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The great bank robbery

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The arrests of Syndicate bank cmd and owner of Bhushan steel highlight the infiltration of middlemen in the public sector

By Vishwas Kumar


 

It was an unholy nexus that saw the exchequer losing crores of rupees. And considering that government banks were involved, it was worrisome. The recent arrests by CBI of Sudhir Kumar Jain, suspended CMD of Syndicate Bank, which has over `10,000 crore assets, and Neeraj Singal, owner of Bhushan Steel, a public limited steel manufacturing company worth `9,000 crore, show a shocking disregard for public probity and morality.

Both were held for exchanging a bribe of Rs. 50 lakh in lieu of a loan worth `100 crore. The scandal blew the lid off rampant corruption in government-controlled banks while awarding “high risk” loans (which have less chance of recovery) to wealthy businessmen under the influence of middlemen.

But why would Jain and Singal, both presiding over huge fortunes, jeopardize their future over an amount as little as `50 lakh? According to a CBI insider, it was a case of desperate times calling for desperate measures.

Struggling company

Singal’s company was struggling with huge debts, totalling `40,000 crore, taken over a period of time. These were mostly from public sector banks like State Bank of India (SBI) and Punjab National Bank (PNB). The company was not in a position to return these huge loans and the resultant interests. In thesecircumstances, the company urgently needed fresh funds to carry on day-to-day operations. But no responsible bank was likely to bail it out, unless some “middleman” convinced top bosses to extend credit limits and “overlook” the debts.

These “middlemen” operate under the garb of loan or financial consultants. As the CBI’s case reveals, Singal got in touch with Pawan Bansal, the MD of Altius Finserv Private Limited (AFPL), a Mumbai- and Delhi-based loan and financial consultant. AFPL opened negotiations with several “friendly” bankers and finally got a positive response from Syndi-cate Bank’s Jain. As per the bank’s rules, any decision to extend a big credit limit could only be taken by Jain.

Negotiations now started between Jain, Bansal and Singal, which lasted over six months. Finally, a deal was struck, where the bank would extend a `100-crore credit limit in lieu of `50 lakh bribe being paid in advance to Jain. They were, however, unaware that the CBI’s anti-corruption unit was listening and recording their telephone conversations and also keeping a watch over their movements. Finally, on August 2, much to their astonishment, CBI sleuths swooped down on them and arrested them.

Easy bait

But why did Jain agree to the offer of Singal and Bansal? To understand that, one must know how CMDs of public sector banks are appointed. In 2013, Delhi’s power circles were abuzz with rumors that the Ministry of Finance was in a hurry to fill vacancies for the post of CMD of these banks. It was alleged that if money was paid, the appointment of these top bankers could be facilitated.

neeraj-singhal

Sudhir-Kumar-Jain_CMD_Syndicate_Bank
(Up-down) Jain of Syndicate Bank and Singal of Bhushan Steel had no scruples about cheating the public of Rs.100 crore

The ministry has a major say in the appointment of top bankers, even though there is a so-called independent panel, the Public Enterprise Selection Board, to do so. Similarly, it was alleged that there was even a rate for the appointment of bank board members. These are people who will scrutinize the CMD’s performances.

According to the CBI, Jain’s appointment as CMD on July 8, 2013, “lacked transparency and smacks of unfair practices”. 

A confidential advisory sent by CBI director Ranjit Sinha to Finance Minister Arun Jaitley hints at collusion with finance ministry officials in his appointment. The CBI advisory, according to an Indian Express report, mentions the role of Rajiv Takru, secretary, financial services, who was chairman of the sub-committee that recommended Jain’s appointment at its meeting on February 11, 2013. Takru is now secretary, Ministry of Development of North East Region.

The “unfair practises” cited by CBI is a reference to Takru’s sub-committee giving SK Jain 29 marks out of 30 in his interview with the Banking Appointment Board. This high score helped to propel Jain to the post, even though he had scored only 62 out of 70 marks in the Annual Confidential Report, the report added. The sub-committee also picked up candidates for seven other top bank posts. The CBI is now awaiting the finance ministry’s nod to probe them too. Takru, however, has denied any favoritism.

The agency’s allegation lends credence to the rumors swirling around in 2013 that middlemen were active in the appointment of top bankers and board members in government banks. Those who were appointed by paying “bribe” obviously indulged in corrupt practises to get their money back. Doling out “‘risky” loans was the easiest way to do so.

Loan brokers

Besides this, providing loans is an important tool for any bank to earn profit. All bankers have annual targets for providing different types of loans, be it car, personal, housing, commercial, etc. They often lure customers by offering incentives such as easy payment schedules and varying interest rates. But there are customers who come with special requirements. These include businessmen who have to negotiate terms and conditions from the bankers. It is here that loan brokers with good connections with bankers play a role. They could, for example, help in reducing interest rates by a few percentages or allow loans without adequate collateral. With rampant bribing, everybody benefits, be it the banker, the businessmen or the broker. Of course, the bank loses out.

In most cases, such businessmen default on these loans and banks are unable to recover them as there is a long, winding legal process to recover them. In most cases, there is nothing left for the banks to recover, as the businessmen gradually strip their companies of all valuable assets. These are either transferred to another company or put in the name of family, friends or close associates.

Such “junk loans”, also called Non-Per-forming Assets (NPAs), led to Syndicate Bank’s net profits declining. Two months
before Jain was arrested, some of Syndicate Bank’s board members raised the issue of rising NPAs during the Annual General Meeting (AGM) held at Manipal, Karnataka. The minutes of the AGM reveal that the net profit for 2012-13 was `2,004 crore. This declined to `1,711 crore in 2013-14 due to the rise of NPAs. Net NPA percentage, as compared to net advance, stood at `1.56 percent in 2013-14 as compared to 0.77 percent in 2012-13, indicating that there was a steady growth in NPAs.

Steel yourself

Let’s look at Bhushan Steel now. The company, founded by Brij Bhushan Singal in Sahibabad, UP, in 1989, started as a value-added steel manufacturer. Singal’s younger son Neeraj, who now runs the company, aggressively expa-nded into steel manufacturing, with major plants located in Odisha. From the time when the Chinese construction boom started till 2011, when steel prices touched an all-time high, all steel companies, including Bhushan Steel, made handsome profits and expanded. In 2009, Bhushan Steel acquired controlling interest in Queensland-based coal and exploration company, Bowen Energy. It further tied up with Japan’s Sumitomo, a steel manufacturer, to start a plant in West Bengal in 2007.

It borrowed heavily from banks to fuel this rapid expansion and growth. Initially, the company met the repayment schedule. How-ever, profits started declining in proportion to the global decline in steel prices.

And then came the double whammy. A huge scandal broke out in the UPA-II government’s award of mines and coal blocks. The Supreme Court stepped in and multiple investigative agencies launched probes. These developments hugely impacted businesses.
Caught in a classic debt trap, Bhushan Steel was on verge of defaulting loans. If the loan was declared a NPA, it would prevent other banks from lending money to the company. Till now, the company had prevented its loans from being declared NPA by paying minimum amounts of interest. However, it urgently needed money to even meet the next round of interest. It was this urgency that forced Singal to seek the help of Bansal for a loan from Syndicate Bank.

This is a classic case of biting off more than one can chew.


Fluctuating fortunes of Bhushan Steel

 

HIGHS

Between 2006-2010, debt repayments: Rs. 55 crore-Rs. 316 crore a year
Cash from operations during the same year: Rs. 400 crore each year
Annual growth rate: 53%

LOWS

From 2010-11, debt repayment obligation more than trebled to Rs. 1,118 crore
Several loans taken, including for phases I&II of the Odisha plant, led to operating cash flows of Rs. 994 crorelIn 2013-14, interest burden shot up to Rs. 1,663 crore
In 2013-14, profits shrank 93% to Rs. 59 crore
Accumulated loans of Bhushan Steel: Rs.40,000 crore
No of banks it took loans from: 51

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