Are the banking rules relaxed for the rich and mighty?
This article which appeared in 'THE HINDU', July 7,2012, explains clearly how banks have been selectively favouring their star clients while we commoners are made to follow all rules in the book, submit stock statements and balance sheets in time and provide adequate security (including collateral) for availing loans.
Can a defaulter owing a public sector bank Rs. 40 crore persuade that
bank to sanction him Rs. 150 crore in further loans before paying back a
rupee? Can he get that bank to lower his debt to less than half of what
he owed them? Can he have the terms of sanction amended repeatedly so
that the personal guarantee demanded of him disappears? And can he get
the bank to change the very purpose for which the loan was given?
Yes, if the defaulter is part of the United Breweries (UB) group headed
by Vijay Mallya and the institution is Bank of Maharashtra (BoM). And it
shouldn’t take more than two months. You can even get the first pay-out
of your loan — before you have shown compliance with even its greatly
weakened terms and conditions.
“There are fears within the bank that this Rs. 150 crore from BoM to a
UB group company may really be about raising money for the group’s
struggling airline, Kingfisher,” a whistleblower within the bank told The Hindu.
“The changes in terms, conditions and purpose of the loan are worrying.
And BoM might well sanction further amounts. This fund-raising drive is
surely on in other banks, too. Which would explain the limited amounts
from each of them.” Kingfisher has a debt of over Rs.7,000 crore and has
not paid employees’ salaries for months. It has defaulted on tax
payments and vendors complain of unpaid bills. BoM’s Rs. 150 crore (so
far) will not dent a debt that size. But it could help raise desperately
needed short-term working capital of Rs. 700-800 crore. A UB Group
spokesperson, however, asserted that there was no “practice of
inter-company funds diversion.”
On March 29 this year, BoM sanctioned a new loan of Rs. 100 crore to
United Spirits, a UB group company. Aware that another UB Group concern,
UB Engineering, still owed the bank money, BoM’s Credit Approval
Committee (CAC) was initially cautious. The new loan could happen only
“after repayment of full recompense amount of Rs. 40.60 crore to the
satisfaction of the bank along with up to date interest in respect of
dues of M/s UB Engineering Ltd ...”
By April 21, barely three weeks later, a new sanction letter had dropped
mention of the Rs. 40.60 crore. Now, it was up to the bank's Recovery
Department to “inform the amount of dues to be recovered from M/S UB
Engineering” in line with the bank's recovery policy. By May 22, the
amount sought to be recovered from UBE was down to Rs. 19.9 crore.
On March 29, the CAC had mandated that the loan to United Spirits be
“utilized solely for future purchase (emphasis added) of casks (approx
1.28 lakhs) for maturation of spirits.” Also, “the bank would make
payment directly to suppliers and vendors.” And no reimbursement would
be allowed “in respect of assets already purchased.” This firmness, the
BoM whistleblower told The Hindu, “arose from fears of the UB
group diverting the money to Kingfisher.” Yet, by May 11, the firmness
vanished. “Amount already spent on procurement of casks shall be allowed
as margin towards promoter’s contribution,” said an amendment to the
sanction. Nor would the bank deal directly with suppliers and vendors.
“Necessary details such as original bills, present value of casks etc.
in respect of casks already procured (emphasis added) should be obtained
and held on record.” That, scoffs a banker, “means bills for stuff
purchased ages ago might be used to show compliance with the loan terms
and conditions. Perhaps no actual rule is broken. But the bank changing
its own condition to ‘already procured,’ raises worries.”
The Hindu sent an email to BoM Chairman & Managing Director
Narendra Singh, raising some of these issues. To which the Bank’s Chief
Law Officer responded: “We cannot divulge any information relating to
the affairs of any of our constituents.” This was “in view of the Bank’s
legal obligation to maintain confidentiality and secrecy of its
constituents accounts.” As required under “Section 13 of the Banking
Companies (Acquisition & Transfer of Undertakings) Act 1970.” Given
that one of the queries was simply whether all RBI directives had been
followed in making the loans, the secrecy argument appears redundant.
By June 21, the amended purpose of the loan read: “For CAPEX (capital
expenditure) requirement of the company for ongoing expansion (total
project cost Rs. 1078 crores).” The strict original purpose had been
drowned in a broader project. The loans have so far seen one sanction
letter cancelled and a second one amended four times.
On March 29, the bank called for a ‘Personal Guarantee’ from Mr. Mallya
as part of the deal. It also sought a ‘Corporate Guarantee’ from Four
Seasons Wines Ltd (a UB Group company) and from United Breweries
Holdings itself. It required the “latest net worth details of Mr Mallya
be obtained before disbursement and it should be satisfactory.” By April
21, the ‘personal guarantee’ condition had vanished. Nor was one
required from UB Holdings Ltd any longer. A guarantee from just Four
Seasons Wines would be enough.
The Bank of Maharashtra grew more generous by the week. The March 29
sanction had required Credit Reports (CRs) from all other banks dealing
with the borrower company/group. (The 18-bank consortium of lenders to
Kingfisher Airlines includes 14 public sector banks). This was to
certify “satisfactory dealings with respective banks prior to
disbursement” of the loan. By April 21, the CR was to certify
“satisfactory dealings” of group companies “other than Kingfisher
Airlines” with the banks, prior to loan disbursement. The new letter
sanctioned a further Rs. 50 crore loan beyond the original one of Rs.
100 crore.
On May 11, the bank further amended the sanction terms. Now the borrower
was only required to obtain the credit report “within 90 days from 1st
disbursement.” Likewise, the borrower was given 90 days after first
disbursement to produce No-Objection Certificates (NOCs) from all other
banks dealing with the Group “in respect of existing working capital and
Term Loan lenders.”
In other words, alleged a BoM whistleblower: “We give them money before
they fulfil any loan conditions. And the Rs. 50 crore looks like a
hand-out to pay off the money earlier owed. This may not end at Rs. 150
crore. There might be further loans soon.”
The April 21 sanction letter stressed that the Rs. 150 crore “should not
be utilised for extending loans to subsidiary companies / associates or
for making inter-corporate deposits.” It sought a ‘suitable
undertaking’ from the company to this effect. “They were still worrying
about diversions to Kingfisher,” says a bank official. They soon stopped
worrying. By May 11, this condition was: “Waived.”
In April, the borrower was forbidden from effecting “any change in their
capital structure” without “prior approval of the bank in writing.”
They were not to undertake mergers, new projects or expansion without
the bank’s consent. By May 11, the company was merely required to “keep
the bank informed in writing” of any such changes. The Bank’s consent
was no longer needed.
Replying to a questionnaire from The Hindu, a UB Group
spokesperson said that “BoM sanctioned a loan of Rs 150 crores on terms
and conditions comparable to loans taken by United Spirits Ltd from
other nationalised banks after due negotiations.” The reply confirms
that the drive involves other banks, too, (see box). Such as the Punjab
National Bank. The spokesperson claimed the “sacrifice amount” made by
the Bank of Maharashtra was no more than Rs. 17.43 crores and part of a
legitimate one-time settlement.
Most importantly, the UB Group Spokesperson asserted that: “USL does not
follow any practice of inter-company funds diversion. In particular,
USL has not lent any funds whatsoever to Kingfisher Airlines.” Why,
then, has Bank of Maharashtra exempted Kingfisher airlines while seeking
proof of “satisfactory dealings” of group companies? The Bank’s Law
Officer pleads “confidentiality and secrecy.”
“This isn’t about just one but many public sector banks, involving
hundreds of crores — more public money than we know about,” says the
Bank of Maharashtra whistleblower. “On the one hand, media reports speak
of lenders turning the screws on Kingfisher. On the other, UB Group
companies seem to be able to get money, perhaps even from the same
lenders, on terms defaulters can’t get. The total amount could be
startlingly large - as also the risks involved for the banks.”
“The Bank of Maharashtra has lakhs of farmers, working people and
retired employees amongst its depositors,” the whistleblower added. “We
are called the common man’s bank. The farmers — routinely blamed for our
NPAs — today struggle to get tiny amounts as loans. But big
corporations like UB get hundreds of crores in weeks in a manner most
risky to the bank. And these kinds of deals won’t figure in our
discussions of NPAs.”
