Large-value accounts responsible for rising NPAs: CBI chief

A group of "large-value" corporate accounts has pushed up non-performing assets (NPAs) and associated financial frauds in the country since 2008, CBI chief Anil Sinha said this week, at a time when dozens of Indian banks are swamped with bad loans.

The crisis runs deep, Sinha said at a financial conference in Mumbai on Wednesday, weeks after the Supreme Court asked the Reserve Bank of India (RBI) to provide details of companies that have each defaulted on loans of more than Rs500 crore.

However, the Central Bureau of Investigation (CBI) director did not give details of the accounts that are being examined by the agency.

India's banking sector, dominated by about two-dozen state-run lenders, has been bruised by its highest bad-loan ratio in years as lagging economic growth hit companies' abilities to service debt.

In August 2013, then CBI director Ranjit Sinha told a gathering of government officials that the "bulk of the NPAs is from the top 30 accounts, which is learnt to be running into thousands of crores."

A loan is recognised as a non-performing asset when the repayment is delayed beyond 90 days. This forces the bank to make provisions by setting aside funds, further restricting its lending capacity.

At the Mumbai meet, Anil Sinha said defaulters are not getting deterred because of "weak and diffused" accountability mechanisms in banks and financial institutions.

"Added to this is the unduly slow and long process by which such loans and advances are red-flagged, declared NPAs, then wilful defaulters and finally fraudulent," he said. It "allows large borrowers ample time to walk with the funds.to tax havens."

According to government figures, gross NPAs of 39 listed banks stood at Rs 4.43 lakh crore in December 2015, nearly ten times the 2009 level.

"The CBI has recently registered a case of cheating and fraud against Kingfisher and its erstwhile management involving allegations of defrauding banks to the tune of Rs 7,000 crore," Sinha said.

"This case was registered in July 2015, but the loans or advances were taken during 2004-2012. However, despite our repeated requests, the banks did not file a complaint with the CBI. We had to register the case on our own initiative."

RBI governor Raghuram Rajan has set banks a March 2017 deadline to clean up their balance sheets and treat some troubled loan accounts as bad and make provisions for them by the end of this March.

Sinha also underscored the need for pre-emptive action to thwart deposit scams that thrive in India's vast informal financial sector.

"The second case relates to PACL -Pearls Agrotech Corporation Ltd-which has reportedly collected over Rs 51,000 crore of illegal deposits from nearly 5.5 crore investors," he said, referring to the scandal that illustrated the risks faced by millions of low-income Indians who live outside the banking system.

"It needed the Supreme Court to step in to order investigations. Should not the regulator have suo moto (on its own) stepped in?"

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Sebi set to get tougher with wilful defaulters

Regulator will make it hard for wilful defaulters to raise funds from public; they can opt for rights issues or share sales to institutional investors

Mumbai: The Securities and Exchange Board of India (Sebi) will make it difficult for so-called wilful defaulters from raising fresh equity or debt from the public, according to two people familiar with the agenda of the regulator’s next board meeting.

The move will mark yet another effort by the Indian government, the Reserve Bank of India (RBI) and now Sebi to crack down on the problem of bad loans.

A wilful defaulter is a company or individual who borrowed money and has no intention of paying it back, has diverted the money to some other purpose than the one for which it was borrowed, or has sold the asset acquired or developed with the money without the lender’s knowledge.

Sebi will, however, allow such entities to raise funds through rights issues or share sales to institutional investors, said one of the two persons, asking not to be identified.

The entity will need to disclose itself as a wilful defaulter in the offer document if it chooses to go in for a rights issue (sale of shares to existing shareholders), or a qualified institutional placement, added this person

Sebi’s board meeting is scheduled for 12 March. A Sebi spokesperson did not respond to an email seeking comment.

In January 2015, Sebi issued a draft paper proposing that wilful defaulters would not be allowed to sell shares, debt securities and non-convertible preference redeemable shares to the public.

The paper suggested that wilful defaulters be barred from taking control of another listed entity, but that they be allowed to participate in counter offers to deal with hostile takeover bids.

Each of these restrictions would be applicable if the issuer, its promoter, group company or director of the issuer of such securities were in the list of wilful defaulters published by RBI, the stock market regulator said.

“The final regulations will be based on the discussion paper that dealt with the wilful defaulters,” said the second person, who too asked not to be identified.

In addition to restrictions to fund raising, such entities and persons will be ineligible to serve as market intermediaries or run mutual funds or alternative investment funds, added the second person.

Bankers said such restrictions would help.

RBI has been asking banks to get tough on wilful defaulters and has a tough set of rules in place which say that anyone tagged a wilful defaulter cannot raise fresh funds from the banking system.

The banking regulator, however, has been of the view that such defaulters also need to have their access to capital markets restricted. “If someone has knowingly stopped repaying banks, then why should he be allowed to access the capital markets? Any such limitation on the borrower would definitely be a power for the banks since they can squeeze these wilful defaulters better,” said Ashwani Kumar, chairman and managing director of Dena Bank and chairman of the Indian Banks’ Association.

While RBI has not disclosed the quantum of loans that fall under the wilful default category, data has emerged from some large public sector banks.

Loans worth Rs.11,700 crore given by State Bank of India have been locked up as non-performing assets as nearly 1,160 defaulters have wilfully decided not to repay, PTI reported on 24 February.

Another state-owned lender, Punjab National Bank (PNB), declared 904 borrowers who owed it a combined Rs.10,869.71 crore as of December-end as wilful defaulters. PNB added 140 companies to the list of wilful defaulters in the December quarter alone.

While banks believe that banning wilful defaulters helps their cause, corporate lawyers caution against a sledgehammer approach.

“Wilful defaulters should be restricted from raising funds from public because there is no accountability to return funds to shareholders. However, Sebi should steer clear of a blanket restriction on fund-raising by defaulters as this would potentially limit the chances of a revival of the company and the existing shareholders would end up paying the price,” said Tejesh Chitlangi, a partner at IC Legal.

Parag Bhide, senior associate at Advaya Legal, said Sebi should approach the issue on a case-by-case basis.

“A complete ban on wilful defaulters may not be good for existing shareholders, including retail investors. Further, such a lifetime exile from financial markets may not be constitutional. Ideally, there should be some time limit (three-five years) for such a ban.”

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Banks delayed in declaring Kingfisher as defaulters: CBI

Banks delayed in declaring Kingfisher as defaulters: CBI

The Central Bureau of Investigation (CBI) on Wednesday blamed commercial banks for the delay in declaring Kingfisher Airlines (KFA) and its promoter Vijay Mallya as defaulters.

"The CBI registered a case of cheating and fraud against Kingfisher and its erstwhile management involving allegations of defrauding banks to the tune of Rs 7,000 crore. This case was registered in July 2015, but loans were taken during 2004 to 2012. However, despite our repeated requests, banks did not file a complaint with the CBI. We had to register the case on our own initiative," CBI director Anil Sinha while addressing a conference jointly organised by the Indian Banks Association and the investigating agency.

HT had reported on February 29, 2016 that the RBI was questioning banks for lending Rs 5,253 cr to Kolkata-based REI Agro Ltd after the CBI uncovered fraud.

Sinha cited the example of how the agency's suo moto action against Pearls Agro eventually led to the arrest of the company's chairman.

SBI chairman Arundhati Bhattacharya, who was also present on the occasion, didn't comment on the issue.

SBI, along with other banks, had lent close to Rs 7,000 crore to the UB Group, the parent company of KFA. It was only last month that PNB declared the airline and Mallya wilful defaulters, a claim currently being contested by Mallya.

"While I fully understand that loan defaults can happen due to business risk and reasons beyond control of banks, borrowers and regulators, yet a significant part of the defaults are wilful and fraudulent," Sinha said. "What causes greater concern is that a major part of the NPAs and frauds are in large-value accounts," he said, adding that a large part of such funds moves outside the country to tax havens through unofficial channels.

Gross non-performing assets (NPAs) of banks have gone up from Rs 44,957 crore in 2009 to Rs 3 lakh crore in 2015.

The CBI investigated 171 cases of bank frauds involving Rs 20,646 crore of funds in 2015.

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