Podcast | Pick of the day - All about irregularities at ICICI Bank

Last Friday, June 23rd, ICICI, India’s largest private lender, announced that it had received complaints about 31 loan accounts from an anonymous person, on which an enquiry was instituted. Subsequently, an interim report was submitted to the regulator. The complaint states that in addition to inflating profits, top executives, including CEO Kochhar and executive director Vijay Chandok, wilfully breached rules to avoid classifying certain loans as bad.

The new complaint, which was made in March of this year, claimed irregularities in the conduct of some borrower accounts, resulting in incorrect asset classification. The complaint cited 31 loan accounts in respect of which this was alleged. One of the allegations is that ICICI Bank inflated profits by at least $1.3 billion over eight years by delaying provisioning for NPAs.

The news outlet Mint noted that the complaint by the whistleblower, an ICICI Bank employee, which was made on 20th and 22nd March to the Reserve Bank and SEBI, alleges that the bank deliberately failed to set aside funds to cover 31 defaulting loan accounts between fiscal 2008 and March 2016.

The complaint alleges the bank inflated profits primarily by underreporting the quantum of bad loans made to 31 companies, in which impairment was delayed, from a quarter to even up to five years. The third whistleblower also claimed ICICI has managed to delay provisioning for NPAs arising out of loans worth at least $3 billion. Provisioning for bad loans means that a bank must set aside a certain portion from its profits to compensate any likely loss caused on a loan. When a bank delays reporting the amount of its bad loans, its profit can appear inflated. Effectively, the bank would have reported losses in some quarters over the eight years, had the bank’s management not deferred impairment of loans, according to the whistleblower.

Some media reports noted that the whistleblower’s allegation of bias in the bank’s top management in some cases of loans is quite serious. In his letter, the third complainant further claimed the bank’s upper management often openly discussed methods to avoid impairment of loans. This included methods to be used or those that had already been used. The letter claimed several meetings were held by senior management to discuss ideas on saving certain loan assets in other countries by funding a group company in India. “The bank’s discussions in such cases indicate the involvement of Chanda Kochhar in negotiations with the client,” said the letter.

The new complaint puts the spotlight on three loans - a USD 923 million loan to Essar Global Ltd, a similar amount lent to Bhushan Steel Ltd, and a USD 615.38 million loan to Essar Steel Ltd. These  three lolans account for 84% of the $2.92 billion disbursed to 31 firms. ICICI dismissed the charges saying that its interim internal report found no “material impact” on the bank’s financials. But news outlets pointed out that ICICI’s response didn’t clarify the threshold amount that is defined as “material” by the bank.

Media reports indicated that lawyers and accountants at the SEC, the Securities And Exchange Commission in the United States, have been investigating the whistleblower’s allegations since they were revealed. ICICI Bank is listed on the NYSE and governed by the SEC. The complaint made on 20th March states ICICI had engaged in fraudulent activities between 2008 and 2016 to avoid the reporting of impairment of loans.

The bank claimed it had conducted an investigation and found no evidence of wrong doing. It said all 31 loan accounts had been classified non-performing much before the complaint was filed. Twenty nine were classified NPA between March 31, 2012 and March 31, 2017. Two others were classified NPA by Dec. 31, 2017.

On the charges of incorrect accounting of interest income and NPA recoveries as fees, no specific examples were cited in the complaint and the bank stated that an internal investigation found these allegations to be incorrect.

On allegations of overvaluation of security for corporate loans, ICICI replied, “In certain accounts, transactions were observed that may have delayed the classification of the account as non-performing under Indian GAAP (generally accepted accounting principles) in earlier years… As mentioned earlier, all the above loans had been classified as non-performing and provided for as per applicable norms by 31 December 2017.” The bank claimed it has already provided for 50 percent of the amount.

The bank also declared in its statement that “no disclosure on divergence in asset classification and provisioning for NPAs was required to be made by the bank with respect to RBI's annual supervisory process for FY2017”. ICICI said further action in the matter of this whistleblower complaint is being taken by the Audit Committee. 

But not everyone is convinced. Mint stuck to its guns stating that the complaint alleged the bank deliberately failed to set aside funds to cover 31 defaulting loan accounts between fiscal 2008 and March 2016, not fiscal 2017. It claimed the bank’s response does not adequately refute the charges that in a number of fiscal quarters between 2008 and 2016, ICICI’s management deliberately delayed provisioning for 31 loans.

This is the third instance of a whistleblower complaining about ICICI Bank since 2016. First, a shareholder, Arvind Gupta, made allegations of impropriety against MD and CEO Chanda Kochhar. He accused the CEO of quid pro quo in return for loans made by ICICI to the Videocon Group, whose promoter had business dealings with Kochhar's husband Deepak. The bank’s board had then expressed full faith in Chanda Kochhar. But the suspicions arising from those allegations haven’t quite gone away.

A second whistleblower complaint forced the board to change its stance. The second complaint claimed the MD and CEO had failed to adhere to the bank’s code of conduct also alleged a quid pro quo while dealing with borrowers. The ICICI board decided to institute an inquiry at that point. The board said the inquiry into the allegations would be headed by an independent and credible person. Retired judge Srikrishna is said to be heading the probe now, though ICICI has not officially confirmed it.  Last week, Chanda Kochhar had reportedly decided to go on indefinite leave, and the head of ICICI Prudential, Sandeep Bakshi, was made the COO.

These are not pleasant days at ICICI Bank, a company that the Reserve Bank singled out as too big to fail. Maybe ICICI is testing the limits of that statement? There is now news that some stakeholders want Kochhar out of ICICI, as well as speculation about a bitter parting of ways between Kochhar and ICICI. And this morning, another fallout of the continuing investigation - ICICI’s stocks dropped 2% in Monday morning trade following the news about allegations by a third whistleblower.

2018 is pretty much annus horribilis for the banking sector in India. The NPA quagmire, improprieties, corruption and collusion have eroded a massive amount of the sector’s credibility. One can’t help but feel that the worst is not behind us just yet.