The story of a former SBI Chairman’s arrest and release: the case of a resolution and retribution.
Sometime in early 2004. I was the last in-charge of the Reserve Bank of India’s Chennai Office of the (then) Department of Banking Operations and Development, now called the Department of Regulation. The following July the Regional Offices merged with the Bank’s Department of Banking Supervision (now Department of Supervision). Late in the afternoon, a short and quiet person walked in unaccompanied. He had recently taken over as the Chief General Manager of the Chennai Circle of State Bank of India. Seven years later he became the Chairman of the bank. He needn’t have troubled himself to meet me. At least the Reserve Bank I knew and admired never stood by such empty formalities. Nevertheless, the simplicity and humility of the man impressed me. Therefore, the news of his arrest shocked everyone who knew him.
SBI Chairman’s Arrest
The arrest on 31 October 2021 of Pratip Chaudhuri, former Chairman, State Bank of India, grabbed public attention but reactions were mixed. Some cynics consider any banker’s, including an SBI Chairman’s arrest, as well-deserved without further inquiry. Such callous responses are spawned by Wiki-pandits. One such wrote that Chaudhuri “… was arrested … for selling property as (sic) throwaway price to one company and he joined same company after retirement.” (Wikipedia as on 13 November 2021)
Hotel Gaudavan Pvt. Ltd., which ran the luxury hotel, GarhRajwada, in Jaisalmer, availed a loan of Rs 24 crore and cash credit of Rs 1 crore from State Bank of India in 2008. With repayments not coming 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 Rs. 39.69 crore. It also proceeded under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) Act, 2002. To secure its financial interest, the bank assigned the loan to the Alchemist Asset Reconstruction Company (AARC) for Rs. 25 crore.
AARC pursued the matter in the DRT and under SARFAESI. 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 before the NCLT admitted the matter in March 2017. The promoters’ dilatory tactics, including not handing over company vehicles to the Interim Resolution Professional (IRP), delayed the process. These invited strictures from the NCLAT and Supreme Court. The promoters also filed an FIR against the IRP resulting in his arrest. The court quashed these proceedings.
In December 2017, despite promoters’ attempts to delay on frivolous grounds, the NCLT permitted sale of the hotel to JFC Finance. The lenders were paid in full while the promoters received just Re 1 per share or Rs 17.4 lakh. The case was the first such sale after the IBC barred promoters from bidding for their own assets.
Was there malfeasance?
The bank recovered Rs. 25 crore out of dues of Rs. 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 at 45.5% through IBC. Recoveries through the SARFAESI route is 26.7%. Lok Adalats and DRTs come next with 6.2% and 4.1% of amount involved.
As the sale was done by the ARC, the consideration received by the bank and its appropriateness as compared to the security value is irrelevant. 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. This sale is unrelated to the value of underlying security.
Thus, there was no case for malfeasance against any banker including Chaudhuri. He laid down office as Chairman of State Bank in September 2013 about six months before the bank sold the asset to the ARC in March 2014. He joined the Board of AARC six months later in October 2014. In any case, such individual cases, especially those of Rs 25 to Rs 40 crore do not come to the Chairman of a bank of State Bank’s size. The systems and processes in the bank are so robuts that a Chairman neither attempts to influence nor is capable of influencing such decisions. I have never comes across such an instance in my experience of having inspected nearly a hundred branches of the bank. And that includes branches of all types: agricultural to industrial finance and corporate to overseas branches.
Why accept less
The logic behind accepting smaller amounts in settlement is based on a banker’s judgement that recovering Rs. 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.
The SBI Chairman’s arrest took place in a related case where the same borrower alleged fraud in the sale. The court initially dismissed the case for want of criminality. The borrower later revived the case and the court issued a non-bailable warrant. Chaudhuri’sarrest, and not that of the other directors of AARC, indicate that the ARC did not brief or defend him properly. Or else, he was the victim of overconfidence.
The episode betrays a lack of understanding of the recovery process and its underlying principles. These could have been clarified during discussions. That there wasn’t any 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 moves like a pendulum. At periodical intervals, the government and the Reserve Bank move to strengthen the hands of the lender vis-à-vis the borrower, and vice versa. But, the system, bankers and other gatekeeprs included, often conspired to bring back an unstable equilibrium favouring a conniving borrower.
In 1962, when the Palai Central Bank failed, an amended RBI Act provided for a de facto credit information bureau. This would have been among the first in the world. Instead of strengthening information sharing among bankers, it soon became dysfunctional. A decade later, in 1971, a study group recommended setting up a Credit Information Trust. The Reserve Bank scrapped the system in 1995.
Similar pious intentions accompanied introduction of the Credit Authorisation Scheme, inventory norms, and such regulations from the late 1960s. But, an industry of professionals sprung up to train and advise borrowers how to cook their figures to get their desired level of credit. 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 measures aimed to speed up recovery and strengthen the bankers’ hands. But, over the years, the system got compromised in different ways. This included 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. Chaudhuri’s arrest is one of the early symptoms (there have been others) of attempts to hijack the system. An alert government and regulator should move fast to close the gaps.
Those wielding high level fiduciary responsibilities should be circumspect who they associate with in their afterlife. Often, they are not for the persons, their worth or contribution, but their last designation.
This is an earlier and longer draft, since revised, of “The story of an arrest, a ‘resolution’ and retribution,” published in The Hindu dated 20 November 2021 (see here)
© G. Sreekumar 2021.
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