in a short duration where it is very difficult for the millions of home loan customers to service.

    It is hence extremely concerning that RBI is idiotically forcing banks to link long term to highly volatile benchmarks vs a more robust benchmark like the EPF rate which will reduce the risk for home loan customers.

    REPLY

    DEBASHIS BASU

    In Reply to Bipin Kochar 2 weeks ago

    True but banks have brought it upon themselves by cheating borrowers for 20 years from bank rate to BPLR to MCLR.

    B. Yerram Raju

    2 weeks ago

    Congratulations. But it is sad that political pressure alone should yield result. Had RBI done on its own, how graceful it could have been for the sector! But the taste of the pudding is in the eating. I have my own fears as the technology required for such transmission may pose issues within the short time. Borrowers will continue to be at the receiving end unless transparency is ensured.

    Harish

    2 weeks ago

    Good Work Moneylife!

    PETER SALAZAR

    2 weeks ago

    Thanks Very Much Money Life for the contribution to this important step by the RBI . Hope the squeeze on the usurious charges by the banks will translate into more careful evaluation of the creditworthiness of large borrowers in future,

    Shib

    2 weeks ago

    Will NBFCs like HDFC (not the bank) follow this and will their customers get the benefit too?

    B. KRISHNAN

    2 weeks ago

    This was long overdue. Successive RBI governors have gloated over this issue (an issue of the common man) on the grounds that Banks profits should be protected, while turning a blind eye to the Banks profligacy in lending to fraudulent entrepreneurs.

    Bank Mergers again at the Most Inopportune Time Raise More Questions than Answers
    A strong economy and weak banking can hardly coexist. We have been stuck with weak banking for the past eight years in a row despite executing reforms such as the introduction of the Insolvency and Bankruptcy Code (IBC), the drive for financial inclusion through schemes such as Pradhan Mantri Jan Dhan Yojana (PMJDY) and the introduction of Micro Units Development and Refinance Agency Ltd (MUDRA). 
     
    There were 40 bank mergers and takeovers during the post-nationalisation period, including the State Bank of India (SBI) merger.  One wonders whether we have drawn lessons from these experiences or otherwise.
     
    Looking at the immediate past, the SBI merger with its associates is yet to deliver the intended results. About 5,000 branches were wound up, guillotining the reach to the rural clientele. Decision-making is at its lowest speed. Informed sources say that the merged associate bank staff at all levels are looked down upon by the pre-merger SBI. Motivation is at its lowest level. 
     
     
    Even this was getting settled, the second bout of merger took place with the Bank of Baroda (BoB), Vijaya Bank and Dena Bank. While the SBI balance sheet took two years to come back to profit, that of BoB jumped to profit at the end of the first year itself. Obviously emboldened by the apparent frictionless mergers in the immediate past, the ministry of finance (MoF) announced merging 10 banks into four. 
     
     
    Could this have been at any worse time than now, when headwinds of slowdown are blowing hard and global uncertainties are on the rise, with trade wars raging between the US and China and our own economy’s GDP growth tanking to 5% this quarter, the lowest in the past eight years? 
     
    Twenty five years have passed since the Narasimham Committee recommended merger for six large banks but warned that it should not be a combination of weak banks. 
     
    Watch out: just eight months ago, all the targeted banks were under the prompt corrective action plan (PCA). Nine out of the 10 have net non-performing assets (NPAs) above the danger level of 5%. Further, all these banks are to be recapitalised meaning that they are weak upfront on capital. 
     
    Further, lately, their balance sheets are saddled with derivatives and guarantees that may move up and add to the losses. Therefore, those targeted for merger are weak banks and not strong ones. 
     
    Dr YV Reddy, D Subba Rao and Raghuram Rajan on one occasion or the other have cautioned the government over consolidation of Indian Banks as a panacea for the ills of the banking system. 
     
    While past accomplishments are no guarantee for future success, past failures can serve as good foundation for enduring success. Financial analysts like Anil Gupta of ICRA feel that the merging banks require harmonisation of asset quality and higher provisioning levels among the merging banks.  
     
    Every merger or acquisition is expected to create value of some kind from synergy, and yet all the statistics show that successes are in the minority and failure can be quite expensive. 
     
    Excepting that all the targeted banks have technologies in sync, no other synergies are seen on the horizon. Each suffers from a heavy baggage of NPAs with several of them in the uncertain National Company Law Tribunal (NCLT) window.
     
    Banking is all about financial intermediation. People both before and behind the counters are at the epicentre of banking. Culture of institutions is intertwined with the diverse cultures spread across the country. Success of mergers across periods and nations is elusive with respect to human resources and cultural issues. 
     
    Canara and Syndicate Banks are of the same soil and they have better prospects than the rest to derive advantage from the merger. All the other merging banks would struggle to synergise on cadre management, incentive system, risk practices, etc. 
     
    Let us not forget that there is a 74% higher spurt in bank frauds in PSBs (public sector banks) than others and several of them emanated from system weaknesses. 
     
     
    It is therefore, important that the big banks start becoming humble and learn lessons instead of becoming conglomerates of an unwieldy nature. Banking basics and customer service can hardly be bargained. 
    In hindsight, the government decided to start the development banks to fund infrastructure projects and relieve the PSBs from this window as experience amply demonstrated that they are not cut out for that job due to their system of funding long-term projects with short-term resources. 
     
    McKinsey has recently warned in an article: “Today’s environment is characterized by rising levels of risk emanating from the shift to digital channels and tools, greater reliance on third parties and the cloud, proliferating cyberattacks, and multiplying reputational risks posed by social media. Faulty moves to make risk management more efficient can cost an institution significantly more than they save.” Will the new CROs, when appointed, be capable of taking care of this concern? 
     
    In another study on mergers and acquisitions (M&A), Becky Kaetzler et al. argue for a healthy post-merger organisational health index where they say that unhealthy acquirers destroy value, while healthy acquirers create value and tilt the odds toward success. 
     
    Leaders considering mergers should first assess their organisation’s own health to better gauge whether or not to take the merger plunge. In the instant case, all the organisations in the target are not at the expected standard of health in the financial sector.
     
    Leadership for transformation and good governance is critical for financial mergers to be successful. These emerging Big Four out of 10 should prove on these two counts that they hold these necessary virtues.
     
    The announcement on governance improvements simultaneously released by the finance minister need a lot more assurance on the selection processes for the independent directors and non-executive chairmen and their roles. 
     
    It would, in fact. be prudent to introduce a declaration in 250 words annually for each director detailing his contribution to the organisation so that the board and the directors can measure up the achievements against such statement. 
     
    The bigger reform required from the owner is a pledge not to interfere in loan sanctions and move a resolution in the Parliament that no party would indulge in loan write off either for the farm or other sectors unless the areas are affected by severe natural calamities. 
     
    Further, higher capital allocation with or without Basel III cannot prevent bank failures triggered by systems, people and processes. 
     
    Capital infusion should be done after specific commitments from the capital-deficit banks on the credit flow to the prioritised sectors, revival and restructuring of viable enterprises in accordance with the Reserve Bank of India (RBI) mandates and the recovery of NPAs. 
     
    There can be no energy without friction. The envisaged mergers are bound to have friction and it is the future that decides whether this will bring positive or negative energy. Let us not forget the dictum—‘too big to fail’ would eventually require the government to bail them out of any failure that ordinary citizens would not like to see or wish.
     
    (The author is an economist and risk management specialist. The views are personal.
     
  • Like this story? Get our top stories by email.

    User

    COMMENTS

    Kodukula Subrahmanyam

    3 days ago

    Good. I don't understand why Punjab and Sind bank was not proposed for merger.

    Harish

    2 weeks ago

    Well-written

    Dr.Dhananjaya Bhupathi

    3 weeks ago

    https://www.moneylife.in/article/bank-mergers-again-at-the-most-inopportune-time-raise-more-questions-than-answers/58084.html
    1. Unless & until the Duds of Ad-hocism in PMO/UFM are replaced by visionaries of bright future, hasty mergers shall result in chaos.
    2. XI BPS talks for wage revision + retirees issues are yet to be addressed-kept pending for past 2 years by PMO/UFM/IBA.
    3. IBA & UFM/PMO, SHAMELESSLY, DENY WAGE REVISION AND PENSIONARY BENEFITS ON PAR WITH CENTRAL GOVT. PAY SCALES; WITH LAME EXCUSE ‘MOUNTING NPAs’.
    4. SBI closed 6000+ branches after the merger of subsidiaries.
    5. Notwithstanding the colossal size of NPAs created at apex level in PSBs, by & large PSB staff up to Scale VII-GENERAL MANAGERS ARE HONEST TO THE CORE & HARDWORKING.
    6. Writing on the wall: Most of PSB staff plan to exit due to low wages & pension + lopsided Govt. policies-resulting in cardiac issues with extreme work pressure.
    7. REMEDIES:
    8. A. Issue an ordinance to bring PSB salaries & pensionary benefit on par with Central Govt. Employees. So that those who want to exit on VRS may be permitted & go in for recruiting youth in vacant posts to attract the most talented.
    B. Prudent to involve UFBU in decision making on mergers.
    9. https://www.youtube.com/watch?v=T7fOf8rUrdw.
    10. SATYAMAEVA JAYATHE!!!

    tapan sur

    3 weeks ago

    Once we mismanage an economy & then do not recognize the same for rectification, it leads to cancer, and to cure it we use expensive measures which become more dangerous & unpredictable. Yesterday alone inverters lost rs.2,65.00 crores in the market. Bad? well there are pickings of Gold but only for those who have enough cash, but the retail investor is on tenterhooks. My prediction on that fateful day at 12 am of a Teratogenic effect on the economy is falling into place. BOL.

    Shrikant Dattatraya Sahasrabuddhe

    3 weeks ago

    Great Article. Correct Diagnosis.Pl. give Authors Introduction in few words.

    REPLY

    B. Yerram Raju

    In Reply to Shrikant Dattatraya Sahasrabuddhe 3 weeks ago

    www.yerramraju1.com

    K V RAO

    3 weeks ago

    The writer, inter alia, has suggested a short write up not exceeding 250 words by board directors about their contribution to the bank.

    While I have no arguments with other points (most of which sound good and so are welcome), the abovementioned point is highly theoretical.
    The writer's suggestion can be accepted and implemented. But it doesn't serve any purpose. All directors will submit such notes and would get neatly filed.

    REPLY

    B. Yerram Raju

    In Reply to K V RAO 3 weeks ago

    All I can say is, you are presumptuous. Once a Director gives a statement of how and to what extent he intends to contribute value to the firm/Bank during the year, it will be easy to have self evaluation at the end of the year. Second, Board will have opportunity to assess the functioning of the Directors. It will also help the Bank to insure the Director at appropriate level instead of a blanket insurance policy. Fourth Board can evaluate itself. In our country, Board Directors invariably think they are superior persons and that they should not be subject to such self assessment even!

    K V RAO

    In Reply to B. Yerram Raju 3 weeks ago

    Merely a statement or declaration cannot create value. The writer's assertion indicates value creation is easy.

    Regarding Board's opportunity for evaluation, the writer assumes that board is separate from the constituent members.
    Board is a set of members and vice versa. There has not been any instance in India (abroad, I am not aware), where board has found fault with itself or with any of its members. Even where the Chairman (mostly ex-officio CEO or Chairman of the Company)has mismanaged the company, the board remained as a mute spectator. How can members find fault with a person who has appointed them?

    Ditto for writer's opinion on board's self evaluation and self assessment.

    I have complemented the writer for his other points but I still don't agree with him on the point under reference.

    K V Rao Bengaluru

    B. Yerram Raju

    In Reply to K V RAO 3 weeks ago

    It is available in Netherlands and implemented successfully. I introduced in the NBFC - presently owned by Government of Telangana and even the Government nominated Directors did not raise any objection. Out of 4 independent Directors three independent Directors gave the statement and this is the first year of such move.
    Value creation is not easy. But efforts to create value must flow to the firm from different directions. Directors are not meant just to meet once in a quarter and review what the management places before the Board. Board should also discuss on strategies and give direction. According to a survey presented at the Institute of Directors' Conclave recently, it was revealed 78% of Boards devoted 90% of time on just regulations and less on Business Development and Strategies or innovations in the Companies. Banks are management led Boards and that is the reason for the huge NPAs we see. The Directors should set some goals for themselves.

    K V RAO

    In Reply to B. Yerram Raju 3 weeks ago

    Dr. Y Raju himself agrees that bank boards have not contributed to value creation and instead are engaged in administrative tasks. The writer opines that board is has created NPAs in banks and in companies they merely spend time on regulations etc etc.
    Then how come the directors will get into the new habit of brief notes about their functioning? I think we should close the discussions without getting into ideal situations. I request the Dr not to take the feedback on only one point of his write up as a reflection of his ability to bring out an outstanding paper.

    B. Yerram Raju

    In Reply to K V RAO 2 weeks ago

    I sincerely thank you for the compliments despite the point of difference. Unless I have the patience to listen, improvement will not come. I respect your difference. Change that is resisted most is the change most needed.

    K V RAO

    In Reply to B. Yerram Raju 2 weeks ago

    Thank you too! If you happen to be in Bangalore, let me know (9980145573)and we can meet.

    We are listening!

    Solve the equation and enter in the Captcha field.
      Loading...
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email

    BUY NOW

    online financial advisory
    Pathbreakers
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 3 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)