The Story behind Corporate Bad Loans: Dubious Assessment, Rampant Diversion of Funds and Meaningless Guarantees

The market’s memory tends to be short as seen with the sharp rally in shares of many banks who until recently were saddled with a broken balance sheet thanks to the RBI under the Governorship of Raghuram Rajan forcing them to recognise bad loans. Last week’s high profile arrests of a former bank CEO and her husband and the promoter of the corporate who was allegedly the receipt of dubious loans, comes as a grim reminder. This week, Sucheta Dalal of Moneylife came up with this piece highlighting the general modus operandi in Indian corporate lending in some grave detail. The piece refers to her findings from a meeting of IDBI Bank’s Wilful Defaulters Committee. She reminds us:

“Remember, IDBI Bank has been cleaned up and turned around by infusing a stupendous Rs49,000 crore through the government exchequer and by Life Insurance Corporation of India (LIC), even after selling valuable legacy investments.”
The ‘cleanup’ didn’t come cheap – the massive recapitalisation diluted shareholders out of sight – shares losing almost 90%.

The findings point to dubious lending, diversion of funds and meaningless guarantees:

“Dubious Lending – Zero Accountability
Poor assessment before sanctioning loans and lack of monitoring is the story behind every default in this list. Take the case of Winwind Power and Energy Pvt Ltd, listed for discussion. This company is a part of the Siva group of C Sivasankaran. It may be recalled that, in Siva Industries, IDBI Bank itself had accepted 94% haircut settling for just over Rs300 crore out of an outstanding of nearly Rs5,000 crore.

That only the public sector banks (PSBs) have extended loans to group entities of Siva is unknown to most people. State Bank of India’s (SBI’s) exposure was Rs399 crore, Punjab National Bank (PNB) Rs310 crore and Bank of India (BOI) Rs75 crore to Winwind Power. After huge payment defaults and other issues, it was declared a fraud account by PNB and BOI in 2020 when it was already too late. Finally, Winwind was sold for a mere Rs63 crore as part of a liquidation process in October 2020 with IDBI Bank receiving a mere Rs4.93 crore on a pro-rata basis.

Diversion of Funds
Massive diversion of funds seems a constant in every discussion on wilful defaulters. What is more remarkable is that none of the dozen-odd lenders in the consortium ever seems to notice rampant diversion or fraud until a company is about to be declared a wilful defaulter.

Consider the case of Techpro Infra Projects Ltd (Techpro) which is into laying oil, water and gas pipelines. IDBI Bank had an exposure of Rs79.4 crore on 25 November 2021 out of its total bank borrowings of Rs362 crore. It was declared a fraud six months later (25 May 2022) by Standard Chartered Bank, Bank of Baroda and IDBI Bank. A forensic audit revealed crores of rupees transferred to subsidiaries and group entities (Shriram Cement, Techpro Infrastructure Pvt Ltd, Huthro Power Corporation and GET Power Ltd). The recommendation to the WDC was to issue show-cause notices to the promoters—a pointless exercise, since the company was already under liquidation. The guarantees, as you will see, are a bigger joke.”

We shall let you read the joke about personal guarantees in its entirety in the article.

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