The arrest, on October 31, 2021, of the former Chairman, State Bank of India (SBI), Pratip Chaudhuri — in a case that was related to a hotel project in Jaisalmer, Rajasthan that was financed by the bank — became the centre of attention, but reactions were mixed. There are some who consider the arrest of any banker as well-deserved without bothering to ask the reason. Such callous reactions are often spawned by ‘Wiki-pandits’. One such person wrote: “… was arrested... for selling property as (sic) throwaway price to one company and he joined same company after retirement.”
The background
The group which ran the luxury hotel, GarhRajwada, in Jaisalmer, availed a loan of ₹24 crore and cash credit of ₹1 crore from the SBI in 2007. With repayments not forthcoming and the global financial crisis raging, the bank restructured the account in 2009. It became a non-performing asset in June 2010. The bank recalled the loan. On non-payment, it approached the Debt Recovery Tribunal (DRT) in 2013 for ₹39.69 crore. It also proceeded under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. To secure its financial interest, the bank assigned the loan to the Alchemist Asset Reconstruction Company (AARC) for ₹25 crore.
AARC pursued the matter in the DRT and under the SARFAESI Act. It also approached the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC). It had to move the National Company Law Appellate Tribunal (NCLAT) and the Supreme Court of India before the NCLT admitted the matter in March 2017. The dilatory tactics of the promoters, including not handing over company vehicles to the Interim Resolution Professional (IRP), delayed the process. These invited strictures from the NCLAT and the Court. The promoters also filed a first information report against the IRP resulting in his arrest. The Court quashed these proceedings.
In December 2017, despite the attempts by the promoters to delay things on frivolous grounds, the NCLT permitted the sale of the hotel to JFC Finance. The lenders were paid in full while the promoters received just ₹1 per share, or ₹17.4 lakh. The case was the first such sale after the IBC barred promoters from bidding for their own assets.
Recovery yield
The bank recovered ₹25 crore out of dues of ₹40 crore. Recovering over 60% is excellent when globally, such sales yield only around 30% or less. In India, recoveries average only 23.2% across various channels. It is highest through the IBC at 45.5% of the amount involved. Recoveries through the SARFAESI route come to 26.7%. Lok Adalats and DRTs come next with 6.2% and 4.1%, respectively.
As the sale of the underlying security was done by the ARC, the consideration received by the bank when assigning its dues and its appropriateness as compared to the security value is irrelevant. This sale is unrelated to the value of the underlying security. Thus, a transparent process was followed for the sale of the receivables by the bank to the arc, and by the arc to the final buyer.
So there was no case for malfeasance against any banker including Mr. Chaudhuri. He laid down office as Chairman of the SBI in September 2013, about six months before the bank sold the asset to ARC in March 2014. He joined the board of ARC six months later in October 2014. In any case, such individual cases do not come to the chairman of a bank of the SBI’s standing
The logic behind accepting smaller amounts in settlement is based on a banker’s judgment that recovering ₹25 crore today is better than recovering an uncertain amount in the distant future, given the time value of money and delays in our judicial processes. The second reason is that banks are in the business of banking, and recovery is not their forte. Investing people and money in messy recovery processes — through specialised branches or otherwise — distracts a bank from its core business.
Mr. Chaudhuri’s arrest took place in a related case where the same borrower alleged fraud in an apparent act of retribution. The case was initially dismissed for want of criminality. The matter was later revived and a non-bailable warrant issued. The arrest of Mr. Chaudhuri and not that of the other directors indicate that he was either not briefed or defended properly; or he was the victim of overconfidence.
A destabilisation
The episode betrays a lack of understanding of the recovery process and its underlying principles. These could have been clarified during discussions. That there were none indicates an attempt to put the system under duress through blackmail to get the desired result.
The balance of power between the lender and borrower has moved like a pendulum. At periodic intervals, the Government and the Reserve Bank of India (RBI) have moved to strengthen the hands of the lender vis-à-vis the borrower, and vice-versa. But, an unstable equilibrium was often restored with the system, bankers and other gatekeepers included, conspiring to put the system back in favour of the borrower.
In 1962, after the Palai Central Bank failed, an amended RBI Act provided for a de facto credit information bureau, which would have been among the first in the world. What would have strengthened information sharing among bankers soon became dysfunctional. A decade later, in 1971, a study group recommended setting up a Credit Information Trust. The entire system was discontinued in 1995.
The Credit Authorisation Scheme, inventory norms, and other regulations were started from the late 1960s onwards with similar pious intentions. But, an industry of professionals sprung up to train and advise borrowers on how to cook up figures to get the level of credit they wanted. The Debt Recovery Tribunal was introduced in 1993 following the Narasimham Committee recommendations of 1991. About a decade later, the SARFAESI Act was passed. These were intended to speed up recovery and strengthen the hands of bankers. But, the system, over the years, became compromised in different ways. This included the non-appointment of judges, failed auctions, delayed payments, and so on. The IBP is the most effective system to date to secure the interests of the lender. Mr. Chaudhuri’s arrest is an early symptom of attempts to hijack the system. An alert Government and regulator should move fast to close the gaps. Those who wield high-level fiduciary responsibilities should also be circumspect deciding who they associate with later. Very often they are not after the persons or their worth, but their last designation.
G. Sreekumar is a former central banker
