Ex-SBI Chairman Arrested - Demoralising

Arrest of EX-SBI Chairman - Unfortunate and Demoralising

Shri Pratip Chaudhuri, ex-chairman of State Bank of India (SBI) was arrested in Delhi by Rajasthan Police on 31st October 2021 for an alleged sale of a non-performing asset (NPA)—Hotel Gaudavan—to Alchemist ARC at a low value. Every banker including Shri Dinesh Khara, Chairman, SBI has termed the arrest as ‘extremely unfortunate’. SBI issued a statement of clarification, as the said project was financed by it and subsequent sale to an ARC, after the account turned into NPA, was carried out by the bank.  It could not have come at a worse time for the central government, which released a press statement on that day assuring bankers that their bonafide business decisions will be protected.

Though the way the news published in the media appear to suggest that a director position was offered in the ARC as a quid pro quo for the sale of NPA by SBI to the ARC, during his period as Chairman of SBI, the clarification statement issued by SBI put things in the proper perspective.

Salient Features of the clarification: ‘Garh Rajwada’, a hotel project financed by the bank in 2007, was incomplete and turned into NPA in June 2010. As the steps taken by the bank for completion of the project/recovery of dues did not yield desired results, approvals for sale to the said ARC was taken in Jan 2014 and the assignment was completed in March 2014. Both the approval for sale and completion of assignment were done through a laid down process as per the policy of the bank. As per the understanding of the bank, the borrower was subjected to the IBC process by the ARC and the  asset was acquired by an NBFC through due process under the orders of NCLT, Delhi. Shri Chaudhuri retired from the bank in Sep 2013.

The following things are clear:

1. The project was incomplete and the bank’s efforts to get the project completed did not yield the desired results. From the newspaper reports, the NPA was sold for Rs.25 cr. in 2014 and the fair value was assessed at Rs.160 cr. in 2017. Why the fair value that would have been made available in 2014, prior to sale of the asset to ARC, is not quoted by the borrower is a fair question to ask, as that will reveal whether the asset was sold cheap. (It is also not clear as to how the value of Rs.160 cr. was arrived at as I read somewhere - a statement by the referred ARC - that the fair value was assessed at Rs.40 cr. when it was presented in NCLT.)  It is also possible that the incomplete project acquired by the ARC was completed in between original acquisition and further sale,  resulting in a higher value now or there was a sharp rise in the property value due to other macro-economic factors. 

2. Shri Chaudhari retired four months prior to approval for sale to ARC was given by the bank. So, apparently there was no quid pro quo arrangement with the ARC, as he was not in service in SBI when the approval was done.

3. Approval for sale to ARC and subsequent assignment of debt were done through a well laid down internal process. (SBI follows committee approach in loan sanctions, NPA sale and all other important financial matters.). Considering the debt outstanding, it is likely that the approval for sale to ARC would have been done at a much lower committee level and the Chairman would never even been informed of this sale.

I sincerely believe that Shri Pratip Chaudhari, known as a man of integrity and as a strong follower of the laid down instructions and process while he was serving the bank, will be able to disprove the allegations and emerge strongly. 

Need for improving staff accountability framework by DFS: Whatever positive strokes intended by Ministry of Finance (DFS), through its order dated 29th October 2021, to motivate bank employees for promoting credit delivery came to a halt with the arrest of Shri Chaudhari, as the news reported carried an ‘impression’ that the highest position in the commercial bank space in India had been abused. The press release of DFS also indicates that appraisal, sanction, disbursal areas were adequately covered for staff accountability exercise. However staff accountability exercise does not appear to be clearly taken care of, when an asset is sold or resolved through DRT/NCLT process. There is a lot of hue and cry witnessed now, when resolutions take place through NCLT, as hair-cuts are huge. Code of conduct is suggested for CoC (Committee of Creditors), as if they are to be blamed for the low realisation. People compare the realised value with the admitted claims forgetting the value of assets created with the loan, the net present value of assets especially commercial plants, fair and distress value, proportion of interest dues in the total outstanding, the time lost between the date the account turned into NPA and referral date to NCLT (failed restructurings without capital asset addition further erode the realisation value). While well-defined board policies carried out objectively is sure to protect an officer taking bonafide decisions internally, he is still exposed to risks and uncertainties by operation of external forces, as witnessed in Shri Chaudhari’s case. Motivation to lend will come to anyone, if he is assured that he will be protected for all his bonafide actions not only in stages up to loan disbursal but also to events, beyond that, initiated for recovery.  DFS should also simultaneously engage with CBI, CVC to plug the holes arising out of actions initiated to sell assets for recovery of money. 

Regards

V.Viswanathan

7th November 2021