Mumbai: The Central Bureau of Investigation (CBI) on Saturday registered a preliminary enquiry against IDBI Bank Ltd and Kingfisher Airlines Ltd, with an intention to look into IDBI Bank’s decision to sanction 950 crore to Kingfisher Airlines at a time when Kingfisher had a negative net worth and negative credit rating.

“It was the first exposure to the bank. There was no need for the bank to take the exposure outside the consortium when already other banks loans were getting stressed," said a CBI official.

A senior IDBI executive, requesting anonymity, said that CBI had asked for certain specific information and the bank had provided the same. “However, we do not know about any investigation as of now," the executive added.

The enquiry into IDBI Bank’s dealings comes barely 10 days after the CBI arrested S.K. Jain, chairman and managing director of Syndicate bank, for allegedly taking a bribe of 50 lakh for increasing the credit limit of some companies in violation of banking rules. Several others, including Ved Prakash Agarwal, chairman and managing director of Prakash Industries Ltd, and Neeraj Singhal, vice-chairman of Bhushan Steel Ltd, have also been arrested in connection with the case.

Kingfisher Airlines owes 7,500 crore to a consortium of banks led by State Bank of India. In February 2013, bankers publicly stated they lost faith in the management’s ability to revive the company. Banks that had then initiated recovery measures, have been able to recover 550 crore by selling the equity they held in the troubled airline, PTI had reported in August 2013, quoting Shyama Acharya, then deputy managing director of the bank. Kolkata-based United Bank of India, which tried to tag promoter Vijay Mallya a “wilful defaulter", has been dragged to court by Mallya. A case is on in the Kolkata high court.

The CBI’s decision to move swiftly on two cases related to allegedly questionable sanction of loans by public sector banks could be purely co-incidental, but it could also point to a desire to tackle governance issues in public sector banks.

On 7 June, DNA newspaper reported that the CBI has expanded its probe concerning non performing assets of public sector banks, with 27 cases already registered against nine companies figuring the the list of top 30 wilful defaulters. Earlier this year, the All India Bank Employees’ Association released a list of 406 defaulter accounts amounting to 70,300 crore, the DNA report said.

“This kind of pressure started six months or so ago and seems to have gathered momentum under the new government," said a senior consultant to the banking sector, who declined to be named because of the sensitivity of the matter. He added that the Reserve Bank of India, too, seems to be of the view that any element connivance between banks and industry in the credit appraisal process must be dealt with as a way to cleanse the system.

RBI governor Raghuram Rajan has consistently said that wilful defaulters must be dealt with strictly. In a conversation with business publications on 6 August, Rajan had said that governance standards in public sector banks must be brought on par with the best.

Rajan added that RBI, along with other regulators such as the Securities and Exchange Board of India (Sebi), would toughen norms for wilful defaulters to the banking system. Among the measures being considered is a rule that would block wilful defaulters from accessing the capital markets. Currently, wilful defaulters cannot access bank funding after being labelled as such by a bank, but they can still raise funds from the capital markets.

RBI is also looking at creating a separate category for borrowers who are considered to be “non-cooperative" and intends to make it tougher and more expensive for such borrowers to borrow from the banking system.

“We are looking at our own definition of non-cooperative defaulter and trying to see how we can make it operational. Non-cooperative defaulters may not be in violation of the laws but we have this genre of promoters who hold up collections at every court using every instrument. That’s perfectly legal but from the perspective of the financial system, it’s a problem because it can take years to collect. So we are saying that you are not a criminal but you are a financial risk. From that perspective, can we increase the cost of any new loans made to that person? Hopefully, that makes the person think twice. So there is a financial stability angle there," said Rajan.

According to a second consultant who works with the banking sector, RBI has been approaching the problem from the point of view of systemic lapses, while also discretely investigating cases where bank discipline may have faltered.

“There is no doubt that there are huge corporate governance challenges in the public sector banking system. But you have to be careful not to tackle these issues in a manner that creates paralysis in the banking system," said the consultant, requesting anonymity.

On Friday, speaking on the sidelines of a press conference, State Bank of India chairperson Arundhati Bhattacharya said that the Syndicate Bank incident may impact the morale of bankers.

“We accept all proposals, but very rigorous due diligence is done by our officials before sanctioning a loan. We are never dependent on these people (brokers) for our loans. The episode (bribe taking) is more an individual act than at the institution level," assured Bhattacharya.

Meanwhile, consortium of 51 lenders is moving to protect exposure to Bhushan Steel, whose top management officials have been arrested in connection with the scam. The consortium, which has an exposure of 40,000 crore to the company, intends to put a management agency in place to oversee day-to-day operations of the company, said Bhattacharya.

The government and RBI are also working on ways to strengthen the process of recovering bad loans. On 3 June, Mint reported that the NDA government is looking to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (Sarfaesi) and the Debt Recovery Act to make it easier for banks to recover money from defaulters. RBI is also looking at requests made by asset reconstruction companies (ARC) to give them powers to replace the management of a firm permanently. Currently an ARC is allowed to replace the management for a stipulated time period, after which the company must be returned to its original promoters.

“They (government and regulators) are trying to get to the root of the bad loan problem. There are clearly two elements to it—the weak economy and the process of loan approval. While there is not much you can do about the first, it seems like there is an effort to tackle the second part decisively," said the first consultant quoted above.

As of March 2014, gross NPA for the 40 listed banks was 2.42 trillion, up 34.41% from 1.8 trillion a year ago. Data for all 40 banks for the quarter ended June 2014 is not yet available.

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