Rot at the Top

The government-owned banks are plundered routinely and bailed out periodically. But RBI, SEBI and ministry of finance remain unaccountable and unconcerned

The arrest of SK Jain, chairman and managing director of Syndicate Bank, has sent shockwaves through the banking and corporate world. The Central Bureau of Investigation (CBI) accuses Mr Jain of allegedly taking a bribe of Rs50 lakh for increasing the credit limit of some companies in violation of banking rules. One of the beneficiaries was apparently Bhushan Steel whose managing director Neeraj Singhal has also been arrested.

CBI followed up the Syndicate Bank case by launching a preliminary investigation into IDBI Bank. The Bank sanctioned Rs950-crore first-time loan to Vijay Mallya’s Kingfisher Airlines Ltd when it already had a negative net worth.

CBI’s actions have caused all lending institutions to tighten the screws on borrowers. Fear is running high because nobody knows how many more phones CBI is tapping. But will it lead to a serious, long-term clean-up that includes a focus on political corruption, top appointments at nationalised banks? Let’s take a look. CBI’s actions have caused all lending institutions to tighten the screws on borrowers. Fear is running high because nobody knows how many more phones CBI is tapping. But will it lead to a serious, long-term clean-up that includes a focus on political corruption, top appointments at nationalised banks? Let’s take a look.

The Reserve Bank of India (RBI), the banking regulator, until recently, remained content with issuing warnings about burgeoning bad loans. RBI governor, Dr Raghuram Rajan, in his early days in office, was more concerned that inquiries by the Central Vigilance Commission (CVC) that prevented bankers from functioning effectively. Is he now convinced that the bigger problem with Indian banking is the rot at the top?

Dr Rajan recently announced that he is working with the Securities & Exchange Board of India (SEBI) to prevent wilful defaulters from accessing the capital market. We remain sceptical about this, for several reasons.

First, it took five years for SEBI to bar B Ramalinga Raju and four others from the capital market for 14 years. Its order asking them to repay Rs1,849 crore is rather meaningless, when you recall that this is a straightforward case where Mr Raju confessed to the fraud only because he had no money.

No forensic investigation has thrown up a clue about where this money went, although the corporate grapevine is sure that funds were diverted to Maytas (Satyam spelt in reverse), a group company, that was on its way to becoming a real estate and infrastructure giant.

Second, we drew a blank when we tried to find out whether RBI was inquiring into the dubious Rs9,000-crore corporate debt restructuring (CDR) package to the politically powerful Lanco group. Our Right to Information applications were stonewalled. If pepper-spray Ladagapati Rajagopal (a member of parliament) fails to borrow more, it will probably be because his clout with the Congress leadership is irrelevant today. That is, probably, why he has been forced to sell his power plant to Adani Power recently.

If RBI were really serious about the quality of lending, it also ought to keep a watch on the mega-borrowings of two other groups—GVK and GMR. Instead, the chairman of the GMR group is on RBI’s central board of directors.

Another Hyderabad-based family that remains unscathed is that of the Reddys of Deccan Chronicle who faced allegations of forging documents to raise Rs170 crore from Future Capital. Is the case buried? Or is SEBI doing another slow investigation that will lead to meaningless action in a few years from now?

Then there is the flamboyant, Teflon-coated, Vijay Mallya, who joyously tweets about sporting events, while his bankers stew. Media reports say that Mr Mallya may, finally, be declared a wilful defaulter, but nobody reports why bankers have yet to invoke his personal guarantee. Remember, Mr Mallya went to court and won the right to pocket a guarantee fee, running into crores of rupees. He is in court again to stop United Bank of India (UBI) from declaring him a wilful defaulter. This is yet another example of how the powerful in India—whether government agencies or individuals—tie up matters in endless and, often, frivolous litigation and claims. They also get a patient hearing from the courts because of their ability to hire an array of ‘eminent’ (read expensive and politically powerful) lawyers.

Supreme Court Justice JS Khehar recently observed, with some anguish, that there should be “consequences to fighting on after having lost in every forum” causing a “direct loss to the nation” in terms of cost of litigation and waste of the court’s valuable time. This applies to Vijay Mallya as well.

The rot in nationalised banks is at the top and starts with the deal-making that precedes top appointments. RBI cannot avoid responsibility for poor supervision either. But it has remained strangely unembarrassed about the fact that bank officers and employees’ unions seem more concerned than RBI about escalating bad loans that threatening to turn banks sick. Bank unions have repeatedly pointed out that bank chairpersons get away scot-free, despite the worst kind of corruption leading to bad loans.

In 2010, I wrote, “…most of us were seriously shocked to discover that Central Bank of India’s former chairman & managing director HA Daruwalla would not be punished after a series of proven corruption cases. In 2010, I wrote, “…most of us were seriously shocked to discover that Central Bank of India’s former chairman & managing director HA Daruwalla would not be punished after a series of proven corruption cases.

Although charges against Ms Daruwalla were proved, all she got was a ‘letter of displeasure’ and only then did we discover that there are no provisions to hand out stiffer punishments to bank chairmen (except removal from service) who allow banks under their charge to be looted.”

An RTI activist also uncovered the fact that Central Bank of India spent Rs70 lakh in defending itself against a whistleblower, of which nearly Rs50 lakh went to the Supreme Court lawyer Abhishek Manu Singhvi who was the Congress spokesperson. Nothing has changed since then.

Cut to February 2014, when Archana Bhargava, chairperson of UBI, was allowed to take voluntary retirement under Dr Rajan’s watch. Not even a letter of displeasure was issued to her. In Ms Bhargava’s case, the Bank bounced back with improved financial results, immediately after her controversial exit, vindicating the allegation of senior bankers that she was deliberately and recklessly suppressing its performance. An inquiry revealed that she had bagged the post due to her political clout, despite a record of previous transgressions and investigations.

This history makes us sceptical about a clean-up action. In 2012, writing in Moneylife under the pen-name Gurpur, a senior banker, said, “NPAs have to be taken seriously because loss-making banks are inevitably bailed out and capitalised with the taxpayers’ money in India. There is another major issue that most analysts miss—banks are allowed large write-offs against NPAs which reduce their tax liability. Lower taxes paid means fiscal stress that has to be borne by taxpayers either as inflation or by higher tax rates.” Finally, taxpayers have to bear the cost of frequent recapitalisation of banks that happens without fixing accountability.

Let me end by pointing to the futility of corporate governance rules which are revised every few years. Every new scam exposes the hollowness of disclosure and compliance requirements. Satyam Computers failed, despite a glittering board, while Bhushan Steel was able to borrow a stupendous Rs40,000 crore (it is the country’s most indebted steel-maker), despite the most lacklustre board. It does have a former chief election commissioner in Brij Bihari Tandon, but the rest are faceless accountants and lawyers. MV Suryanarayanan, a former nominee of LIC, has clearly become so close to the company that he is now an ‘independent’ director.

In Syndicate Bank, a father passed on his directorship to his young daughter like a family right. That may only change because the new government will want its own appointees on bank boards. As for the middlemen in the Syndicate Bank episode their well-known shady past only requires a Google search.

The new Companies Act places onerous responsibilities on independent directors with serious consequences for failure. But the ministry for corporate affairs probably needs to be reminded about its new powers and prodded to act on them for public good.