By: Aparna S. Panchadhari
In recent years the number of non-performing assets (hereinafter referred to as NPAs) have increased quite alarmingly across all banking sectors ( public, private, co-operative) in India and has become a cause of concern. Accumulation of NPAs affects the bank’s profitability as these assets are not generating income anymore and this in turn affects the banks capacity to issue credits.
In the last couple of years, as the Indian economy witnessed downturn trends, the banks have been straddled with high NPAs and restructured assets. Macro-economic dynamics may be a major contributor, however, inadequate credit assessments and monitoring during the upturn in the economy have also contributed to the same. (1) There are many reasons external and internal for a standard asset to transform into an NPA.
Several research papers and articles by prominent industry experts have analysed the various factors responsible for NPA and I agree with the same. However, I strongly feel that among the many reasons ‘Quid pro quo’ transactions are a prominent internal reason that succeeds in hiding behind the defective lending and poor credit appraisals in creating NPA.
This paper aims to bring to the forefront a cause which has been active in the backdrop of a majority of NPAs that lead some banks to a brink. This paper is divided into 5 parts. Part II of this paper explains NPAs and the bank’s approach to treating it. As I think, to understand the mindset behind quid pro quo transactions it is necessary to know what NPAs are and how banks deal with it.
Therefore this section explains the same. Part III examines the quid pro quo connection. The simple meaning of the term quid pro quo is -something for something. In ordinary quid pro quo exchange, each party agrees to do their part in order to get the other party to do theirs; each condition their own willingness to perform on the willingness of the other; and each regards the other as obligated to do their part in the light of their agreement(2).
Part IV attempts to highlight the high profile cases involving quid pro quo transactions and Part V concludes the paper.
UNDERSTANDING NPAs AND THE BANK’S APPROACH IN TREATING IT:
A bank on giving a loan to a borrower charges interest on that loan i.e; it receives money on the lent amount. Such amount received by the bank becomes its profit and the loan is called an ‘asset’.
Now when the borrower, either for some bona fide reason or intentionally fails to pay the interest and/or the principal amount within the specified period (90 days) to the bank, then such loan becomes a bad loan or a non-performing asset. Assets that are non-performing with more than 90 days delay are classified into 3 categories viz: Substandard, Doubtful and Loss assets.
“NPAs neither generate any profits nor are the number of assets recoverable”(3). Rising NPAs require the banks to make higher provisions for the losses caused by these NPAs and so more funds are reserved by banks by contemplating the possibility of future losses.
This in turn affects the profitability of banks. In such scenarios banks are found to manipulate the nature of their assets or liabilities. Therefore in order to maintain robust balance sheets, the banks came up with a more illusionary system called, ‘evergreening of loans’. Illusionary because “ ever-greening is a process where an in-spirit delinquent loan is shown as current by showing a fictitious repayment and issue of a new loan”.(4)
By ever-greening the banks achieve two things, firstly such assets do not reflect as NPA and secondly, it shows a higher credit growth. But in actuality, it is the same stressed asset that has turned as NPA. Such practices are hard to detect and thus low NPA levels are engineered by ever-greening(5).
These are all ways of internally covering the facts of stressed assets. Banks have been practising this for years on and when these fraudulent practices went undetected, it became a routine practice and over-optimism led to unsound decisions by management and top officials where huge amounts were lent to businesses that are not worthy of such benefits.
Raghuram Rajan (Ex-Governor RBI) in his notes to the Parliamentary Committee has pointed out that public sector banks fell short in scrutinizing projects. Despite the initial project being underwater and the promoters intent suspect, the banks continued to put more money.
He also says, ”Yet, unless we can determine the unaccounted wealth of bankers, I hesitate to say a significant element was corruption. Rather than attempting to hold bankers responsible for specific loans, I think bank boards and investigative agencies must look for a pattern of bad loans that bank CEOs were responsible for – some banks went from healthy to critically undercapitalized under the term of a single CEO. Then they must look for unaccounted assets with that CEO. Only then should there be a presumption that there was corruption”(6).
Recently there have also been frauds of high magnitude that have contributed to rising NPAs. Although the size of frauds relative to the total volume of NPAs is small, these frauds have been increasing.
This is also where the loans were renewed and gross negligence along with corporate malpractices starts by way of favours in return to favours.i.e; quid pro quo.
THE QUID PRO QUO CONNECTION:
‘Quid pro quo’-Yet another factor that is interwoven with corruption. Banks being the custodian of the hard-earned money of a common man are responsible to protect it and avoid a breach of trust. But due to reasons such as fraud and corruption banks are failing to live up to the expectations of the taxpayer. The frauds are the management of funds are a hard blow to the trust between the two and as a result, it also shatters the trust towards the RBI and the government.
It has been observed that politicians, influential individuals, big corporate houses hold the reins of quid pro quo transactions. The corrupt officials usually play along for personal gains. It all starts from taking up a big-ticket loan where the bank obliges as it adds to the credit growth of the bank and that too with a big and prestigious name.
Then due to some unforeseen policy issue or for business expansion or any other similar reason a new loan is demanded, which is granted merely on goodwill, false promises and without due diligence. Most often the borrowers use the loan amount for purposes other than the ones projected and instead a loss is shown on the front.
To cover this the borrower either approaches the same bank or goes to some other bank. Once again a fresh loan is taken and the cycle keeps on continuing until some major event that reveals the plot takes place or some whistleblows the wrongdoings.
The bank officials and the borrowers work hand in hand on this. Every attempt is made by the corrupt to keep the deals under wrap. Attempts are made from opening various fictitious accounts to facilitate the loan, to acting as a broker in corporate deals. And such attempts are handsomely rewarded. But what happens when so many loans pile up? They turn into non-performing assets.
The recent debacle of Yes Bank, ICICI Bank, PNB, PMC bank, CKP bank, also the Vijay Mallya and the consortium of banks led by SBI have made the issue of NPA and quid pro quo quite familiar. The practice of such exchanges is prevalent in all types of banking sectors- Public sector banks, private sector banks and co-operative banks.
HIGH PROFILE NPA CASES AGAINST THE BACKDROP OF QUID PRO QUO :
Starting with the public sector banks, the PNB and Nirav Modi-Mehul Choksi case deserves a special mention closely followed by the Vijay Mallya case.
- PNB and Modi-Choksi case: Nirav Modi and his partners in M/s Diamonds R US, M/s Solar Exports and M/s Stellar Diamonds conspired with the then DM and SWO of PNB along with some other employees to commit fraud to the tune of Rs.13000 crores. Every person party to the crime cheated the bank and caused the wrongful loss by committing the cognizable offence of criminal conspiracy, cheating and abuse of official position(7). Investigations into the Punjab National Bank fraud revealed that some employees had created assets and maintained bank accounts abroad which the management and investigators suspect could be related to the Nirav Modi scam(8). Also, these employees had unexplained wealth in their names. Poor asset management, poor due diligence, incompetent and overconfident staff and most importantly greed of few office-bearers pushed the bank into creating huge NPAs.
- Vijay Mallya case: In the Vijay Mallya case loans were given to Mallya/ Kingfisher Airlines without proper investigation and due diligence. He owes 17 Indian banks an estimated Rs 9,000 crore, is accused of fraud and money laundering in the country. Some of the officers misused their positions and helped Mallya in acquiring loan as per his demands. In response to Mallya’s extradition, the UK High Court considered the vast evidence placed on record by GoI and relying on the case of Devani v. the Republic of Kenya,  EWHC 3535 opined that there was a prima facie case that the funds loaned by Indian banks to Mallya were misused. A number of email trails were relied on to rule that he had misrepresented his net worth to the banks. It was further held that there was a prima facie case of a conspiracy to defraud which involved not just the Kingfisher Airlines executives but also some bankers. There was clear evidence of misapplication of loan funds and thus there was a prima facie case of conspiracy to launder money against Mallya(9)
- YES Bank : Yes Bank has undergone a steady decline largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors, and withdrawal of deposits The bank has also experienced serious governance issues and practices in recent years, which have led to a steady decline of the bank(10). Bliss Abode Private Ltd, a company incorporated on March 6, 2017, with Bidu Kapoor (Rana Kapoor’s wife) as 1 of its Directors, has its registered office at an address which was previously owned by Gautam Thapar, the former promoter of CG Power and Industrial Solutions who was removed as company chairman over alleged financial irregularities. The ED believes it has enough evidence to link the purchase of this property to a larger ‘scam’ of quid pro quo between the then Yes Bank MD and CEO, Rana Kapoor, and corporate houses which took a loan from Yes Bank. In a similar case, the CBI has filed an FIR against a dozen companies and people, including Rana Kapoor, his wife Bindu Kapoor and three daughters – Roshini, Rakhee and Radha – alleging criminal conspiracy to receive kickbacks of Rs 600 crore from DHFL in lieu of Rs 3,700 crore loan to the Kapil Wadhawan-promoted company. Like most corporate frauds in India, the fall of Yes Bank is linked to alleged funds siphoning by promoters, allegedly through layers of ‘shell’ companies directly or indirectly controlled by the former promoter and his family(11).
- Syndicate Bank: The Central Bureau of Investigation (CBI) arrested Sudhir Kumar Jain, chairman and managing director of Syndicate Bank Ltd, for allegedly taking a ₹ 50 lakh bribe. His brothers-in-law are allegedly involved in the mechanics of the pay-off. Jain, who took charge as chief of Syndicate Bank in July 2013, was allegedly offered the bribe for increasing the credit limit of a few companies, throwing banking norms to the wind(12).
- SBI: Last year CBI arrested Shyamal Acharya, a deputy managing director of State Bank of India, the country’s largest lender, for allegedly taking a bribe in kind—an Omega and a Rolex watch worth ₹ 7.75 lakh each. Both the watches were seized from Acharya’s cabin by CBI. Allegedly, Acharya violated norms for loan approval. The State Bank of India (SBI) instituted a two-member internal panel to look into the allegation but could not find any procedural lapses in a ₹ 75-crore loan sanctioned to Delhi-based Worlds Window Group (WWG). CBI had filed a case against Acharya, K.K. Kumra, who was an adviser at WWG, and Piyush Goyal, founder, WWG. Apparently, Goyal had sought a ₹ 400 crore loan from the bank and Kumra, a former bank official, in turn, got in touch with Acharya, who allegedly influenced his juniors and got ₹ 75 crores sanctioned, to begin with(13).
- PMC Bank: Punjab and Maharashtra Co-operative Bank (PMC) used more than 21,000 fictitious accounts to hide loans it made, according to a police complaint lodged by Indian officials, in the latest banking fraud case to spook the country’s depositors and investors. A single realty firm and its group companies were the beneficiaries of 44 loans. The complaint filed by the EOW names the bank’s Chairman Waryam Singh and its Managing Director Joy Thomas, along with other bank officials, and accuses them of criminal breach of trust, forgery and falsification of records. It also names bankrupt realty 2wsdxc 8company Housing Development and Infrastructure Ltd, along with its former senior executives Sarang Wadhwan and Rakesh Wadhwan, who were beneficiaries of the loans(14).
Apart from these many cooperative banks have fallen victim to the exploits of its powers
Due to the magnitude of these cases, these were and are closely followed by the media and therefore everyone is aware of the cases. But there are many more banks where the top officials have flouted ethical and professional rule books. The top management also keeps mum to avoid ignominy.
Sometimes subordinate officers are helpless before their superiors who put them into situations where there is no other way out and as a result, they get sucked into the sinkholes of corruption. All this only to please someone with the expectations of being in the good books for future advantages or to satisfy their ulterior motives or simply for personal gains. Whatever the reason the result is the same- a failure of an entire institution ultimately affecting a large population of hard earners and loyal taxpayers.
- Growing NPAs in banks Efficacy of credit rating agencies,pwc India available at https://www.pwc.in/assets/pdfs/publications/2014/growing-npas-in-banks.pdf ,last seen on 21/07/2020.
- J Lewinsohn,Paid on both sides: Quid pro quo exchange and the doctrine of consideration,129, Yale Law Journal, 690, 690, (2020), available at https://www.yalelawjournal.org/article/paid-on-both-sides, last seen on 08/07/2020
- A. Rajput , Ugrasen, A Study on Causes of Non-Performing Assets and Its Prevention and Measures of Industrial Development Bank of India Ltd. With Reference to Gorakhpur Branch. Proceedings of 10th International Conference on Digital Strategies for Organizational Success SSRN 1,1 (2019),available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3308434,last seen on 21/07/2020.
- P.Tantri,Tackling the ever- greening problem in banks,The new Indian Express (31/03/2020),available at https://www.newindianexpress.com/opinions/2020/mar/31/tackling-the-ever-greening-problem-in-banks-2123725.html, last seen on 21/07/2020.
- The Wire staff,Raghuram Rajan explains the origins of India’s NPA crisis.The Wire(12/09/2018),
- First Information Report(Under Sec 154 Cr.P.C.), cbi.gov.in, http://www.cbi.gov.in/firs/2018/2018_pdf/2018_bsnfc_mumbai_firs/RC0772018E0001.pdf, last seen on 21/07/2020.
- S.Dave, S.Shukla, PNB fraud: Bank likely to slap civil case on staff linked to Nirav Modi,The Economic Times(21/03/2018), available at https://economictimes.indiatimes.com/industry/banking/finance/banking/pnb-fraud-bank-likely-to-slap-civil-case-on-errant-staff-linked-to-nirav-modi/articleshow/63390892.cms?from, last seen on 08/07/2020.
- Devika,UK High Court dismisses extradition appeal of Vijay Mallya, The SCC Online Blog, available at https://www.scconline.com/blog/post/tag/vijay-mallya/, last seen on 08/07/2020.
- Companies business news Yes bank:A timeline of how it went down,Moneycontrol, available at https://www.moneycontrol.com/news/business/companies/yes-bank-a-timeline-of-how-it-went-down-5008281.html,last seen on 08/07/2020.
- D. Mondal,The Usual Suspect,Business Today(05/04/2020),available at https://www.businesstoday.in/magazine/banking/the-usual-suspect/story/398437.html, last seen on 08/07/2020.
- T.Bandopadhyay,How to deal with corrupt bosses of state owned banks, Livemint available at https://www.livemint.com/Opinion/VbBYxr8BfVtqFdD6uphD3M/How-to-deal-with-corrupt-PSU-bank-bosses.html, last seen on 08/07/2020.
- PMC Bank Created Over 21,000 Fake Accounts To Hide Loans,51Assocham Banking E-Bulletin 9,11(2019) available at https://www.assocham.org/userfiles/Banking%20Bulletin_October%202019%20OK.PDF, last seen on 08/07/2020.