In the morning of May 19, 2014, three days after the Lok Sabha poll results were announced, and with a government not quite in place, chaos reigned at the debt recovery tribunal (DRT) in Ballard Estate, the old commercial district of Mumbai. A lawyer, his juniors and his clients were shouting slogans against the presiding officer of what is known as DRT 1, on the 5th floor of Scindia House.The lawyer wanted to stop presiding officer HV Subba Rao from reading out orders on cases he had already prepared. Subba Rao sat through the din and read out the 10 orders. Then he retired to his chamber and called the police.In his complaint at the Mata Ramabai Ambedkar Police Station, Subba Rao alleged that a certain lawyer did not want him to pronounce orders in four cases and created a ruckus and made wild allegations to stop him. The police duly arrived, arrested two lawyers and the day ended with little else achieved.

Subba Rao, a former lawyer from Visakhapatnam, is still the presiding officer at the DRT 1 of Mumbai.



Such is the work pressure that even on a regular work day he makes little progress. His day at the office starts at 10.30 am with a roll call of around 100 cases or appeals that have been filed and have to be scheduled for hearing. That task itself takes at least the first one-and-a half hours.

Then he starts hearing the 40-50 cases that are slated for the day. At 1:30 pm the tribunal breaks for lunch and meets again at 2:30 pm. In the three and a half hours he gets for hearing cases, it is possible to take up only two or three from the long list.The debt recovery tribunals (or DRTs; there are 38 across India plus new ones announced) and the debt recovery appellate tribunals (DRATs) operate under the DRT Act of 1993 and The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 (Sarfaesi).The tribunals are supposed to resolve cases between banks that have lent money and borrowers who have defaulted on their payments within six months, and dispose appeals within 120 days.However, such is the pile-up of cases that it is impossible to even schedule hearing dates within those limits (see box story: DRAT It! DRTs Just Don’t Work).Subba Rao met ET Magazine out of courtesy but refused to discuss anything because he is not authorised to speak to the media; the only person who can is the chairman of the DRAT, who sits upstairs on the sixth floor.Justice A Arumughaswamy, a retired Chennai high court judge, has been the chairman for more than a year.In fact he held joint charge at Chennai and Mumbai up to March 2015 (when a separate judge was appointed to head the Chennai DRAT) and has been unwell recently and is recuperating in Chennai. So the DRAT in Mumbai is barely functioning, and is perhaps an accurate metaphor for the DRTs and DRATs across the country.“The process of bad loans recovery often takes 15-20 years,” says MR Umarji, chief legal advisor at the Indian Banks Association, an umbrella organisation of banks in India.Umarji, during a stint at the Reserve Bank of India ( RBI ), had played a crucial role in helping draft the Sarfaesi Act. He sees hope only in the proposed National Company Law Tribunal, which can someday lighten the load of the DRTs.Umarji, who also serves on the high-powered Bankruptcy Law Reforms Committee, feels the hopeless situation at the DRTs contributes to the low ranking of India on the ease of doing business league tables and leads to manipulation of the system.“The appeals by borrowers under the Sarfaesi Act lead to an immediate stay in the recovery process and stops banks from taking possession of assets of defaulters and selling them. Creation of false, backdated tenancies and pleas to protect interests of minors in cases where a Hindu undivided family is the defaulting borrower are common manipulations to delay the process,” says Umarji.



While money is stuck in debt recovery, there has been clamour for pumping more money into the banking system, especially the public sector banks (PSBs), to relieve them off their bad loan woes. The Union government recently announced a scheme called Indradhanush that will bring in almost Rs 70,000 crore directly into the PSBs.



It will provide the bank balance sheets some muscle and allow them to write off more dubious loan accounts to clear their books. But with gross NPAs or total bad loans in Indian banks at Rs 3.1 lakh crore, will this be a case of throwing good money after bad?

Good money and Bad Money

The Mumbai DRT also has an underbelly. The lawyers who practice at Mumbai’s DRTs complain about, amongst other things, a gang of touts operating within the tribunals.While the advocates are happy to come on record on the lack of infrastructure and a pile-up of cases, all of them refuse to be quoted while discussing the nefarious activities. ET Magazine spoke to at least five senior DRT advocates.The lawyer’s fee at the DRT is capped at Rs 40,000 per case. The touts, on the other hand, charge Rs 20 lakh per case for getting favourable orders and scheduling from the presiding officers and court clerks.Recently, briefs in two big cases, one involving the scion of an old Marwari business family, and another involving a listed real estate company have changed hands. An advocate who lost the scion’s brief to the gang says on condition of anonymity: “They clearly wanted a lawyer who knows how to work the ‘second’ channel.”The group works with two or three advocates. The lawyers who spoke to ET Magazine said they have apprised the presiding officers that money is being collected in their name. How does this gang operate? Often it starts with an afternoon visit at home.Earlier this month, an alleged tout visited the house of a borrower, a businessman in plastics, one afternoon. The borrower, who has eight pending cases in Mumbai DRTs, spoke to ET Magazine on condition that his name will not be mentioned as he feared for his own safety.As the borrower was not at home his family helped connect the tout with him on phone. Later, the tout called back from a PCO in Dadar in central Mumbai with a package deal: “We normally charge Rs 20 lakh per case, but for your eight cases we will help settle all for Rs 1 crore.”The lawyers insist that some well-wheeled borrowers are finding the gang’s operations useful and are handing over their briefs. “Please do a sting operation,” suggested one of them.On the other hand, banks often depute junior officers to handle their cases at the DRT. Uma Faria, a senior DRT advocate, points out that all borrowers are not dishonest and often seek an early settlement if terms are reasonable. “While the banks sell their loans to asset reconstruction companies [ARCs] at a discount, I wish they had empowered their officers to strike deals on similar terms with the borrowers themselves. I often see borrowers who meet ARC officers in DRT courts urging them to buy out their loans from the banks,” says Faria.



However, the ARCs themselves are far from scripting a success story. In fact, out of 16 licenced ARCs, only six are operating. The ARCs, once seen as panacea for NPA problems, are themselves starved for capital. Harish Chander, executive vice-president at Edelweiss ARC, says that the company prefers to take up distressed assets or companies that can be turned around as a business instead of trying to recover some money by selling the assets.

There are 500 companies in its portfolio today. He laments that DRTs have not been built like institutions with their own cadre, unlike the judicial courts. “The presiding officers, the registrars, the recovery officers are all on deputation from different places like banks and government departments and no one sees the DRT as a career option.”

Chander, who was formerly with IDBI Bank, feels that the corporate debt restructuring process (CDR) where banks and financial institutions voluntarily come together to restructure the loans of a company, can help prevent the logjam at the DRTs.While the ending of many bad-loan stories are decade-long stalemates at the DRTs the beginnings are perhaps racier. Many start with an intent to de-fraud the bank.Here are three random examples: almost a year back on August 7, Central Bureau of Investigation (CBI) officers arrested Bhushan Steel vice chairman and managing director Neeraj Singal for allegedly offering a bribe of Rs 50 lakh to Syndicate Bank chairman and managing director Sudhir Kumar Jain. The company owes more than Rs 40,000 crore to more than 50 banks.In March this year the Enforcement Directorate (ED) filed cases against Vadodara-based Biotor Industries and four Gujarat-based cooperative banks for alleged money laundering. HDFC Bank, State Bank of India (SBI) and Indian Bank have been pursuing Biotor since 2011 in the Mumbai DRT to recoup Rs 56 crore. And in July this year, the ED attached 1,000 acres of land owned by Zoom Developers in the US for an Rs 2,200 crore loan fraud. Zoom has also been pursued by SBI in the DRT since 2011.If these are large cases of alleged fraud, there is also a cottage industry operating under the radar. Middlemen, or connectors, mostly smalltime chartered accountant firms and consultancies and large realty brokers, offer to help their clients secure a loan. Small-scale manufacturing as well as those selling through the ecommerce marketplace model are the usual clientele.SME Corner, a finance firm started by former Barclays Bank honcho Samir Bhatia, offers to arrange loans for small companies. Bhatia says: “Usually the middlemen or connectors charge a 2-4% fee for arranging a loan. I have heard that a part of this may be used to influence bank officers.”While Bhatia says he has not personally encountered such cases in his career, Vikram Babbar, executive director, fraud investigation & dispute services, at Ernst & Young (EY India) indicates that the existence of middlemen often contributes in compromising the loan sanctioning process at banks. He says: “The middlemen try and negotiate on the processing fees, as well as on the criteria for sanctioning a loan, and may attempt to get one or two waived.”But then it gets even more sinister. For example Jagvinder Brar, partner for forensic services at KPMG, points out that the middlemen often create shell companies — a maze of them — and keep them alive only for a few months to help defraud banks.He says studies done by KPMG found there are localities in Mumbai that act as cradles for shell companies — he talks about the area around Hinduja College near Opera House in south Mumbai and the northern suburb of Bhayandar. Here, often small shops like laundries or tailoring outfits are registered as addresses for shell companies that are used to play the loan fraud game.A chartered accountant who spoke to ET Magazine spilled the beans on some of the tricks played by his compatriots. He did not want to be quoted as he was speaking about people who know him. “I knew of a CA in Tardeo who would ask his clients to borrow, then pay one or two equated monthly installments [EMIs] and then just disappear. He had even created bank rubber stamps and would provide fake payment receipts for use when the cases land up in DRT. One of them had even asked me to send interested clients to him.”The Syndicate Bank case that broke a year ago drew a lot of attention to loan frauds of this kind and the RBI came out with a circular on May 7, 2015 on loanrelated jiggery-pokery. The circular included an illustrative list of 45 early warning signals. It also introduced the concept of a red-flag account — an account that has displayed one or more of the early warning signals for fraud.Loan frauds and suspected frauds above Rs 50 crore have to be mandatorily updated to a new data platform created by the apex bank. The banks may choose to update the ones below the threshold too, and have been asked to create fraud monitoring groups that will report to the banks’ chief executives on a monthly basis. It also mandates review of loans through the entire process from the pre-sanction stage to disbursement. The circular introduces staff accountability for fraud cases and mandates the board of the banks to fix accountability in case of involvement of very senior officers.KC Chakrabarty, a former deputy governor of the RBI who headed Punjab National Bank and Indian Bank before that, says there is often pressure on the bank chairmen from different quarters for sanctioning loans. “I have been pressured from the highest quarters. In the five years before I joined Reserve Bank in 2009, I was transferred five times,” he says, indicating that it was a result of his not listening to higher powers.Chakrabarty, who had quit his position at the RBI in March 2014 three months before his tenure ended, says loan frauds are not even clearly defined in India today and asks an oft-repeated question. “Should a diversion of funds to another business be considered a fraud? After all if the borrower does not default, the bank will not even look where the money has gone.” There is a divergence between the position taken by banks and the RBI on this as the latter wants banks to treat a diversion as a fraud, even if the borrower has not defaulted on repayments.Chakrabarty had started his career as a teacher in Varanasi and then worked his way up the ranks in PSBs before joining the RBI. He met ET Magazine on a rainy afternoon in July at his Mumbai residence during a quick trip to India from London, where he is now based and works as a consultant. Chakrabarty scoffed at the RBI circular. “A fraud hoodwinks you, surprises you. A fraud does not come with early warnings.”He even advocates legitimising middlemen. “All across the world there are middlemen. Indian PSU banks are not allowed to pay middlemen. Neither do the PSU bank officers go out and sell loan products to good clients. So we end up with whoever walks in and whoever the middleman brings in. So when middlemen are involved they are always agents for the borrower,” he says.Private banks can pay fees to middlemen and Samir Bhatia’s SME Corner actually earns its revenues through fees paid by banks. Chakrabarty insists that as long as the interest of the bank is not compromised, there is nothing to worry about middlemen.To its credit, the RBI has been at it for a while, and Chakrabarty himself was at the apex bank when the action started. To crack down on loan frauds and get a correct picture of NPA numbers the RBI ordered forensic audits of two Kolkatabased banks United Bank of India and Allahabad Bank in December 2013 and January 2014. A year ago, the finance ministry also sought a similar audit on the third Kolkata-based PSB , UCO Bank, but the objective was to take a close look at the loan sanctioning process.In January this year the RBI restricted United Bank from issuing loans of ticket size of more than Rs 10 crore. In the last two years, many banks themselves have sought forensic audits of specific loan or NPA accounts to check if a fraud was perpetrated. The auditors are of course the forensics groups at the Big Four audit and accounting firms like EY, KPMG and Deloitte.EY’s Babbar says that some tell-tale signs of fraud often emerge early during forensic checks, especially if the borrower refuses to cooperate or has an established obfuscation mechanism. Babbar says that with one borrower, he found a group of smart consultants being hired to interact with the bankers though they knew little about the nittygritty of the business.What these people could do was to make smart presentations and mislead the bankers. EY has done around 15 forensic studies in banks so far, and Babbar says that in 99% of the NPA cases there is a diversion of funds. Some of the other tell-tale signs to watch out for: basic bookkeeping without updated software, a web of group companies that can facilitate rotation of funds, and company’s statutory auditors sitting on the board of related companies.One forensic auditor who did not want to be quoted due to client confidentiality issues, said that in one case the bank that had asked them to do an audit insisted that the auditor omit some of its qualifications with the threat that in case the auditor did not agree they would get an audit report done by another smaller CA firm.Recognising a case as a fraud not only opens up vigilance enquiries on the senior staff at banks but also leads to increasing the NPA basket that needs to be written off the balance sheets. It also needs to be a leap of faith, a faith that the country’s dented and slow recovery mechanism, the DRTs, can make a mark in recovering bad debt. To make that leap calls for much more than a promise of a Rs 70,000 crore cash infusion.