Banking Central l Pratip Chaudhuri’s arrest and its potential ramifications

On 1 November, Jaisalmer Police arrested former State Bank of India (SBI) Chairman Pratip Chaudhuri in an alleged loan scam. I am told this is the first ever instance of a former SBI Chief getting arrested in a corruption case. Chadhuri, allegedly went to join the board of Alchemist asset reconstruction company (ARC) after retirement from SBI. This ARC had bought properties of Godawan Group. The group had drawn a loan from SBI for this purchase and later defaulted turning it to a bad loan. A loan becomes bad if there is no repayment in 90 days.

Is Chaudhuri guilty in this case? There are different views about this part. The cops who arrested the former SBI chief of course believe so. But a section of top bankers do not. They are, in fact, upset with Chaudhuri’s arrest.

Former SBI Chairman and Chaudhuri’s successor in SBI, Rajnish Kumar, even called this arrest is a motivated action. “This seems to be a case of motivated, high-handed action. There is a set of rules laid out by the RBI for the sale of assets to ARCs, which were followed. Where is the corruption here?,” Kumar asked.

Another top banker who is in competition, too, expressed surprise about the arrest. “If an asset is sold to an ARC, there would have been a set of rules followed. Such actions are scary. How will bankers do developmental works if this is the case?,” asked the banker who declined to be named.

Coming to the larger question, what is the message that Chaudhuri’s arrest send to the banking world?  Here, there is an important question on how the law identifies bankers guilty in what is generally seen as routine transactions.

Banks sell assets to ARCs on a regular basis when the loan is in default and chances of recovery through regular means is deemed nil. The question is whether SBI under Chaudhuri followed the due process of asset sale to ARC.

As for Chaudhuri joining the director board of the ARC is concerned, there is nothing unusual. All ARCs have bankers on their boards. Also, these are institutions with which they would have done business at some point.

This column doesn’t intend to say that Chaudhuri is innocent in this case nor does it mean to say the investigators are at fault. If there is flouting of rules and illegal gain from misuse of office, the concerned individual needs to be brought before the law.

But, the point is if bankers are chased post retirement for what is a regular transaction, then such actions can be counter-productive for the larger economy.

Over the years, there are several instances where national investigating agencies have registered cases and filed charge sheets against former top bosses of public sector banks (PSBs). There are cases against other senior or mid-level officers also in connection with various transactions.

These cases can be broadly tagged into mainly two categories:

The first; where bankers are implicated in cases involving clear cases of financial frauds; for example, the Punjab National Bank-Nirav Modi fake LoU case, the Kingfisher-Vijay Mallya case, or the 2010 corporate bribe-for-loan case.

We also have examples from the private sector such as ICICI Bank- Chanda Kochhar-Videocon quid-pro-quo scandal, Yes Bank-Rana Kapoor episode, the Punjab and Maharashtra Cooperative Bank case, and so on.

In all these cases, there was evidence that the bankers colluded with fraudsters for financial irregularities or flouted rules for personal gains. Investigations into such cases are logical as wrongdoing is established. But there are also examples of other cases involving large loan defaults and asset sales where top bankers have been named but there is no solid evidence of wrongdoings. This is the second kind.

Cases of the second kind have impacted the confidence of bankers and created a panic situation in the banking sector. This has slowed down lending decisions over years in the PSBs.

Many former bankers have expressed this fear 'off record': why should a banker go with a bet that could eventually haunt him for the rest of his life; better not go for it at all, they say.

Bankers fear that the loans they sanction today will return to haunt them in their retirement years. And they have a valid point. Only detailed investigations will tell us whether Chaudhuri is guilty or not.  Let this not be a case of unfair action against a former bank chief.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)