MUMBAI, SUMIT MOITRA, MANJU AB,SAI MANISH: Expressing serious concerns over the rise in bad loans, the Supreme Court (SC) on Tuesday asked the Reserve Bank of India (RBI) to submit a list of big loan defaulters who owe more than Rs 500 crore.
The court has given the central bank eight weeks to submit the information in a sealed cover.
The direction was issued by a bench which was hearing a public interest litigation against Housing and Urban Development Corporation (Hudco).
The bench, headed by Chief Justice TS Thakur, expressed concern over the mounting bad debts of the banking system, pointing out at the irregularities in sanctioning huge loans to wilful defaulters in some cases.
Wilful defaults are pegged around Rs 3.75 lakh crore. According to bankers, that is three-fourth of the gross non-performing assets (NPAs). This is the list that bankers submit to RBI.
Senior bankers say that gross NPAs are classified under various heads like siphoning off funds, changing the end-use, round-tripping and bloating up assets. Banks exclude natural calamities and such genuine stress from the list. However, RBI has so far not given an official figure on wilful defaults of the banking sector.
To declare accounts or borrowers ‘wilful defaulters’, banks have to follow certain procedures like they would have to follow while initiating recovery procedures.
Meanwhile, leading corporate lawyers say that the whole issue may continue to be shrouded in secrecy as the information is sought by the apex court in a sealed cover.
While banks shield large borrowers by citing client confidentiality, retail borrowers of home, car and personal loans are put to shame by publishing their pictures in newspapers.
Rarely do banks put up names of large corporate borrowers even when loans taken by them are several times bigger.
Anil Harish, a leading corporate lawyer based in Mumbai, said: “When the supreme court has asked for the information, the RBI will have to give it. But a sealed cover means that the apex court may also not reveal it. The supreme court will study the list and see if there was proper due diligence undertaken to sanction the loans. Sometimes, loans do go bad due to poor due diligence. In other cases, there are genuine problems, like in the steel, mining or the real-estate sector, where external factors are central to the problems.”
Well-known fraud cases that were handed over to the CBI in the last few years include Zoom Developers (with a debt of Rs 2,200 crore), Praveen Tayal Group’s Jayabharat Textiles, Krishna Knitwear and Eskay Knit with loans of Rs 3,000 crore, Kolkata-based REI Agro (Rs 4,000 crore), Winsome Diamond (Rs 3,500 crore) and Electrotherm (Rs 434 crore).
Another leading lawer Rajesh Narain Gupta, said: “It is very good that courts are taking cognisance of default issues. It is certainly a deterrent for borrowers when the issues are being debated at the highest level. But the list should have been made public so that pressure mounts on defaulters. The supreme court is in sync with RBI governor Raghuram Rajan who wants to bell the big fish.”
In the corporate debt restructuring scheme of RBI, there are 242 live cases with a total debt of Rs 2.5 lakh crore. About 21% of these have come from the iron and steel sector, with 52 companies having a debt of about Rs 50,000 crore, 19 infrastructure companies (Rs 42,823 crore), 12 companies in the engineering segment (Rs 25,484 crore) and 33 textile companies(Rs 15,800 crore), among others.
RBI deputy governor SS Mundra said at a conference last week that the borrowers do round-tripping by presenting the same collateral. For example, a diamond company presents the same stock of diamonds at its branches, say, in Mumbai, Dubai and Hong Kong and gets loans from banks.”
Medium-scale industries showed the highest stress, with 31.5% of their loans being stressed; 23.7% of loans to large industries were stressed at the end of the second quarter ended September 30, 2015, said Mundra.
In December 2015, the SC, in a landmark judgement, had told the RBI that the banking regulator cannot withhold information citing ‘fiduciary relations’ under the Right to Information (RTI) Act.
Naming a borrower a wilful defaulter might be an easy thing for a bank to do. However, the real challenge lies in proving that the default was done wilfully, and in a banking system largely driven by paperwork for appraisal and monitoring, there is little a banker can do to establish the ill intent of a borrower.
“For a bank to stamp a defaulter wilful, it has to be shown that loan was not repaid despite the promoters having money in their bank. And since money is usually transferred out of the accounts of the defaulting company, the onus is on the banker to prove that funds were siphoned off,” says an official of a Kolkata-headquartered bank which had stopped short of pronouncing Kingfishger as a wilful defaulter.
On Tuesday, Punjab National Bank (PNB) became the third public sector lender to declare the Kingfisher and its two guarantors – United Breweries and Mallya – as wilful defaulters. Earlier, United Bank of India and State Bank of India had done the same.
United Bank of India had briefly hogged the limelight in 2014 when it named Kingfisher promoter Vijay Mallya and its directors as wilful defaulters, and even published a list of people of such infamy, triggering a country-wide debate on ways to tackle bulging NPA levels in the banking system.
But the Calcutta High Court played spoilsport, nulling United Bank’s decision mainly on technical grounds like failure of the bank to follow the norms laid down by Reserve Bank of India to identify a borrower as wilful defaulter.
According to the master circular of the Reserve Bank of India, a bank is required to set up a two-tier mechanism to identify a wilful defaulter. First tier is the Identification Committee, who will identify a wilful defaulter on the basis of cogent evidence. Its finding is then required to be considered by the second tier, the Grievance Redressal Committee, after affording the defaulting borrower a reasonable opportunity of hearing by the committee.
United Bank was then forced to strike off names of Kingfisher, its directors, and also several other defaulters like Bipin Bohra of SPS Group. After the jolt, the bank has now turned its attention to United Breweries (Holdings), whose name has appeared on its revised defaulters’ list as a guarantor to Kingfisher.
The role of RBI has also been brought into question by the bank. Apart from commenting that “natural justice ought to have been read in the relevant clause of the master circular”, the court last July asked RBI to present itself in the case of UB Holdings vs United Bank of India since the master circular would require interpretation, and that the court was “likely to take a serious view of the matter” if RBI fails.
Following this, RBI filed an affidavit-in-opposition and has now begun expressing its views on the case.
The Calcutta High Court would conclude hearing RBI on Wednesday, which would play a crucial role in banking sector’s effort to nail Mallya, who has so far enjoyed upper hand in the legal process.
If United Bank’s effort falters this time too, it is quite likely that PNB’s declaration will meet the same fate.
Even though the consortium of banks has announced the auction of Kingfisher House in Mumbai’s Andheri suburb for a minimum price of Rs 150 crore, they may not be able to recover much from the sale of other assets pledged by the airline’s promoter Vijay Mallya while taking loans from banks.
A list of assets pledged by Mallya, and seen by dna, shows that most have eroded significantly in value. The Mumbai and Goa properties are the only two immovable properties mortgaged by Mallya and represent the most significant part of the mortgages whose sale can help banks recover money.
While Kingfisher House in Mumbai is in the name of Kingfisher Airlines, the Kingfisher Villa in Candolim, Goa, is registered in the name of Mallya’s company United Breweries (Holdings) Ltd. Banks led by SBI have struggled to take possession of Mallya’s Goa property.
Among other things, Mallya pledged banks for availing the loans include all trademarks under the Kingfisher Airlines brand, fixed assets of the airline, two helicopters, around 17 million shares of his various companies including Mangalore Chemicals & Fertilisers, United Spirits and McDowell Holdings, 11 leased aircraft in addition to some 115 million shares of Kingfisher Airlines.
The banks have realised that they couldn’t recover much from the assets pledged by Mallya. From the 23 million shares of Kingfisher Airlines sold by banks, they earned a measly Rs 7.5 crore till 2014. The trading in Kingfisher Airlines shares was now suspended after penal action was initiated against the company. At the time when Mallya personally pledged those shares, their market value was shown as Rs 745 crore.
Most of the planes leased by Kingfisher Airlines have been taken back by plane leasing companies. Meanwhile sources have told dna that the two helicopters, VT-SVM and VT-LVM, were not in flying condition when banks took their possession. The status of these choppers, one a two-seater and the other a 12-seater manufactured in France by Eurocopter, is unclear. Banks are also struggling to recover money from the sale of Kingfisher trademarks pledged to them. dna had reported in February 2015 that the trademarks pledged to avail Rs 7,000 crore in loans were junk and valued less than Rs 6 crore. Banks have struggled to even find buyers for the Kingfisher brands to recover part of their bad loans.dna that the two helicopters, VT-SVM and VT-LVM, were not in flying condition when banks took their possession. The status of these choppers, one a two-seater and the other a 12-seater manufactured in France by Eurocopter, is unclear. Banks are also struggling to recover money from the sale of Kingfisher trademarks pledged to them. dna had reported in February 2015 that the trademarks pledged to avail Rs 7,000 crore in loans were junk and valued less than Rs 6 crore. Banks have struggled to even find buyers for the Kingfisher brands to recover part of their bad loans.
It took two years for banks to take possession of Kingfisher House after raising a demand notice for it in 2013. Surprisingly, banks did not auction the property for over a year after taking its physical possession. Now with the Supreme Court asking the RBI for a list of India’s top corporate defaulters, Mallya’s name might just figure right on top.