Bank loan conundrum

In a development that could rattle banking sector yet again, Ravindra Marathe, the Managing Director and Chief Executive Officer of Bank of Maharashtra, was arrested on Wednesday by the Economic Offence Wing (EOW) of the Pune police in connection with Rs 3,000 crore loan default case involving DSK Group which is into real estate space.

This incident came close on the heels of the Board of Directors of ICICI Bank asking Chanda Kochhar, the bank’s MD & CEO and a star woman banker, to go on leave till the completion of an independent investigation into allegations of conflict of interest and favouritism in sanctioning loans to Videocon.

While the Bank of Maharashtra chief’s arrest is yet another example of how bad the bad loan crisis is in public sector banks, Kochhar’s episode goes on to prove that private banks despite having robust checks and balances compared to public sector units are not immune to fraudulent loan transactions.

In the Bank of Maharashtra case, senior management is facing charges of colluding with DSK Group’s DS Kulkarni and sanctioning loans to his shell companies. In February this year, Kulkarni and his wife were taken into custody on the charges of duping 4,000 investors to the tune of Rs 1,154 crore and diverting bank loans totaling Rs 2,892 crore. Some of the loans were given to shell companies. This is a classic case of how rampant corruption is in the public sector banks.

Meanwhile, Kochhar, who joined as a management trainee in ICICI Bank way back in 1984 and rose to the coveted position of MD and CEO through hard work, is in a deep trouble now as questions were raised over a Rs 3,250-crore loan ICICI Bank had given to the Videocon Group in 2012.

Videocon obtained Rs 40,000-crore loan from 20 banks and ICICI Bank’s loan was part of that. It was alleged that after the loan was sanctioned, Videocon Group CEO Venugopal Dhoot provided funds to NuPower Renewables founded by Kochhar’s husband. Videocon is going through bankruptcy proceedings now.

Thanks to dud loans like these, total non-performing assets (NPAs) in the country’s banking sector have reached a humungous Rs 10 lakh crore now. Public sector banks alone account for more than Rs 8.9 lakh crore while the remaining are with private sector.

With one mega corporate loan turning NPA after another at a faster pace, banks are likely to turn their ire on small defaulters. Already, there are enough complaints that banks have turned aggressive on defaulters of personal loans and other small barrowers. Such aggressive recovery tactics will not only show the banks in poor light but also force the banking regulator RBI to step and protect borrowers as it did in the past. Such steps will have adverse impact on the banks’ efforts to recover loans from large borrowers.

Against this backdrop, the central government has its task cut out. It will be interesting to see how the government will pull the key banking sector out of the growing bad loan morass!