Can a defaulter owing a public sector bank Rs. 40 crore persuade that bank to sanction him Rs. 150 crore in further loans before paying back a rupee? Can he get that bank to lower his debt to less than half of what he owed them? Can he have the terms of sanction amended repeatedly so that the personal guarantee demanded of him disappears? And can he get the bank to change the very purpose for which the loan was given?

Yes, if the defaulter is part of the United Breweries (UB) group headed by Vijay Mallya and the institution is Bank of Maharashtra (BoM). And it shouldn’t take more than two months. You can even get the first pay-out of your loan — before you have shown compliance with even its greatly weakened terms and conditions.

“There are fears within the bank that this Rs. 150 crore from BoM to a UB group company may really be about raising money for the group’s struggling airline, Kingfisher,” a whistleblower within the bank told The Hindu. “The changes in terms, conditions and purpose of the loan are worrying. And BoM might well sanction further amounts. This fund-raising drive is surely on in other banks, too. Which would explain the limited amounts from each of them.” Kingfisher has a debt of over Rs.7,000 crore and has not paid employees’ salaries for months. It has defaulted on tax payments and vendors complain of unpaid bills. BoM’s Rs. 150 crore (so far) will not dent a debt that size. But it could help raise desperately needed short-term working capital of Rs. 700-800 crore. A UB Group spokesperson, however, asserted that there was no “practice of inter-company funds diversion.”

On March 29 this year, BoM sanctioned a new loan of Rs. 100 crore to United Spirits, a UB group company. Aware that another UB Group concern, UB Engineering, still owed the bank money, BoM’s Credit Approval Committee (CAC) was initially cautious. The new loan could happen only “after repayment of full recompense amount of Rs. 40.60 crore to the satisfaction of the bank along with up to date interest in respect of dues of M/s UB Engineering Ltd ...”

By April 21, barely three weeks later, a new sanction letter had dropped mention of the Rs. 40.60 crore. Now, it was up to the bank's Recovery Department to “inform the amount of dues to be recovered from M/S UB Engineering” in line with the bank's recovery policy. By May 22, the amount sought to be recovered from UBE was down to Rs. 19.9 crore.

On March 29, the CAC had mandated that the loan to United Spirits be “utilized solely for future purchase (emphasis added) of casks (approx 1.28 lakhs) for maturation of spirits.” Also, “the bank would make payment directly to suppliers and vendors.” And no reimbursement would be allowed “in respect of assets already purchased.” This firmness, the BoM whistleblower told The Hindu, “arose from fears of the UB group diverting the money to Kingfisher.” Yet, by May 11, the firmness vanished. “Amount already spent on procurement of casks shall be allowed as margin towards promoter’s contribution,” said an amendment to the sanction. Nor would the bank deal directly with suppliers and vendors. “Necessary details such as original bills, present value of casks etc. in respect of casks already procured (emphasis added) should be obtained and held on record.” That, scoffs a banker, “means bills for stuff purchased ages ago might be used to show compliance with the loan terms and conditions. Perhaps no actual rule is broken. But the bank changing its own condition to ‘already procured,’ raises worries.”

The Hindu sent an email to BoM Chairman & Managing Director Narendra Singh, raising some of these issues. To which the Bank’s Chief Law Officer responded: “We cannot divulge any information relating to the affairs of any of our constituents.” This was “in view of the Bank’s legal obligation to maintain confidentiality and secrecy of its constituents accounts.” As required under “Section 13 of the Banking Companies (Acquisition & Transfer of Undertakings) Act 1970.” Given that one of the queries was simply whether all RBI directives had been followed in making the loans, the secrecy argument appears redundant.

By June 21, the amended purpose of the loan read: “For CAPEX (capital expenditure) requirement of the company for ongoing expansion (total project cost Rs. 1078 crores).” The strict original purpose had been drowned in a broader project. The loans have so far seen one sanction letter cancelled and a second one amended four times.

On March 29, the bank called for a ‘Personal Guarantee’ from Mr. Mallya as part of the deal. It also sought a ‘Corporate Guarantee’ from Four Seasons Wines Ltd (a UB Group company) and from United Breweries Holdings itself. It required the “latest net worth details of Mr Mallya be obtained before disbursement and it should be satisfactory.” By April 21, the ‘personal guarantee’ condition had vanished. Nor was one required from UB Holdings Ltd any longer. A guarantee from just Four Seasons Wines would be enough.

The Bank of Maharashtra grew more generous by the week. The March 29 sanction had required Credit Reports (CRs) from all other banks dealing with the borrower company/group. (The 18-bank consortium of lenders to Kingfisher Airlines includes 14 public sector banks). This was to certify “satisfactory dealings with respective banks prior to disbursement” of the loan. By April 21, the CR was to certify “satisfactory dealings” of group companies “other than Kingfisher Airlines” with the banks, prior to loan disbursement. The new letter sanctioned a further Rs. 50 crore loan beyond the original one of Rs. 100 crore.

On May 11, the bank further amended the sanction terms. Now the borrower was only required to obtain the credit report “within 90 days from 1st disbursement.” Likewise, the borrower was given 90 days after first disbursement to produce No-Objection Certificates (NOCs) from all other banks dealing with the Group “in respect of existing working capital and Term Loan lenders.”

In other words, alleged a BoM whistleblower: “We give them money before they fulfil any loan conditions. And the Rs. 50 crore looks like a hand-out to pay off the money earlier owed. This may not end at Rs. 150 crore. There might be further loans soon.”

The April 21 sanction letter stressed that the Rs. 150 crore “should not be utilised for extending loans to subsidiary companies / associates or for making inter-corporate deposits.” It sought a ‘suitable undertaking’ from the company to this effect. “They were still worrying about diversions to Kingfisher,” says a bank official. They soon stopped worrying. By May 11, this condition was: “Waived.”

In April, the borrower was forbidden from effecting “any change in their capital structure” without “prior approval of the bank in writing.” They were not to undertake mergers, new projects or expansion without the bank’s consent. By May 11, the company was merely required to “keep the bank informed in writing” of any such changes. The Bank’s consent was no longer needed.

Replying to a questionnaire from The Hindu, a UB Group spokesperson said that “BoM sanctioned a loan of Rs 150 crores on terms and conditions comparable to loans taken by United Spirits Ltd from other nationalised banks after due negotiations.” The reply confirms that the drive involves other banks, too, (see box). Such as the Punjab National Bank. The spokesperson claimed the “sacrifice amount” made by the Bank of Maharashtra was no more than Rs. 17.43 crores and part of a legitimate one-time settlement.

Most importantly, the UB Group Spokesperson asserted that: “USL does not follow any practice of inter-company funds diversion. In particular, USL has not lent any funds whatsoever to Kingfisher Airlines.” Why, then, has Bank of Maharashtra exempted Kingfisher airlines while seeking proof of “satisfactory dealings” of group companies? The Bank’s Law Officer pleads “confidentiality and secrecy.”

“This isn’t about just one but many public sector banks, involving hundreds of crores — more public money than we know about,” says the Bank of Maharashtra whistleblower. “On the one hand, media reports speak of lenders turning the screws on Kingfisher. On the other, UB Group companies seem to be able to get money, perhaps even from the same lenders, on terms defaulters can’t get. The total amount could be startlingly large - as also the risks involved for the banks.”

“The Bank of Maharashtra has lakhs of farmers, working people and retired employees amongst its depositors,” the whistleblower added. “We are called the common man’s bank. The farmers — routinely blamed for our NPAs — today struggle to get tiny amounts as loans. But big corporations like UB get hundreds of crores in weeks in a manner most risky to the bank. And these kinds of deals won’t figure in our discussions of NPAs.”

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