How corruption takes place in banks in India

The Directorate of Execution last week arrested Deepak Kochchar, husband of the former CEO of ICICI Bank Chanda Kochchar, in connection with a money laundering case.

The Kochchars were said to have received bribes, instead of Chanda facilitating Videocon to guarantee loans from ICICI bank, which then turned into NPA (non-performing assets).

In January 2019, ICICI Bank terminated Chanda’s employment and recovered the bonuses and stock options she had received from April 2009 to March 2018.

In January earlier this year, the ED seized assets worth Rs 78 crore as proceeds of white collar crime.

There have been many cases of broker-banker, banker-promoter nexus, which have led to arrests of bank officials in the past, namely, Zoom Developers, Nirav Modi scam, Money Matters, Bhushan Steel, Videocon- Kochchars, Rana Kapoor, Winsome Diamonds, which are popping up prominently. In all of these cases, the most senior bank officials were suspected of being involved in the fraud.

According to data from the Reserve Bank, up to 5,200 public sector bank officials were sanctioned for fraud between January 1, 2015 and March 31, 2017 (1 every 4 hours).

Small loans of up to Rs 5 crore which are sanctioned by relatively lower level officers are susceptible to such a practice. Over the years, however, bribes, even for large loans, have increased.

PSU banks were previously thought to be suffering from this malaise, but the Kochhar affair and similar cases show that private banks are not spared either.

Foreign banks operating in India have reported fewer cases. The main reason is that the risk managers of foreign banks, or delegation officers as they are called, do not have the authority to approve high rate loans. Often these files are sent to Asian and / or Global Headquarters for approval.

Promoters and brokers, even if they succeed in establishing the local committees of foreign banks, find it very difficult to influence the members of the three committees.

In both public and private sector banks, promoters / brokers should set up a single committee or boards of directors or senior officials (CEO / CRO / GM, etc.) to have their loans processed.

What is the modus operandi of the promoters / brokers who bribe the bankers so that the loans are voted in commission? They make friends with the bankers. Diwali is the “official season of corruption” in India. You must visit a bank branch or head office during the festival. Officers that matter are splashed with freebies, ranging from premium pens and wallets to consumer durables and gold coins.

Many banks have a defined gift policy whereby gifts above a certain limit must be reported and submitted to the compliance committee, which then uses them for charitable purposes. In foreign banks in India, the limits are usually set at $ 75 per customer.

During one of my tenures in an overseas bank, one of the Indian clients gave us gold coins because they are considered “auspicious”. Compliance refused to grant permission and we had to return the gift. Obviously, some colleagues were not happy.

One of the main groups in the country, which until recently had some of its companies in the Insolvency and Bankruptcy Code (IBC), has a very innovative method of influencing bankers. He distributes gift cards to bankers of various denominations during Diwali, across the banking landscape, even to banks that have not provided him with any banking facilities.

Presumably, gift card denominations would be higher for banks that have facilities rather than those that have not made any loans.

The problem with public and private sector banks is that the Chief Risk Officer reports to the Chief Executive Officer who is responsible for the business. Often times, CROs are reluctant to ask relevant questions or question the business aspect because, at the end of the day, its assessment is done by the CEO.

Besides Diwali gifts, overseas vacations, event passes, football / cricket matches, high-profile Bollywood party invitations, etc. are also organized. Bribes in the form of loans / investments in related party companies (as has been alleged in high profile cases) have also gained ground to escape scrutiny by enforcement agencies. The larger the loan amount, the larger the bribes.

The role of politicians cannot be ignored either, even more so in the appointment of CEOs / CEOs of public sector banks. The appointees are then attracted / influenced to lend money to close confidants of their political bosses.

Private lobbies strive to install specific people as chairmen of large public sector banks, and the job offers opportunities for many bribes in exchange for private loan favors.

Bribes are not only paid for granting loans, but also for other things, such as classification of NPAs, breaches of covenants, filling collateral, renewing loans, additional loans, waiver of fees / penalties, extensions, loan restructuring, etc.

You could see so many debt arranger profiles on LinkedIn. Who are these people? What special qualities do they have? How can they consolidate the finances of a business that does not meet a borrower’s credit parameters and give them loans for a fee? Why do companies go to such brokers when they can go directly to banks? These intermediaries often end up being intermediaries in the exchange of gifts / money.

The children of most of the promoters attend foreign universities and are globetrotting citizens. They often meet with senior officials of foreign banks at industry conclaves. These sophisticated English speaking children are senior officials, pushing for agreements, who then pass the leads on to the respective local offices in India.

When I was in foreign banks in India, we received many requests of this type. But because we knew the credit history and financial capacity of the business, we rarely made any progress on these proposals. However, a lot of time was wasted analyzing them as it came from above.

Many PSU banks have established branches abroad. When an Indian bank opens a branch abroad, who would normally do business with it? Mainly Indian companies and individuals. Since these branches have business goals, many companies that would not pass the credit / KYC test in India are given loans because the thresholds are lower.

I have heard that promoters of very small businesses who would never even have a date with a senior PSU bank official welcome them for lunches and parties outside of India. These small businesses are big customers of their foreign branches.

Ultimately it all comes down to an individual’s value system and integrity of character, which in many cases appears to be quite weak these days.

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