The Rs. 4,760 crore GTL corporate loan case, on which the Central Bureau of Investigation (CBI) has already registered a case, raises important questions. The CBI’s first information report, which Moneycontrol reviewed and reported on in detail last week, clearly suggests serious laxity on the part of lenders in monitoring the end use of bank money and reluctance in taking appropriate remedial actions at the earliest even after issues were first flagged.
For those who aren’t familiar with the case, the alleged fraud involves GTL group, an infrastructure services company, drawing multiple loans from a clutch of 24 banks over a period before diverting the money through a clandestine way of operations that involved the creation of vendor firms.
Banks are sitting ducks. Among the banks, ICICI Bank has an exposure of Rs 650 crore to GTL Ltd, Bank of India Rs 467 crore and Canara Bank Rs 412 crore.
There are two key lessons for banks from the GTL episode.
One, essentially, the company gave substantial advances to the vendor companies, but didn’t make purchases for the corresponding value.
Later, the advances were routed back to the company, according to the FIR. From the CBI probe, it looks like bankers were blissfully unaware of any of these developments until it was too late. In simple words, the first lesson for lenders here is to monitor the corporate loan use closely before things go out of hand. That clearly didn't happen in the GTL case.
The second lesson for lenders is to act quickly at least when a problem is identified, which too they didn’t do in this case. Even when the Reserve Bank of India (RBI) identified the issue and flagged it to one of the banks in the consortium, no immediate action was taken. To be precise, the RBI, in a letter dated April 1, 2016, advised lDBI Bank, one of the lenders to GTL, to red-flag GTL and initiate a forensic audit, according to the CBI’s FIR.
Two months later, lDBl Bank responded on behalf of the consortium, saying the account should not be red-flagged and a forensic auditor should not be appointed because it may delay the settlement of dues, the FIR shows. Enquiries revealed that RBI, in a letter dated 15 July, 2016, again directed IDBl Bank to comply with the directions of its earlier letter.
Accordingly, chartered accountant NBS and Co. was appointed to conduct a forensic audit of GTL Ltd. The audit revealed major irregularities, including “much lesse” purchases from vendors against the higher advance amounts extended.
In this backdrop, the critical questions here are the following:
Why did banks act late even after identifying the serious irregularities? Why were the central bank’s warning signals ignored? More details will emerge only when the CBI probe progresses against directors of GTL, bankers and other parties involved in the fraud. But clearly, banks forgot the basic rules of prudential lending in the GTL case.
The Rs 4,760 crore GTL fraud isn’t the first where banks failed to assess and monitor the end use of big corporate loans. It is unlikely to be the last too—until banks wake up from their deep slumber and keep their eyes open when big corporate promoters knock on their doors.
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)
