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Business News/ Opinion / Columns/  Inside the world of brokers and art of ‘phone banking’
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Inside the world of brokers and art of ‘phone banking’

Brokers used to play a critical role in getting public sector banks to sanction loans

Roller Coaster: An Affair With Banking By Tamal Bandyopadhyay, Jaico Publishing House, 340 pages, ₹499.Premium
Roller Coaster: An Affair With Banking By Tamal Bandyopadhyay, Jaico Publishing House, 340 pages, 499.

Brokers used to play a critical role in getting public sector banks to sanction loans. Private sector banks had been more sophisticated and clinical in their approach to the appraisal and sanction of loans. Not always in the good sense of the term.

For instance, Yes Bank, the “lender of last resort" in its heyday, perfected the art of giving loans to those who could never get a bank loan.

Its CEO Rana Kapoor was a great believer in “phone banking". He was in direct contact with the borrowers on the one hand and his top executives from the business verticals on the other to get things done. It was a “direct dealing" methodology.

The first round of discussions would typically happen at his residence. Then proposals would be presented to the credit committees brilliantly, dissecting all aspects of the borrowers—positive and negative. But the loans would actually be sanctioned by tweaking the weightage on different aspects.

The bank was aware that such loans would turn bad, but Kapoor was confident that they could park it all with another bank or a [non-banking financial company or NBFC] and buy them back later. It was a “sharp" practice within the banking norms, which permitted the sale of loans. If Kapoor was selling something, it was understood within the industry that he would buy it back. But there was nothing in writing.

He was arbitraging between the banks and NBFCs, using the letter of the law on bad loan norms of two sets of financial intermediaries. For banks, a loan turns bad after the borrower fails to pay interest on it or the principal for 90 days. For NBFCs, in those days, this limit was 180 days. Now, the RBI has started treating banks and NBFCs almost on equal terms regarding regulations.

Yes Bank had two safety valves for such rotten loans. One of them was an exorbitant processing fee for sanctioning such loans. The fee income was the first tool of recovery. The second was a very high interest rate. In its prime, Yes Bank was enjoying much higher returns than any other bank, earning interest on the amount lent as well as extracting huge processing fees. As a result, the actual cash inflow could be as high as 80 per cent of the principal. This is why the bank could take risks and write it off if and when a loan turned bad after a few years.

Let’s get back to the brokers’ story.

Indeed, bribes could swing small loans for firms, but is it easy to “manage" big loans as too many committees are involved in sanctioning such loans? After all, one can’t bribe all senior executives who are members of such committees.

But “speed money" could sometimes change hands for faster appraisal of loan applications and sanctions.

Also, decisions could be influenced when they took such exposures through other debt instruments in the form of investments. An equally significant concern for an investigating agency was the settlement of bad loans in the pre-insolvency law days. Often such loans were settled at hefty discounts. Of course, the beneficiaries (read: Corporate borrowers) wouldn’t mind bribing bankers to get it done. But even the smartest brokers cannot have a field day forever.

In August 2014, when the Central Bureau of Investigation (CBI) arrested a broker in Delhi for his alleged involvement in paying Syndicate Bank CMD Sudhir Kumar Jain 50 lakh for approving a loan to a steel company, another broker in downtown Mumbai celebrated the arrest.

According to some of his friends, he claimed to have played a part in the arrest by tipping off the investigating agency.

In November 2010, when the CBI arrested the Mumbai broker for his alleged involvement in a similar scam, the Delhi broker uncorked a bottle of champagne. They had worked together for two years, in 2008 and 2009, before falling out over profit-sharing. The profits were enormous. Presentations and annual reports of the Mumbai broker’s firm show that he was instrumental in syndicating 50,000 crore across sectors between 2008 and 2011. He had a virtual monopoly over a government-owned insurer and many public sector banks. He also tried to use the media to plant stories against his former colleague-turned-foe.

I am not naming either for obvious reasons. I was in touch with one of them and many of their employees, friends and “admirers", former directors of the boards of group companies, regulators, bank officials, and peers to get a ringside view of their world....

Incidentally, these brokers did not target the banking community alone. Insurers, mutual fund managers, and even heads of private equity funds got trapped in their net. For example, one fund manager of an asset management company owned by a large insurance outfit used to frequently travel overseas at the expense of the Mumbai-based broker who believed he could buy anybody with his three Ws—wine, women, and wealth—not necessarily in this order, though. The fund manager also received two high-end cars—a Ford Endeavour and a Porsche—registered in the name of the broker’s NBFC, and he used to stay in a flat provided by the broker.

Excerpted with permission from Roller Coaster: An Affair with Banking Tamal Bandyopadhyay, published by Jaico Publishing House.

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Published: 08 Jan 2023, 10:33 PM IST
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