PSU banks responsible for ABG scam

ABG Shipyard was an internationally prominent shipbuilder. It had built 165 ships in the last 16 years of which 46 were exported. The company was ranked high by international rating agencies like Lloyd's, Bureau Veritas, American Bureau of Shipping and others. It was known for its good quality products. This shows that the company was fundamentally strong.

However, the 2008 global financial crisis led to a change in the fortunes of the company. The demand for ships declined and it gradually slipped into losses. The loan taken by the company were classified as non-performing assets (NPAs) by various banks in 2013. The statutory audit report of 2016 mentioned that the company was incurring heavy losses and was facing a number of court cases by its vendors but it also said that the company had been transparent about its dealings and had made the required disclosures in its balance sheet. It gave no indication whatsoever of a scam.

It was only in 2018 that a meeting of the lending banks decided to order a forensic audit to uncover any possible wrongdoing. Global consultancy firm Ernst and Young (EY) was appointed as the forensic auditor. EY gave its report in January 2019 and disclosed that that a certain scam had taken place. Directors of the company had diverted some of the loans through their overseas subsidiaries to their personal accounts. However, the amount of such diversions is not yet known in the public domain.

I suspect this may be a case of witch-hunting to hide the failures of the lending banks in undertaking due diligence before giving loans. Interestingly, the lead bank ICICI remained inactive even after the EY report came in. The State Bank of India filed the first complaint in November 2019, 10 months after the EY report. It filed the second complaint in August 2020 – 8 months after the first complaint; and a CBI inquiry was ordered in August 2021 – full one year after the second complaint. This shows that not only the lead bank ICICI, which was primarily responsibility for managing this loan, was inactive but even SBI was laggard and it took it more than 2.5 years to act upon the EY report. It is also notable that the internal and external auditors of ICICI and other banks could not uncover any wrongdoing from 2013 till 2019 even though the company was slipping into losses.

The main lenders to ABG were all public sector banks (PSBs) led by ICICI Bank, followed by State Bank of India, IDBI Bank, Bank of Baroda, Indian Overseas Bank and others. The ICICI Bank was infamous in 2018. Its CEO Chanda Kochhar was accused of money laundering. Her husband Deepak Kochhar had personal relationships with Videocon to which Chanda Kochhar as the CEO of ICICI Bank had extended loans. The possible complicity of Chanda Kochhar in the loans given to Videocon led to her being shunted out of the bank. This earlier scam tallies with the unwillingness of ICICI Bank to take timely action against ABG Shipyards.

ABG Shipyard was fundamentally a strong company as indicated by its good performance of building ships and by the high rating given by various international agencies. It is normal for businesses to go up and down. There is a saying that no two full moons are the same for businesses. Therefore, ABG going into losses is not exceptional. What is exceptional is that the ICICI Bank and the other PSBs participating in the loans remained quiet and did not act proactively after the loans became NPAs in 2013.

This type of collusion with borrowers is endemic to the PSBs because the personal interests of the officials do not converge with those of banks. A CEO of a PSB may take a bribe of Rs 20 crore and give a loan of Rs 2,000 crore to a suspected company because the CEO would gain Rs 20 crores even though the bank may lose Rs 2,000 crores. A CEO of a PSB drawing a salary of, say, Rs 2 crore per year, would stand to gain 10 years' salary by accepting a bribe of Rs 20 crore. The situation is fundamentally different in the private banks. Here the personal interest of the owner and the interests of the private bank are mostly aligned with each other. The profits of the private bank are more or less the same as the profits of the owner. Thus, the owner of a private bank would not take a bribe of Rs 20 crore to give a suspected loan of Rs 2,000 crore because the owner himself will lose Rs 1,980 crore in the process. The CEOs of PSBs continue to give suspected loans because of this lack of alignment between the personal objectives of the CEO and the objectives of the PSB. No wonder we have had a number of scams involving PSBs in the last few years. I say with certainty that such scams will continue to take place in the times to come.

Indeed, in some cases, private owners have bled their companies. However, the losses incurred by the private companies do not overflow into the government revenues. It is borne by the shareholders who made a bad investment. This does not happen with PSBs because the owner is the Government of India and is affected by the losses incurred by the PSBs.

It is time for the government to take a bold action and privatise all PSBs except, perhaps, the State Bank of India which provides services such as clearing houses to the banks across the country. Only then will we get rid of the corruption that is prevalent in the PSBs. It is time that the government dealt with the root cause of the continuous scams hitting the PSBs rather than making scapegoats of a few CEOs of PSBs just as Chanda Kochhar was shunted out only to have ICICI Bank extend bad loans to ABG Shipyards.

(The author is former Professor of Economics at IIM, Bengaluru)

(The opinions expressed in this column are those of the writer. The facts and opinions expressed here do not reflect the views of The Hans India)