The Story behind Corporate Bad Loans: Dubious Assessment, Rampant Diversion of Funds and Meaningless Guarantees
Last week, I wrote about how banks basically accept meaningless personal guarantees from industrialists or their group companies which can never be effectively invoked. I specifically mentioned the massive personal guarantees of Rs11,000 crore-Rs12,000 crore from Venugopal Dhoot of Videocon, as well as Prashant and Ravi Ruia of the Essar group, which are not backed by any assets and are essentially pointless pieces of paper. (Read: Kochhar and Dhoot Arrests: Setting the Stage for BJP’s 2024 Election Campaign?)
A former finance secretary was disturbed enough to write to a member of the standing committee of parliament for finance suggesting that the committee “may like to go into this extraordinary travesty and propose necessary reforms and measures.”
As luck would have it, I received a set of documents put up for discussion by the ‘wilful defaulters committee’ (WDC) of IDBI Bank in successive meetings over the past year.
Remember, IDBI Bank has been cleaned up and turned around by infusing a stupendous Rs49,000 crore through the government exchequer and by Life Insurance Corporation of India (LIC), even after selling valuable legacy investments. The government plans to privatise IDBI Bank this year and has invited bids to buy a 30.48% stake from LIC and 30.24% from the government, giving full management control to the new owner. (Read: IDBI Bank Privatisation: Much-needed Move, but at What Price?). So, the manner in which the Bank handles bad loans should also be of interest to the new owners as well as investors.
This column will only focus on the WDC meeting of 17 October 2022 which looked at 54 cases. The documents raise serious questions on processes followed by banks that inevitably lead to misuse of funds.
It turns out that as many as 23 cases to be discussed that day were sub judice—among the biggest reasons for delays in India. Most sub judice cases seem to be a delaying tactic and some defaulters even obtained stay orders from courts, despite forensic audits establishing large-scale diversion of funds or fraud.
The WDC discussed 11 cases listed below in detail:
The names of the list are
The defaults date back to 2013-14 or earlier and had already gone through a loan restructuring process involving significant concessions from the lender. Forensic audits are invariably commissioned just before filing bankruptcy proceedings and have invariably revealed massive diversion of funds, and, in many cases, outright fraud.
The documents put to the WDC fail to answer the most obvious questions that comes to mind: Why wasn't the use of funds better monitored and why were forensic audits not ordered before restructuring loans? The answer lies in what the late Dr KC Chakrabarty, former deputy governor of the Reserve Bank of India (RBI), used to tell us. He said, by the time a bank gets around to declare a company a wilful defaulter, there is nothing much left to recover—not even the guarantees collected at the time of disbursing multiple loans. Here are some key findings from the above-mentioned list.
Dubious Lending – Zero Accountability 
Poor assessment before sanctioning loans and lack of monitoring is the story behind every default in this list. Take the case of Winwind Power and Energy Pvt Ltd, listed for discussion. This company is a part of the Siva group of C Sivasankaran. It may be recalled that, in Siva Industries, IDBI Bank itself had accepted 94% haircut settling for just over Rs300 crore out of an outstanding of nearly Rs5,000 crore.
That only the public sector banks (PSBs) have extended loans to group entities of Siva is unknown to most people. State Bank of India’s (SBI’s) exposure was Rs399 crore, Punjab National Bank (PNB) Rs310 crore and Bank of India (BOI) Rs75 crore to Winwind Power. After huge payment defaults and other issues, it was declared a fraud account by PNB and BOI in 2020 when it was already too late. Finally, Winwind was sold for a mere Rs63 crore as part of a liquidation process in October 2020 with IDBI Bank receiving a mere Rs4.93 crore on a pro-rata basis.
Diversion of Funds
Massive diversion of funds seems a constant in every discussion on wilful defaulters. What is more remarkable is that none of the dozen-odd lenders in the consortium ever seems to notice rampant diversion or fraud until a company is about to be declared a wilful defaulter.
Consider the case of Techpro Infra Projects Ltd (Techpro) which is into laying oil, water and gas pipelines. IDBI Bank had an exposure of Rs79.4 crore on 25 November 2021 out of its total bank borrowings of Rs362 crore. It was declared a fraud six months later (25 May 2022) by Standard Chartered Bank, Bank of Baroda and IDBI Bank. A forensic audit revealed crores of rupees transferred to subsidiaries and group entities (Shriram Cement, Techpro Infrastructure Pvt Ltd, Huthro Power Corporation and GET Power Ltd). The recommendation to the WDC was to issue show-cause notices to the promoters—a pointless exercise, since the company was already under liquidation. The guarantees, as you will see, are a bigger joke.
Meaningless Guarantees
In every single default, the Bank had personal guarantees from all the promoters and, in some cases, from group entities. Documents put before the WDC do not always include documentation or discussion about whether the guarantees are backed by any assets and what is the current status. In a few cases, there is a mention of a share-pledge, but these have no value when a company faces bankruptcy. Others say, guarantees have been invoked without explaining if anything is recoverable.
In the case of Winwind Power and Energy Pvt Ltd of the Siva group, documents show that IDBI Bank had accepted a pledge of 100,000 shares of Tata Teleservices held by Siva Industries and Holdings. Wouldn’t we want to know the bankers who signed off on the decision to accept such a guarantee?
The Techpro documents say that personal guarantees by the promoters and three group entities were invoked. But this is clearly a futile exercise in all three cases—Techpro Engineers is under liquidation; Citizen Communications has been struck off after SARFESI proceedings and the status of Techpro Infotech Ltd is also listed at ‘strike off’ by the ministry of corporate affairs. There is no mention of whether anyone in the Bank responsible for monitoring the loans had kept track of the guarantors or made any effort to secure alternate collateral.
GVR Projects, which is in the EPC business, is even worse. The documents list 15 guarantors, of whom 10 are third-party guarantors. IDBI Bank’s exposure was 11% or Rs243 crore out of a total exposure of Rs2,271 crore. The documents note that it is evident that the promoters/directors/guarantors have “disposed of or removed the movable fixed assets or immovable property” given to secure the loans without the knowledge of the lender. This is a criminal offence. And it is another empty guarantee. The documents claim that IDBI Bank retains the right to proceed against 15 persons who issued personal guarantees and two more firms (GVR Realities and GVR Realities Pvt Ltd); but it is probably safe to bet this will only lead to legal costs for the Bank without any recovery.
Cheema Spintex Ltd is another defaulter in the list accused of removing and disposing of fixed assets and immovable property that was secured against the loans. The Bank also has duly obtained ‘networth certificates’ from promoters who have given personal guarantees. A former IDBI banker tells me that these are meaningless pieces of paper, since the officers creating meticulous paperwork to justify the loans rarely bother to check whether the assets included in the ‘networth’ are free of lien or any encumbrances.
Shrenuj and Company, which is in the diamonds and jewellery business, has dozens of group entities and subsidiaries in India and abroad. After defaulting on loans and the subsequent forensic audit, it was accused of large-scale diversion and misappropriation of funds to group entities as well as misreporting of records. IDBI Bank declared it a fraud account in September 2020. Shockingly, Shrenuj was found to have issued corporate guarantees to the tune of Rs1,209 crore (as on 31 March 2016) to other lenders for advances sanctioned to its subsidiaries and associates. Clearly, the process adopted by banks in accepting such guarantees is flawed to the point of being fraudulent. In fact, the Shrenuj account was subsequently declared a fraud account.
Staff Accountability: In the few cases where there is a reference to ‘staff accountability’, there are bland remarks such as—‘staff accountability was not discernible’ (which actually seems to mean that there was no lack of accountability); however, when an account is declared a fraud—as in the case of Techpro Infra, the Bank claims to be ‘re-examining’ the issue of accountability. In Shrenuj as well as Cheema Spintex, the documents exonerate the staff completely!
Pathbreaking Projects Ltd (formerly Abhijeet Projects), the latest inclusion in the list, is surely one that demands some answers from Bank officers who sanctioned a loan of Rs85 crore to buy a Bombardiers Challengar 605 aircraft. Not only is an aircraft a hugely depreciating asset, but every aspect of the purchase was dubious. Instead of purchasing the aircraft directly from Bombardier, it floated a 100% subsidiary registered in Hong Kong to route the transaction with the claims (since disproved) that Bombardier had refused to accept buyers’ credit of IDBI Bank for the purchase. How and why would officials accept this logic and go ahead with the loan is anybody’s guess; but no official has been held accountable.
The company had borrowings from 11 lenders of whom eight had declared it a fraud account leading to action by the central bureau of investigation (CBI). The attempt to invoke a guarantee by the promoter and a group entity had apparently drawn a blank from the defaulter who did not even cooperate with the forensic audit.
While I have not gone into details about the extent of exposure and restructuring of each loan, the picture that emerges is clear. Indian banks, especially PSBs, have poor processes for monitoring the use of funds and the guarantee process is downright dubious. It is time we demand that the banking regulator and the finance ministry fix these issues before the exchequer is allowed to dole out any funds to bailout and recapitalise PSBs.
1 year ago
I fully agree with the author. I am still not able to understand the reasons that prevent the banks from exercising their right against hypothecated goods and assets, when they come to know that the loan was getting from bad to worse. Second, most loans are now sanctioned by a group and/or system and therefore accountability fixing gets a tough exercise.
1 year ago
This is still the tip of the iceberg. Below the surface you have influence peddling and Neta-Babu strig pulling.
Replied to S.SuchindranathAiyer comment 1 year ago
1 year ago
Infusion of Rs. 49,000 crore by LIC was not a clean up. It was a bail out, the second bail out. The first bail out was in 2005 done by shifting gross NPAs of over 12000 crore into SASF, which over 15 years achieved just around 50% nominal recovery. These bail outs were not restructurings in true sense since the bank was allowed to continue with its profligate & dubious ways. It could drag long for second bail out simply because it took time to mess around with a good IDBI Bank which which it had gobbled up at the time of first bail out.
This article shows that the bank hasn't improved an iota and has been nibbled away inside out at the cost of taxpayers money.
It is also clear now that its privatisation will be at a net loss to LIC which took up large chunk in second bail out. This is thus, also a story of LIC's management inadequacy!
1 year ago
To add, currently Supreme Court has stayed personal guarantor ibc case filing. So nclt are not admitting PG application. This is one more big bottleneck forloan recovery or resolution
1 year ago
The biggest partners in this are chartered accountants including famous international book keeping firms. Remember the satyam story and the King Fisher story. Connivance at every level to siphon off crores of rupees owned by the exchequer when an ordinary man on the street has to run from pillar to post to get a genuine 10 lacs loan. King fisher got a loan with its logo as security????. The whole thing revolves around a bunch of papers and number work created by chartered accountants. In retrospect I would have recommended a Bharat Ratna for Harshad Mehta who unearthed such gaping holes in our banking system but we jailed him.
1 year ago
"Just then the alarm clock beside my bed rang loudly to make me awake from my sleep & I opened up news-paper & the headline said, defence ministry has further reduced their no development boundary limit to 50 m from 10 m from their premise boundaries & this will be a big problem for development of the new projects in the city; when those words hit my brain, I realized what I have shared above was a dream & I am back in the real world now!"...

Frds, something about real estate & resolutions needed to be made by concerned, a black humor sharing, you can read it at link below & please share to make others aware...

sanjay deshpande
[email protected]
1 year ago
Guarantors pulling out their securities without the knowledge of the lender is just not possible without collusion of the lending officials as each guaranteed asset should, as a rule , have been subject to periodical verification and check by the inspecting officials of both the Bank and the external auditors for all such large advances.
1 year ago
All idbi ex officers taken vrs. Their assets and income should be audited. ?? ?? ???? ????????
Govindayanamaha !
1 year ago
The more things change, the more they stay the same. I am not sure of the last line ("it is time ..") makes any difference. Ultimately, it is the hapless taxpayer who always gets the short-end of the stick.
1 year ago
For the small common man like me, I need to furnish dozen's of documents even to secure 2-3 lakhs of home, and banks like HDFC, will take my original documents of capital assets, and every aspect gets secured. Even for a month late for EMI, bank will be calling to me. So it means, they leave big horses and will have strict monitoring for small accounts, Jay Ho!!
1 year ago
And yet, the beauty of it is that these 'bankers' will be promoted to head bigger banks, will claim all the credit for 'cleaning up bank balance sheets' (actually done by the taxpayer) and be eulogized for all the losses that the taxpayer is forced to bear. It would be justice for the taxpayer if these guys were instead terminated from service without benefits, because the losses due to their sheer negligence are not small change by any yardstick.
Kamal Garg
Replied to jaishirali comment 1 year ago
All losses of any PSU bank is always borne by the taxpayers only. Even in case of private banks, the final losses in the form of write-off or bad debts is borne by ordinary depositors/common citizens/tax payers only.
All such concerned officers should not only be terminated from service but also their personal assets be confiscated and sold off.
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