International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-3, Issue-2, Feb.-2017 http://iraj.in BANKER & BORROWERS’ NEXUS RESULTING INTO HIGH RATE OF NON-PERFORMING ASSETS IN INDIA

ANAND SAGAR

Department of Management, Shri JJT University, Jhunjhunu, Rajasthan(India) E-mail: [email protected]

Abstract - After the multi-agency probe launched against Vijay Mallya in various loan-default cases, the liquor barron left India for London. The government has approached the British authorities asking them to send back Mallya to India to face the law here. The CBI has alleged that about Rs 260 crore out of a loan of Rs 900 crore was diverted by Air, while Rs 263 crore was used to pay salaries, tax deducted at source, income tax and loan installments. It seeks to make out a case of "omissions and commissions" caused by the bank officials including ex-IDBI Bank chairman Yogesh Agarwal and eight others. While people at large feels that the guilty must be suitably punished, a section of the bankers and experts feel that Resolution of bad debts, on the books of public sector banks, could get delayed following the CBI's arrest of TOP IDBI officials for sanctioning loans that went bad after a restructuring programme. Most public sector bankers feel that commercial decision-making would get hit because of the CBI action. Not just loan resolution but there might be an impact on PSUs' sanctioning of new loans as well. Now lenders would be extremely cautious on new proposals. Moreover, this would be very untimely as credit growth is at its lowest in decades. At the same time bad loans are at an all-time high, and need to be resolved in order to free up bank balance sheets for lending. CBI sources revealed that RBI guidelines were ignored and the loan was granted to Mr Mallya in three tranches, despite Kingfisher's weak financial position (Negative Net- worth) and low credit rating.

Keywords - Bad Loan, NPAs, Negative Net-worth, Lower Credit Ratings, default, RBI, Bankers, Bending of rules.

I. INTRODUCTION would be extremely cautious on new proposals. Moreover, this would be very untimely as credit The CBI has registered a case against Mallya and growth is at its lowest in decades. At the same time others alleging that the IDBI Bank extended loans bad loans are at an all-time high, and need to be worth Rs 900 crore to the and at resolved in order to free up bank balance sheets for that point in time the airline had negative credit lending. CBI sources revealed that RBI guidelines ratings. After the multi-agency probe launched were ignored and the loan was granted to Mr Mallya against Vijay Mallya in various loan-default cases, in three tranches, despite Kingfisher's weak financial the liquor barron left India for London. The position (Negative Net-worth) and low credit rating. government has approached the British authorities asking them to send back Mallya to India to face the II. REVIEW OF LITERATURE law here. The request of the Indian authorities is being scrutinized by the British authorities. (1) Rajesh Ahuja (2017) The CBI on 23rd January, The CBI has alleged that about Rs 260 crore out of a 2017 (Monday), arrested former chairman and three loan of Rs 900 crore was diverted by Kingfisher Air, ex-executives of IDBI Bank and four executives of while Rs 263 crore was used to pay salaries, tax Kingfisher Airlines in the loan default case involving deducted at source, income tax and loan installments. liquor barron Vijay Mallya. The arrests came after It seeks to make out a case of "omissions and the agency sleuths conducted searches at 11 places commissions" caused by the bank officials including including Vijay Mallya’s residence in New Delhi, ex-IDBI Bank chairman Yogesh Agarwal and eight three floors of UB towers in Bengaluru, residence of others. Aggarwal and Raghunathan. The CBI has registered a case against Mallya and A section of the industry experts feel that Resolution others alleging that the IDBI Bank extended loans of bad debts, on the books of public sector banks, worth Rs 900 crore to the Kingfisher Airlines and at could get delayed following the CBI's arrest of TOP that point in time the airline had negative credit IDBI officials for sanctioning loans that went bad ratings. Mallya was the director of the airline. The after a restructuring programme. Many public sector airline stopped operations in October 2012. The CBI lenders are in a state of shock after CBI arrested. had registered the case under various sections of the Although IDBI Bank was one among the consortium Indian Penal Code (IPC) and Prevention of of 17 lenders, bankers feel that IDBI was targeted Corruption (PC) Act. Following the CBI case, the because the institution breached internal norms. Most Enforcement Directorate also launched probe under public sector bankers feel that commercial decision- the Prevention of Money Laundering Act in the making would get hit because of the CBI action. Not matter. After the multi-agency probe launched against just loan resolution but there might be an impact on Vijay Mallya in various loan-default cases, the liquor PSUs' sanctioning of new loans as well. Now lenders barron left India for London. The government has

Banker & Borrowers’ Nexus Resulting into High Rate of Non-Performing Assets in India

143 International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-3, Issue-2, Feb.-2017 http://iraj.in approached the British authorities asking them to officials for sanctioning loans that went bad after a send back Mallya to India to face the law here. The restructuring programme. Many public sector lenders request of the Indian authorities is being scrutinised are in a state of shock after CBIarrested, what was by the British authorities. then theTOP rung of IDBI Bank, for sanctioning a loan of Rs 900 crore to Kingfisher Airlines(KFA). (2) Swati Deshpande (2017): The CBI has alleged Although IDBI Bank was one among the consortium that about Rs 260 crore out of a loan of Rs 900 crore of 17 lenders — which together advanced Rs 6,900 was diverted by Kingfisher Air, while Rs 263 crore crore to KFA — bankers feel that IDBI was targeted was used to pay salaries, tax deducted at source, because the institution breached internal norms. income tax and loan instalments. The CBI bank Most public sector bankers TOI spoke to, said that securities and fraud cell had in July 2015 registered a commercial decision-making would get hit because of case of criminal misconduct and conspiracy against the CBI action. But none were willing to speak on unknown IDBI officials showing undue favour record. "Not just loan resolution but there might be an to Kingfisher Airlines in disbursement of loans impact on PSUs' sanctioning of new loans as well," amounting to Rs 900 crore. said Dipak Gupta, joint managing director, Kotak The chargesheet filed on Tuesday invokes sections Mahindra Bank. According to Gupta, lenders would 120B (criminal conspiracy), 420 (cheating) of IPC be extremely cautious on new proposals. and section 13(1)(D) and 13(2) of the Prevention of Another chief of a private bank said that this would Corruption Act which deal with abuse of official be very untimely as credit growth is at its lowest in position as a public servant for pecuniary advantage decades. At the same time bad loans are at an all-time and criminal misconduct. The maximum punishment high, and need to be resolved in order to free up bank attracted is seven years in prison. It seeks to make out balance sheets for lending. According to Karthik a case of "omissions and commissions" caused by the Srinivasan, senior vice-president at ratings bank officials including ex-IDBI Bank chairman agency ICRA, the development could impact new Yogesh Agarwal and eight others, including former loans and also decisions on resolution of bad loans. CFO of Kingfisher Airlines A Raghunathan and three "It is human nature to be cautious under such other Kingfisher employees. IDBI Bank is an Indian circumstances. There would be concern on whether government-owned financial service company, the haircut would be considered too low," said formerly known as Industrial Development Bank of Srinivasan. India, headquartered in . The premier agency had on Monday arrested the (4) Sreenivasan Jain, Tanima Biswas (2017) CBI bank's former deputy managing directors O V sources say that Reserve Bank of India or RBI Bundellu and B K Batra, two other former officials, S guidelines were ignored and the loan was granted to K V Srinivasan and R S Sridhar, apart from the Mr Mallya in three tranches, despite Kingfisher's airline's executives, Shailesh Borkar, A C Shah and weak financial position and low credit rating. Amit Nadkarni. The CBI produced Agarwal and According to sources in the CBI, Kingfisher applied others before special CBI court judge H S Mahajan for a corporate loan of Rs. 750 crore to IDBI on on Tuesday and sought their judicial custody on the October 1, 2009. Even as this application was grounds that they are "influential people" and may pending, Mr Mallya met with the then IDBI chairman "flee" the county as Mallya had "already fled the Yogesh Agarwal on October 6, seeking a short term country". The court remanded the ex-IDBI Bank loan of Rs. 150 crore. On the very next day, chairman and 8 others to judicial custody till Kingfisher officially filed for this loan and it was February 7. All nine applied for bail. The special sanctioned immediately. judge Mahajan after hearing a strong plea for interim Again on November 4, Kingfisher applied for another bail from Amit Desai and Aabad Ponda, defence short term loan to IDBI, which was, once again, counsel who represented some of the accused, granted the same day. Kingfisher Chief Financial however posted their bail plea for hearing on January Officer Raghu Nathan wrote to IDBI mentioning a 30. CBI prosecutor Bharat Badami sought time to file meeting between Mr Mallya and Mr Aggarwal, which replies to the bail plea by that date. Rajiv Chavan, led to this loan being sanctioned the same day. The Girish Kulkarni, Shreyans Mithare and other defence credit committee of IDBI was to meet to consider lawyers will now argue for bail next Monday. Pranav Kingfisher's corporate loan application later that Badheka counsel for four KFA ex-employees, month. For that Kingfisher had to pledge its Raghunathan, Nadkarni, Borkar and Shah, will also unencumbered shares, a mandatory condition to get move a plea for home food for Shah, a strict Jain, the loan. But the CBI says on November 10, Mr which the court granted, subject to provisions of the Mallya mailed Kingfisher CFO Raghu Nathan telling Jail manual. him there was no need to pledge the shares because he had already discussed this with the IDBI CMD and (3) Mayur Shetty (2017) Resolution of bad debts, that was the 'accepted position The IDBI credit on the books of public sector banks, could get committee had a meeting on this on the 24th of the delayed following the CBI's arrest of TOP IDBI month and Mr Aggarwal allegedly approved the

Banker & Borrowers’ Nexus Resulting into High Rate of Non-Performing Assets in India

144 International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-3, Issue-2, Feb.-2017 http://iraj.in minutes, accepting Mr Mallya's condition. CBI restructured loans and other loans where sources also claim that 263 crores, which was a part borrowers have been given more time are taken of the loan, has been diverted out of the country and into account, stressed assets would be around 17- used to pay up previous loans of Kingfisher. Mr 18% of their portfolio." Mallya in tweets on Friday claimed that the money  Last year at the recent meeting of the Banks was not misused and that he had submitted Board Bureau (BBB), a new body constituted by documentary evidence with the CBI. He has said he the government to improve governance of public is being subjected to a 'witch hunt'. "Till this minute sector lenders, PSU banks sought immunity from there is no final judicial determination on what KFA "unnecessary oversight" from agencies such as owes to Banks and what I may owe in my personal the CBI and the Central Vigilance Commission capacity after trial. Yet it is reported that I have fled (CVC) on decisions related to loans that are or run away owing money to banks that I never ever taken collectively. But in spite of all that, the borrowed in the first place," Mr Mallya said. CBI resorted to such a drastic and unprecedented manner as the lending rules were severely bent to III. FINDINGS extend undue favour to the defaulting borrower.

 After the multi-agency probe launched against CONCLUSION: Vijay Mallya in various loan-default cases, the liquor barron left India for London. The  The rhetoric of some of the public sector banks is government has approached the British understandable that Resolution of bad debts, on authorities asking them to send back Mallya to the books of public sector banks, could get India to face the law here. The request of the delayed following the CBI's arrest of TOP IDBI Indian authorities is being scrutinized by the officials for sanctioning loans that went bad after British authorities a restructuring programme. Moreover, most  About Rs 260 crore out of a loan of Rs 900 crore public sector bankers feel that commercial was diverted by Kingfisher Air, while Rs 263 decision-making would get hit because of the crore was used to pay salaries, tax deducted at CBI action. Not just loan resolution but there source, income tax and loan installments. It might be an impact on PSUs' sanctioning of new seeks to make out a case of "omissions and loans as well. Now lenders would be extremely commissions" caused by the bank officials cautious on new proposals. including ex-IDBI Bank chairman Yogesh  Keeping in mind the way the rules were bent Agarwal and eight others. while sanctioning the huge amount of loans, the  A section of the industry experts feel that guilty must be punished according to the law of Resolution of bad debts, on the books of public the lend. It will help sending the correct signals sector banks, could get delayed following the to their counterparts and will deter and refrain CBI's arrest of TOP IDBI officials for them from committing similar kind of blunders sanctioning loans that went bad after a in their dealings with the notorious borrowers. restructuring programme. Many public sector  All banks, especially the Public sector banks lenders are in a state of shock after CBI arrested. should address bad loans by growing advances Although IDBI Bank was one among the and doing one-time settlements with defaulters. consortium of 17 lenders, bankers feel that IDBI PSBs have been not been able to do this and was targeted because the institution breached rather preferring to fall back on the government internal norms. Most public sector bankers feel for capital. that commercial decision-making would get hit  The Rs 20,000 crore set aside by the Government because of the CBI action. Not just loan under Indradhanush scheme is far too less and it resolution but there might be an impact on PSUs' should set aside more. But this could raise sanctioning of new loans as well. Now lenders criticism from some quarters about throwing would be extremely cautious on new proposals. good money after bad.  It is very untimely as credit growth is at its  Possibly, the IDBI and KFA saga is just a tip of lowest in decades. At the same time bad loans the iceberg and there is much more in the store are at an all-time high, and need to be resolved in for IDBIs’ counterparts in the banking sectors order to free up bank balance sheets for lending. and their borrowers. The development could impact new loans and also decisions on resolution of bad loans. "It is REFERENCES: human nature to be cautious under such [1] Rajesh Ahuja (2017) CBI arrests former IDBI chairman in Vijay Mallya circumstances. There would be concern on loan default case Hindustan Times, New Delhi, 24th January, 2017. whether the haircut would be considered too low. [2] Swati Deshpande (2017): “CBI charges Vijay Mallya, others in Kingfisher Airlines-IDBI bank loan case”, Times of India, 25th January, 2017.  The bad loans in public sector banks have [3] Mayur Shetty (2017) , “IDBI arrests may hit loan settlements at PSU banks, Times of India, 26th January, 2017. crossed Rs 6.3 lakh crore, which represents [4] Sreenivasan Jain, Tanima Biswas (2017) “How IDBI Bank Bent Rules For Vijay around 11% of their loan book. "If the Mallya According To CBI” NDTV Business, 28th January, 2017

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