The Great Loot of Banks' Funds by Unscrupulous Promoters of companies who are wilful defaulters are creators of huge NPA in Banking system

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S. RamaChandran

Comments by AllBankingSolutions.com :

In our continuous fight to expose the NPA mess in the Banking industry, we give below a letter sent by Mr. S Ramachandran, former General Manager at Bank of Baroda. The letter raises questions on the utility of boards in banks, which are not performing their desired roles in keeping the bank's CEOs & EDs in check. We are uploading the full letter as sent by him to Ms. Anjuly Chib Duggal, Secretary, Departmental of Financial Services. Readers should also add more points which they are aware so that this current situation be analyzed effectively, and not brushed under the carpet. We feel all our readers will share this article to help spread this message.

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Letter Transcript

Subject: The Great Loot of Banks' Funds by Unscrupulous Promoters of companies who are wilful defaulters are creators of huge NPA in banking system

MS ANJULY CHIB DUGGAL,
SECRETARY, DEPARTMENT OF FINANCIAL SERVICES,
MINISTRY OF FINANCE,
NEW DELHI.
18th FEB,2016

MADAM,

Speaking at the IMC - Pravin Chandra Gandhi Chair, Deepak Parekh, HDFC Chairman said "RBI has clearly articulated the band aid solutions (for bad loans) no longer work and the deep surgery is needed". I agree with this. He further said about the Public sector banks balance sheet clean up exercises that "too much anaesthesia can result in a patient becoming comatose". RBIs point of view was that recognition of NPAs was an anaesthetic needed for surgery (for putting assets back on track). Mr. Parekh very rightly said that the non-performing assets rot has to be tackled and the quarter ended December 31,2015 has been brutal for banks as out of the 40 listed banks that have declared their third quarter results ,gross NPAs of 10 banks exceeded 8%,while in the case of 22 banks it exceeded 5%.

Provisions of banks for bad loans increased manifold and RBI is coming out with a sledge -hammer on banks following its directive on asset quality review. Yes we need transparency and accountability in accounting for the NPA. The banking sector cannot afford another quarter like the one just gone by. But, it is unfortunate that banks have already warned that the next quarter also looks similar.

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There is a director representing the RBI on the bank board. He is meant to to provide early warning signals to RBI .Then there is a government director .What is the purpose of his being on the board? There are statutory auditors .How do they not realised red flags well in advance? RBI has drawn up a list of about 150 defaulters across the banks. This list is being circulated for banks to check their books .What is so secret about this list? Why not put these names out in the public domain? These defaulters need to be named and shamed.

The need of the hour is transparency, if Air India RUNS UP TO LOSSES OF RS 32000 CRORE, we get the government to infuse capital over a period of time without ensuring that the reason for the loss occurring in the first place is addressed .Well-heeled promoters of major companies cause similar humongous losses to PSB and force government to write off their debts. No one seems to want to cause pain to these borrowers. Why not take personal guarantee and pursue criminal cases against them? When a promoters personal assets are at stake subject to attachment before judgement ,he will react at the first signs of adverse developments and not participate in activities such as diversion of funds. Coupled with this, bankruptcy laws have to be made stringent so that the guarantors can be forced into insolvency ,which is another way of naming and shaming .Banks are found to be reluctant to proceed against guarantors even when this recourse is available.

Write offs were introduced for banks to manage their tax liabilities on stressed assets so that they were treated as as advances. They were technical in nature since banks were expected to continue recovery attempts. Where as in practice it is another matter as banks are not pursuing enthusiastically recovery of these advances once the assets were written off their books. RBI TOOK SOME STEPS IN 2014-2015 to tighten controls on errant borrowers ,which include increased provisioning ,amortising loans over a 25 years period including refinancing options ,and empowering banks to take majority control in defaulting companies under the strategic debt restructuring scheme.4. Prodding banks to disclose the real picture of bad loans.

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While the RBI hopes these measures will clean up the bank balance sheet by 2017 ,the banks themselves feel that they require more time .This seems to indicate the hope that the problem will sort itself out. The govt is also thinking since may 2015 about setting up an asset reconstructions company (arc) with equity from the govt and the RBI, which I feel is a wrong step and RBI perhaps rightly ,believes that such ARC IS "morally hazardous" It also does not wish to subscribe to its equity. The very efficacy of the current operational dozen odd ARCs in disposing stressed assets over the last ten years does not provide much confidence since they have barely managed to resolve about RS 2000 crore.

The government has also announced that it will recapitalise the banks, providing RS 70000/- CRORE in the next four years which is according to rough calculations would be woefully inadequate as this amount would be required by SBI alone and considering the 74%of the country's total lending is handled by PSBs.

The willful defaulter continues to enjoy the same social status .The who's who fall over fall each other to be the guest list of their lavish bashes as also enjoying other "hospitalities". There is no point in crying foul while making it a prestige issue to be seen in their company.

It is intriguing that the regulator has to unearth hidden NPAs .This should be the domain of banks and auditors. If they have defaulted what is their accountability? This has to be based on hard data and stipulated norms .More importantly will this be an on going process ,and will more accounts have to be identified by the RBI as the SUPREME COURT has suggested?

Lastly while conducting the asset quality review by the central bank i.e RBI it has revealed "malpractices ranging from funding of "satellite Entities" round tripping of funds by companies, repayment of short loans through overdraft facilities and incomplete evaluation of viability of projects", what punitive action has been taken against such corrupt, dishonest officials of the bank such as CMDs, EDs, GMs etc may be brought to public domain. To hold CMDs AND EDs accountable, the MINISTRY OF FINANCE should come out with a legislation to prosecute them which provision does not exist as per the affidavit filed by the MOF in the S.C. How can the CMDs and EDs who hold the public money in trust can go Scot-Free for fraud they commit on the banking system connivance with unscrupulous borrowers?

I am happy to inform you that even the newly elected president INDIAN INSTITUTE OF CHARTERED ACCOUNTS OF INDIA, Mr. DevRaj has admitted of improper appointment of statutory auditors by PSB banks is one of the reasons for mounting NPAs .HE further said the quality of auditing in banks has come down and NPA could be lesser by 30 to 40% if there is transparency at a press conference held at Hyderabad on 17th FEB,2016.

Alleging that bank management were appointing auditors who will be favourable to them, be also faulted the process of Bank branch audit. "only 20%of the branches are audited and most of the advances are not scrutinised "he claimed adding that banks were taking cover under core banking solutions when questioned",

Reddy also expressed his displeasure over RBI "NOT LISTENING" to ICAI and request to revert back to old system of it appointing statutory auditors for banks. Under the autonomy package to banks were empowered by the govt to appoint their own statutory auditors in 2008-2009 under the old govt.

THE present govt should have a re look at the above observation and take appropriate action to have proper audit of the banks.

WITH KIND REGARDS,

S. RAMACHANDRAN
Former GM BOB, CHAIRMAN & CEO OF SANGLI BANK LTD (NOW TAKEN OVER BY ICICI BANK)
SOCIAL WORKER

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