The banking fraud case against the Gujarat-based ABG Shipyard Ltd, for causing a “wrongful loss of ₹22,842 crore to the consortium of banks”, is a classic case of all-round failure. The fraud was detected long ago by the banking system. The banking regulator and central agencies were in the know for long and yet the Enforcement Directorate (ED) and Central Bureau of Investigation (CBI) got into meaningful action only in February 2022 to register FIRs for money laundering and fraud, and interrogate prime suspect Rishi Agarwal.

Consider some plain facts known so far.

A complaint by the State Bank of India (one of the 28 banks and lending agencies at the receiving end of the fraud) to the CBI reveals that the fraud (diversion of funds, misappropriation and criminal breach of trust with an objective to gain unlawfully at the cost of the bank’s funds) came to light on January 18, 2019, after Ernst & Young submitted a forensic audit report. The audit was for a period between 2012 and 2017 (the period of alleged crimes). The bank’s committee declared it a fraud in June 2019.

Curiously, the complaint by State Bank of India (SBI) also states that the ABG Shipyard’s account “became NPA (non-performing asset) on July 30, 2016 w.e.f. November 30, 2013 (original date of NPA), due to failed restructure”. This means ABG Shipyard was defaulting loans from 2013 and had become NPA but restructuring/evergreening of loans continued till 2016. The fraud was confirmed in 2019. The first complaint to the CBI was made on August 25, 2020 — as per the CBI’s FIR registered on February 7, 2022.

ED was probing the ABG group’s ABG Cement in connection with the banking frauds that led to the collapse of non-banking IL&FS in 2018. Both ABG Shipyard and its sister concern ABG Cement face liquidation. The ED had attached ABG Cement’s properties in January 2021.

Note the dates carefully to detect the soft-paddling of the fraud case against Rishi Agarwal.

Rajan’s 2015 warning

First, former RBI governor Raghuram Rajan’s letter to the Prime Minister's Office (PMO) specifically red-flagged several willful bank defaults/NPAs on February 4, 2015? The date and the letter were confirmed by the RBI in response to an RTI query in October 2018.

Rajan had given “a list of high-profile cases to the PMO urging that we coordinate action to bring at least one or two to book. I am not aware of progress on this front. This is a matter that should be addressed with urgency”.

Then in 2018, a parliamentary committee headed by BJP leader Murli Manohar Joshi had again flagged the NPA issue, and called Rajan for deposition. The Joshi committee criticised the government for inaction. By then, Rajan’s tenure had ended — months ahead of the infamous demonetisation of 2016.

RBI’s reply to the RTI query says the cases flagged by Rajan were under investigation by many government and external agencies, although it didn’t give details. Another RTI query seeking information about the correspondence between the RBI, the Ministry of Finance and the PMO, the minutes of meetings to discuss the issue, and the action taken, etc. was stonewalled by all invoking confidentiality.

Defaulters flee

Since then, several high-profile businessmen have defaulted and fled the country after diverting bank loans (Vijay Mallya, Nirav Modi, Mehul Chokshi and others) to their overseas accounts. Some have not fled but declared themselves or their businesses bankrupt (Anil Ambani, Rana Kapoor, Wadhawan brothers, and now Rishi Agarwal).

The RBI annual reports show bank frauds spiked significantly in 2018.

From about 4,500 cases a year for the previous 10 years, the annual average jumped to 7,195 during FY18-FY21. The amount involved, which was gradually going up, jumped significantly to ₹4.1 lakh crore in FY18. Total bank frauds during FY18-FY21 amounted to ₹8.1 lakh crore.

What is worse, the NPA write-offs too have significantly spiked. A total of ₹10.7 lakh crore has been written off by scheduled commercial banks (SCBs) as NPA between FY15 and FY21.

More than 76% of write-offs involve public sector banks (PSBs). The PSBs not only lose money and profits they would have earned had the governance been better and invested wisely, they are then remonetised with more public money — a double whammy for people.

The sincerity in controlling NPAs from generating and controlling once generated is also in doubt because Rajan’s attempt to clean up the banking system was actually blamed for further surge in NPAs. Before explaining how, here is what Rajan did to clean up banks.

Rajan initiated the end of forbearance regime in 2013 (restructuring or evergreening of loans) with his warning against dressing up bad loans with the famous remark: One can put lipstick on a pig, but it doesn’t become a princess. Then he ordered an Asset Quality Review (AQR) in 2015 to discover hidden NPAs (banks are reluctant to declare accounts as NPA as they would have to make provisions against it, reducing their money flow and profits).

The Economic Survey didn’t take it kindly.

Blame on Rajan!

The Economic Survey of 2020-21 held Rajan responsible for worsening the NPA crisis. It said Rajan’s AQR “led to a second round of lending distortions” leading to further NPAs. It said: “Concerned that the actual situation might be worse than reflected on the banks’ books, RBI initiated an Asset Quality Review to clean up bank balance sheets. While gross NPAs increased from 4.3% in 2014-15 to 7.5% in 2015-16 and peaked at 11.2% in 2017-18, the AQR could not bring out all the hidden bad assets in the bank books and led to an under-estimation of the capital requirements. This led to a second round of lending distortions, thereby exacerbating an already grave situation.”

RBI, the banking regulator, needs to rethink its strategy on willfull defaulters. RBI guards the identity of big loan defaulters even when they are classified by it as “wilful defaulters” – defaulters who have the capacity to repay loans, but they divert loan for other purposes, siphon off loans or disposes off assets given for securing loans.

A decade after RTI activists sought such information and four years after the Supreme Court directed it (once even threatened contempt proceedings), the RBI released a list of top 30 wilful defaulters in November 2019. The list figured three firms of Mehul Choksi and one by Vijay Mallya.

Wilful defaulters are fraudsters, known to deliberately not repay and siphon off bank loans. Common sense says such defaulters should be pro-actively disclosed and tough measures should be taken against them, not mollycoddled in the name of protecting their business interests.

Had the defaulters’ list been disclosed earlier, or acted upon, it would have been easier to prevent Vijay Mallya, Mehul Choksi, Nirav Modi and others from fleeing India and recovering loans. Choksi fled the country in January 2018 after siphoning off bank money (his relative Nirav Modi too fled the same year; both accused in the Punjab National Bank fraud case). Mallya fled in 2016 after defaulting.

During 2015-2020, the Centre disclosed in a reply to the parliament that 38 economic offenders had fled.

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