Last month, eight senior executives from various financial institutions were arrested by the Central Bureau of Investigation (CBI) for allegedly accepting bribes for sanction of loans. The agency said loan syndicator, Money Matters, bribed lenders from Bank of India, Central Bank of India, Punjab National Bank and LIC Housing Finance to get big-ticket loans sanctioned. Soon after the arrests, officials from the respective banks were quick to comment that all credit delivery procedures were followed.
“There is no violation of prudential norms or lending to financially unviable projects,” says S Sridhar, CMD of Central Bank of
However, if such a development — bankers refuse to call it a scam — has happened despite banks having followed “prudential lending norms”, there could be a loophole in the system. Denying the existence of loopholes, most bankers laid the blame on intermediaries or loan syndicators, whom they felt should be banned because of their propensity to target the most vulnerable banker.
However, argue former state-owned officials, banning intermediaries was not the answer. “The real challenge is to make loan syndication more transparent and give recognition to loan originators,” says G Narayanan, a former executive director of Indian Overseas Bank, who is with the Centrum Group.
Echoing his view, former general manager of Bank of India, VH Ramakrishnan says: “Intermediaries are essential in a system where bankers from government-owned banks rarely take initiative to source business from corporates. And this is not due to lack of inertia. The fear of an inquiry by the chief vigilance commissioner is so strong among them that they do not approach or pitch for business from corporates.”
This is one of the key reasons that debt syndicates should be recognised rather than banned. They bring together lenders and borrowers. As of now, anyone can operate as a loan syndicator. They do not need to be registered with any regulator. It needs to be clarified here that even as Money Matters was registered as a Category I merchant banker with the Securities and Exchange Board of India or Sebi, the registration was primarily for carrying out merchant banking activities. Intermediaries in loan syndication are not regulated in India
Registration may also not be the answer to the problem of speed money, but will surely enable the banking regulator, RBI, to take action. It can either ban the institution from syndicating loans or direct banks not to deal with the said institution till it is proved guilty. As things stand, RBI can’t call for any information from Money Matters nor ask banks to stay away from Money Matters.
The Insurance Regulatory and Development Authority (Irda) has made it mandatory for all insurance intermediaries to obtain a registration from the regulator. Similarly, loan synidcators could be made to register with the banking regulator.
As things stand, banks informally accept syndicators who have the backing of big banks such as SBI Caps, promoted by the State Bank of
Secondly, all loan documents, irrespective of the loan size, should mention the manner in which the loan was sourced, viz, if the borrower approached the branch or the banker approached the borrower, another banker referred it to them, or name the debt syndicator which approached them. As of now, no record is maintained by banks on how many accounts were sourced from which debt syndicator. If at all records would be available on loans sourced through entities such as SBI Caps and IDBI.
Once a record is maintained for all borrowers, a banker would know at the press of a button how many loans were sourced in-house, how many were from outside and through which institution. This again will not end instances of bribe-for-loan. But surely, a banker will be able to differentiate who (debt syndicator) brought better proposals to the table. Even in developed nations, loan documents name debt syndicators and the fees charged.
Banks which are averse to debt syndicators will have to develop credit appraisal skills. As of now, not many banks possess in-house capabilities to evaluate infrastructure or even core sectors — cement and steel — projects. They rely on intermediaries or debt syndicates to prepare appraisal notes, known as information memoranda, which enumerate details of projects, promoters, cost and the industry perspective.
Last but not least, the government will have to relook at the way it appoints nominee directors on PSU bank boards. As of now, executive directors and CMDs are appointed only after they are interviewed by a high-level appointment committee which comprise members from the finance ministry and RBI and after the CVC clears their names. However, government nominees are appointed without going through this process. There should be a process of screening the nominees. This is significant in the context that the arrested director of Central Bank of
Speaking on the condition of anonymity, the head of a financial institution points out that even small intermediaries bring value to their customers. “Many of these firms have extremely good knowledge of the risk appetite of various financial institutions. When they receive a proposal from a corporate house, they are immediately able to figure out which lender will have the appetite for that particular client or that sector,” he says.
However, the most unfortunate aspect of the entire episode was that banks do not see this as an issue of concern. Instead they are shying away from talking about it in public fora. The CEO of HDFC Bank , Aditya Puri, told the media recently: “It’s a micro development, please don’t put a macro angle to it.” Only when such issues are debated, will they sensitise lenders and lead to policy changes.
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