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Explained | Will the money recovered from Vijay Mallya, Nirav Modi and Mehul Choksi help banks?

Why is the recovery process long? What are some systemic issues?

June 27, 2021 02:30 am | Updated December 02, 2021 10:57 pm IST

A man reads a newspaper outside a branch of Punjab National Bank (PNB) in Ahmedabad, India, March 20, 2018. REUTERS/Amit Dave

A man reads a newspaper outside a branch of Punjab National Bank (PNB) in Ahmedabad, India, March 20, 2018. REUTERS/Amit Dave

The story so far: The Enforcement Directorate (ED) on June 23 came out with a statement saying that it has seized assets worth ₹18,170.02 crore belonging to three fugitive businessmen. The seized assets belong to liquor baron Vijay Mallya and diamond traders Nirav Modi and Mehul Choksi — all three left India before law enforcement agencies could nab them for fraud. The ED estimated that the seized assets would help public sector banks recuperate about 80% of their losses from the loans given to companies connected to these three individuals. It also noted that assets worth 40% of the total loss amount had already been handed over to the concerned banks. This includes cash worth approximately ₹6,600 crore obtained through the sale of shares. Finance Minister Nirmala Sitharaman later said that fugitive and economic offenders would be actively pursued by the government and that their properties would be attached for the dues to be recovered.

Why did the ED seize and sell the assets of the businessmen?

The three fugitive businessmen have been on the run for a few years now for allegedly cheating banks. The ED stated that these businessmen caused a total loss of ₹22,585.83 crore to banks by “siphoning off the funds through their companies”. Mr. Modi and Mr. Choksi have been pursued for committing fraud using unauthorised letters of undertaking (LoUs) that caused a loss of about ₹11,500 crore to the Punjab National Bank . It has been alleged that Mr. Modi colluded with Punjab National Bank employees in Mumbai to create unauthorised LoUs in his favour. On the other hand, Mr. Mallya has been accused of cheating banks of ₹9,000 crore by siphoning business loans towards other purposes. Banks also alleged that Mr. Mallya had offered personal guarantees for the loans taken by his business.

Indian authorities have been trying to extradite these businessmen to India to prosecute them under the Prevention of Money Laundering Act (PMLA) and other laws. In 2019, the ED managed to convince the courts to declare Mr. Mallya and Mr. Modi as fugitive economic offenders under the Fugitive Economic Offenders Act, 2018 , allowing it to seize assets owned by them. Of the ₹18,170.02 crore seized by the ED under the PMLA, assets worth ₹9,041.5 crore have already been handed over to banks according to the agency.

Will the recovered money help banks?

The actual cash worth ₹6,600 crore transferred by the ED will obviously help public sector banks, which have been troubled by bad loans, to recoup some of their losses. However, the recovered amount is unlikely to have any major impact on the overall health of banks. This is simply because bank losses attributed to these fugitives are tiny compared to the overall amount of bad loans in the books of banks. It is estimated that the total bad loans of Indian banks stood at more than ₹8 lakh crore at the end of September 2020. Some believe it could easily cross ₹10 lakh crore by the end of the financial year 2021 due to the impact of the two waves of the COVID-19 pandemic on repayments.


Further, doubts remain over the actual value of the remaining assets that have been seized by the ED. The money that has been transferred to banks came from the sale of Mr. Mallya’s shares in United Breweries Holding Limited (UBHL). Other assets seized by the ED belonging to these fugitives may not be as liquid as the UBHL shares. For example, when banks tried several times in the past to sell assets such as various properties owned by Mr. Mallya, the sales did not attract significant buyer interest. So, it is likely that banks may face hurdles trying to sell illiquid assets owned by the trio and may not actually be able to recover the amounts cited by the ED in its statement on Wednesday.

Why is the recovery process long?

It is also worth noting the delays that have plagued the entire recovery process and the costs associated with such delays. Banks were unable to sell the UBHL shares belonging to Mr. Mallya as its sale was contested in courts by various parties. In fact, it was only after a PMLA court order last month restored the UBHL shares from the control of the ED to the banks that the current sale has transpired. The ED had earlier moved the PMLA court after the Bengaluru Debt Recovery Tribunal, too, had ruled in favour of transferring the shares to the banks.

The true scale of the losses to banks may also be higher when the cost of interest foregone by banks since the defaults is taken into consideration. Even when a borrower defaults, banks need to continue paying interest to lenders. There is also the opportunity cost of the interest that the banks could have earned if they had lent the money to a more eligible borrower.


What are some systemic issues?

The seizure and the liquidation of assets may help in paying back a significant share of the liabilities that these fugitives owe to banks. However, efforts to extradite them are likely to continue as they are accused by banks of not just default but also various other frauds, including siphoning off loans that were sanctioned for business purposes. It is unclear when the trio will actually reach India, given the legal procedures involved in their extradition process.

More importantly, many still believe that these asset seizures do not go far enough to address the root problem of banking scams in India, which is systemic. For one, loans given by public sector banks to powerful industrialists were often influenced by crony, non-business considerations. When the Indian economy was booming, most of the loans that were disbursed by public sector banks were concentrated towards a small group of industrialists. There was also very little oversight of the purposes for which these loans were put to use. At one point, these loans to corporates constituted almost three-fourths of the total bad loans in the banking system. This issue was brought to light by former Governor of the Reserve Bank of India, Raghuram Rajan, during his tenure.


Addressing the problem of crony lending will require deep structural changes in the banking sector. Currently, India’s banking industry is dominated by public sector banks, which are heavily prone to political influence of various kinds, according to experts. This affects the health of banks, which are forced to lend as per special interests while ignoring any business sense. Such structural reforms, however, are hard to come by, given that they will upset special interest groups.

Furthermore, fugitives such as Mr. Mallya, Mr. Modi and Mr. Choksi are considered by many to be ‘small fish’ compared to other large industrialists who have not faced the brunt of the law.

Is the new debt resolution regime robust?

Despite laws such as the Insolvency and Bankruptcy Code (IBC), 2016, recovery of dues from defaulters remains a prolonged process for banks as courts are burdened with cases.

Under the new regime, the amount lenders have managed to recover from defaulters has improved significantly when compared to the pre-IBC regime. This is true even as a few large corporate resolutions may have skewed the numbers in favour of the IBC regime. The time it takes for recoveries from corporate defaulters has also improved from about 4 years to about 400 days. However, cases have been piling up and the existing Benches of the National Company Law Tribunal have been unable to dispose of cases within deadlines. This may extend the resolution process of troubled companies into several years, which was the case before the IBC regime. Further, when the resolution of a company is deemed infeasible and the company is liquidated, the recovery made by lenders is abysmal due to the absence of a robust market for the sale of stressed assets.

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