Analyzes lending patterns of India's public sector banks, traces the need for reform and offers suggestions

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Indian PSBs’ Recovery Suits for Bad Loans Expose a Sordid Tale
Shantanu Basu
There is a public outcry for Vijay Mallya’s blood ever since he ‘escaped’ from India, for not
paying his employees’ salaries, stealing their PF and pension dues, not paying I-T and service
tax, passenger refunds, etc. Yet he bought islands, luxury and vintage cars by the dozen, loved
his girls, never missed an opportunity to transfer funds overseas by acquiring real estate.
Let us face it. How many loan defaulters have done the very same things? The answer is willy-
nilly entirely in the positive. There are CBI cases filed for wrongful cornering of spectrum, coal,
much more. It’s just that they were far more discreet with just an occasional Lutyens Delhi
bungalow or a Chhattarpur farmhouse purchase getting only passing media attention. Why did
nothing receive the kind of attention that VM received form the media? Undoubtedly, the media
hushed it all up for extraneous considerations.
Has the PSB sector not taken any action against defaulters? CIBIL’s default suits (non-wilful)
above Rs. 25 lakh shows that, as on 31/12/2015, FIs have filed recovery suits for Rs. 727.94
crore, Foreign banks Rs. 462.97 crore, PSBs Rs. 45180.63 crore while private banks for Rs.
10294.75 crore. By state, Maharashtra accounts for Rs. 33917.02 crore followed at second place
by WB with Rs. 12901.96 crore, Delhi Rs. 12326.08 crore, Tamil Nadu with Rs. 11522.57 crore,
AP with Rs. 9060.28 crore, Gujarat Rs. 7788.27 crore and Karnataka with Rs. 6664.98 crore.
The total value of 7444 recovery suits above Rs. one crore is Rs. 115301.60 crore.
Interestingly, when CIBIL data for wilful default suits (a separate category) above Rs. 25 lakh is
factored (5276 suits), the numbers add another Rs. 20987.19 crore for Maharashtra, Rs. 8754.81
crore for Delhi, Rs. 4560.71 crore for WB, Rs. 4072.73 crore for Tamil Nadu, Rs. 3050.18 crore
for AP and Rs. 2725.56 crore. In effect against Rs. 115301.60 crore (>Rs. one crore non-wilful),
there is a corresponding amount (>Rs. 25 lakh wilful) of Rs. 56621.29 crore, i.e. a ratio of about
2:1. In other words, about 50% of defaults are wilful! And suits have been filed for a total value
of about Rs. 1.71 lakh crore in both categories.
Now let us turn to the personal guarantor profiles of a few select wilful defaulters > Rs. 25 lakh.
The SBI page on the CIBIL web site shows M/s. JB Diamonds for dues of Rs. 140.96 crore. SBI
mentions seven Directors, all of whom, except one are identified by a unique DIN. Take another
instance. M/s. Biotor Industries, Mumbai show three Directors, this time not giving personal
guarantees for default of Rs. 100.46 crore. The same holds true of M/s. Vindhyvasini Steel
Corporation with two Directors and default of Rs. 106.21 crore. Likewise, Zoom Developers
defaulted on Rs. 410.18 crore on PNB while none of the three Directors is shown as having stood
personal guarantee. In no case is any list of the nature and value of guarantees or assets of these
entities disclosed. At least, Vijay Mallya stood personal guarantee for a much bigger amount for
KF!

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In the absence of any pendency dates of these suits by CIBIL, I have not been able to cause any
age analysis of these suits. Nor are the purpose for which these loans were sanctioned, date of
default and date of filing recovery suit, court of suit mentioned by CIBIL. The WB page of
CIBIL’s wilful defaulters makes for interesting reading. They range from vehicle dealerships to
rice & oil mills, retail shops, dairies, ‘alms mission’, trading companies, packers and movers and
many more. There are also cases in which Directors are common, e.g. Jaydada Movers, Jaidada
Paribahan, Jaidada Infrastructure, Medidrips Carrier (total loans of Rs. 21.73 crore) from the
same SBI branch, viz. Chowringhee with identical Directors or their family members. The same
holds true of KKN Rice Mill, KKN Oil Mill, Everbright Trade Co., Haridarshan Tracom,
Cotwall Commerce and Mahabir Impex (Rs. 96.98 crore), again by the same SBI branch. Mr.
Pushpesh Baid and Ms. Kokila Devi Baid, Directors of Mala Textiles, KN Agro, Raman
Commodeal and Leonids Electronics are in collective default of Rs. 60.39 crore to SBI, Howrah,
New Alipore and Salt Lake.
Mr. Baid teamed with Mr. Lokesh Poddar to set up Ma Ambay Jewellers and Brijdham Jewllers
which then defaulted on another Rs. 59.34 crore to SBI, Ballygunje. There are bigger common
fish too. Take Mr. Dhiraj Thard, Ms. Sushma Thard and Mr. Somnath Ghosh whose Vishwarupa
Steels, Shri Radhekrishna Smelters and Vishwarupa Tubes are in collective default of Rs. 122.79
crore to SBI, SAMB-II, Kolkata. There are many more similar cases in WB alone; other states
are no different, where the amounts are often substantially higher. Interestingly, one Bhaichung
Bhutia is in default of Rs. 70.35 hotel for his hotel intriguingly named Hidden Flower. The
amounts sanctioned are equally interesting. For instance, one Prof. Tapan Kumar Ghosh of Bally
is in default of Rs. 52.76 lakh for his atta chakki (wheat mill) to SBI, Bally when WB is a
predominantly rice producing and consuming state! All this primarily to small borrowers since
WB has very few large corporate entities.
Larger corporates have their share too. Yashovardhan Birla’s Zenith Birla (India) is in default of
Rs. 139.59 crore to SAMB, Mumbai. There are other big defaulters like Indore Wire Co. (Rs.
78.72 crore), Laxmi Solvex (Rs. 77.12 crore), Kalsaria Diamonds (Rs. 45.94 crore), Minestone
(Rs. 56.56 crore), Shree Ganesh Forgings (Rs. 44.17 crore), Macrocosm Infrastructure & Power
(Rs. 59.66 crore), Shreem Corpn. (Rs. 283.08 crore), Ram Shyam Textile Industries (Rs. 60.13
crore), etc. to various Mumbai branches of SBI.
What do the above statistics tell us? Loans have been indiscriminately sanctioned by PSB
branches, presumably to jack up lending achievement. There is no e-linkage between branches to
connect the credentials of common Directors and their borrowings from other PSBs. Doubts also
arise of the reasonableness of amount of loans sanctioned vis-à-vis the object of sanction, e.g. the
atta chakki in WB. Delays in filing recovery suits and the glacial recovery proceedings are
evident from the piling up of Rs. 1.71 lakh crore worth of recovery suits. Even the cash value
and title of assets pledged/mortgaged is doubtful. There is obviously no standardized procedure
for sanctioning loans in PSBs either. Otherwise, why would the amount of wilful defaulters vary
so widely between PSBs of similar size? It is also doubtful that full disclosure of financial assets

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of promoters, their technical and business capacity, the viability of their proposals were honestly
taken into account by PSB branches in their internal evaluation and recommendation reports
prior to sanctioning and releasing such loans.
So what should be done? First, the Union Finance Ministry (DFS) and RBI must create a
centralized database of all loans made by PSBs by June 30, 2016. This should not be difficult
since all PSBs are computerized and most information would be available in digital form.
Second, this database must capture all data relating to borrowers including purpose of sanction,
current market value and encumbrances on title of mortgages obtained by PSBs as collateral, and
details of all PSB officials that were involved in the process of sanction of each loan. Third, the
genuineness of the mortgaged collaterals must be verified by establishing teams of lawyers
coordinated by the legal depts. of PSB corporate offices who will also be responsible for random
checking of such lawyers’ reports.
Fourth, the number of DRTs must be expanded manifold to accommodate the large backlog and
a separate appellate bench created in High Courts and the Apex Court for disposal of all pending
suits within the next 9-12 months. Fifth, the proliferation of PSB branches needs to be controlled
(by merging branches) such that not more than three large PSB branches operate in every 25 sq.
km in urban areas and 100 sq. km. in rural areas. This would not only curb malfeasance in the
rural branch subsidy scheme of DFS but also reduce administrative overheads of PSBs
substantially. Sixth, the Post Office Bank could take over the functions of PSB branches in rural
areas on commissionable basis and allow PSB ATMs in rural areas on their premises, instead of
branches. Seventh, although all PSBs have fairly well-defined transfer polices for their
personnel, yet these need to be synchronized such that no officer-grade personnel serves a branch
for more than two years in rural and three in urban areas. Inter-bank transfers of personnel
should also be introduced.
My last three suggestions are for the Union Finance Ministry. Please desist immediately from
nominating civil servants, journalists and ideologues, etc. to PSB and CPSU boards for they
already caused immeasurable harm to our banking and CPSU system. They contribute precious
little to these institutions but are available to claim benefits and remain the unholiest link
between GoI and PSBs. And Directors appear to be unaware of their responsibilities under the
new stringent corporate governance parameters of the Companies Act, 2013. It is therefore time
that exemplary action was taken by the Union Finance Ministry by removing all these
underserving nominees, investigate their monitoring failures in the last 5-7 years, and replace
them with professional private bankers, management specialists, economists, statisticians, etc.,
all as nominees of the President of India. If a private journo can be appointed to the board of a
major private engineering company (owned 45% of GoI’s FIs), surely the above are equally, if
not much more, deserving of such nomination!
Next, the vigilance outfits in PSBs need to be re-staffed and expanded. The present system of
dual control of a CVO in PSBs & CPSUs needs to be done away with. Instead, CVOs should
report to a Central Financial Services Vigilance Board (CFSVB) staffed by senior bankers,

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management, risk-mitigation, forensic auditors and other professionals appointed for five-year
terms (without extended terms) and chaired by a retired judge of a High Court, if not of the Apex
Court. This Board could be empowered by law to carry out police and forensic investigation.
Likewise, the internal audit setup in PSBs ought to be staffed with personnel from banks/ FIs
other than the PSB whose internal audit is involved. This unit too would report to the CFSVB.
Last but not the least, is the need to divest several assets owned by PSBs like guest houses, large
premium residential apartments, holiday homes, right size bloated regional and zonal offices and
corporate HQs. The proposal mooted by the Union Finance Ministry to merge the existing PSBs
into six large PSBs is welcome move, provided this dovetails into right sizing personnel out of
sale proceeds of strategic assets owned by PSBs. Simultaneously, new technology that would
allow one PSB to dispense cash against cheques drawn on fellow PSBs or pooling ATM cards at
all PSB branches without any surcharge, online requests for demand drafts/bankers’ cheques and
cheque books, secure submission of life certificates by GoI pensioners, renewal of fixed deposits
with auto-generated certificates, myriad more. These would reduce the pressure of daily visitors
to branches and consequently expensive personnel in PSB branches.
While the FM and RBI Governor’s caution yesterday on carrying out a witch hunt on PSBs may
adversely affect PSB lending in an economic downturn, yet they cannot turn themselves away
from many unpalatable and ages-overdue reforms if India’s critical banking sector is to prosper.
That is why reforms must happen not just in PSBs but in the composition of their boards and
their entirely negative relationship with the GoI. For recapping PSBs via the National Budget
have severe limitations. Instead, all-out efforts must be made to force PSBs to recover debts
owed to them for which recovery suits have already been filed. Unless the judicial framework
too is overhauled, empty sloganeering would remain the hallmark of the FM’s oft-stated populist
determination to recover dues. Not all bad debts are mala fide and it is precisely here that
professional boards are required for PSBs to professionally distil the bona fide from the mala
fide without causing a scare in lending operations. At the same time, policy efforts to relieve the
debt burden of defaulters whose miseries stem from extortionist govt. policy (e.g. ATF for
airlines), global economic downturn, inconsistent investment regulatory framework, over-
taxation, etc. must be taken up in right earnest and redressed within the next 6-12 months.
In the final analysis, the health of a nation’s banking system mirrors its fiscal health, indeed its
quotient of well-being. The gross indebtedness of Indian corporate agencies that many on social
media attribute to dues to PSBs owe only in part to PSBs and more to global FIs on international
borrowing. Any default on these accounts too will deal a severe blow to India’s international
creditworthiness. Thus the problem is two-fold, viz. domestic and international defaults. The
stakes are national and international. Honesty and professional competence in adopting
corrective fiscal policies will deliver good governance and preserve the savings of India’s
citizens and help them rise from their present economic morass. Dishonest sloganeering will only
exacerbate the looming crisis and give lie to those who opine that India’s banking system and
international creditworthiness face no immediate threat of collapse.

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