Photo: Hemant Padalkar/Hindustan Times
Anup Roy | Khushboo Narayan Live Mint FRI, AUG 15 2014. 12 37 AM IST
Brokers rarely find themselves in the limelight, except incidents like arrest of Syndicate Bank chairman S.K. Jain in an alleged bribery case
Mumbai: He smiles a lot with the practised ease of a man who has learnt to do so as if he means it.
He carries a leather-bound planner in his hand.
And he is there wherever bankers are—media briefings to announce results, analyst meetings, award ceremonies, and conferences.
After most events, he can be seen mingling with the bankers, most of whom seem to be very friendly with him. Sometimes, he even leaves with them.
This man, who will remain unnamed, is one of the most powerful brokers or intermediaries in the Indian banking system. His success rate—or the proportion of the number of loans he has facilitated to that he sought to facilitate—is close to 100%, he claims.
The man, and other brokers like him, find themselves where they rarely like to be—in the limelight—after the arrest by the Central Bureau of Investigation (CBI) of Syndicate Bank chairman S.K. Jain for allegedly accepting a bribe to increase the credit limit of some borrowers. Among the others arrested is a certain Pawan Bansal, who ran an investment bank, Altius Finserv—a firm to help corporates raise money—and allegedly brokered transactions between banks and borrowers.
Earlier, in 2010, CBI arrested several bank executives, and also representatives of Money Matters Financial Services Ltd, a company that served as an intermediary between banks and borrowers, in a loans-for-bribes case.
But no bank chairman was arrested yet, and the non-performing assets on the books of Indian banks were not considered as a big a problem then as they have become now. As of 30 March, the gross non-performing assets (or bad loans) on the books of 40 listed banks stood at Rs.2.42 trillion, up 34.41% from a year ago.
On 7 June, DNA newspaper reported that CBI had expanded the scope of its investigation into bad loans on the books of banks. Last week, the federal investigative agency also started looking into a loan extended by IDBI Bank Ltd to the grounded Kingfisher Airlines Ltd, well after the company had run into debt-trouble with other banks.
Which is why the man mentioned in the first instance suddenly finds his brethren in the news.
The man, who brought along a friend and fellow intermediary—let’s call them Broker 1 and Broker 2—for a meeting with Mint, said he finally decided to talk because bankers want too much now.
“In my 20 years of business, I have never seen such greed among bankers. Everyone takes kickbacks, that’s part of the process. But in the last few years, the greed has touched the sky. It is very difficult to do business in this environment.”
“I want this greed to end,” he added.
Of course, there are brokers
Broker 1 would rather not be called a broker. He used to prefer financial intermediary, but is now more of a strategic advisor or consultant. He added that he no longer works for a fee; now, his take is a stake in the project itself.
“My primary responsibility is to secure finances for the projects and fixing other appointments, like meeting top architects for real estate projects, because I am acting as a partner,” he said. “That’s how all consultants, if they are industrious, eventually diversify.”
Everyone seems to know of the existence of brokers who can facilitate loans. There is a role for middlemen in most transactions, and it isn’t illegal to be one.
“Brokers are a necessity. All banks have a specific format to apply for loans. If you don’t file the proposal in that format, the proposal gets rejected immediately. We are specialists,” said Broker 1.
“As far as middlemen are concerned, there are some good middlemen and some not-so-good middlemen. A good middleman acts as a broker. But if the point of a middleman is to pay bribes, that is obviously not okay,” saidRaghuram Rajan, governor of the Reserve Bank of India (RBI), on 6 August in a post-policy interaction with select print media at RBI headquarters. He was answering Mint’s query on RBI’s view on the role of middlemen (mintne.ws/1kn7hHq).
“As of now, there is no law prohibiting the practice of engaging a middleman for getting loans approved, hence there is no question of illegality,” added H.P. Ranina, a Supreme Court advocate and a corporate lawyer.
Problems arise when, as Rajan points out, the middleman is there to pay bribes.
And Broker 1 doesn’t try to hide this aspect of his role.
“To reach bank chairmen, you will have to come to us.”
“We know what the bank wants and what the banker wants.”
And that’s the malaise that the government and investigative agencies are trying to tackle.
“It’s part of the whole set of governance issues that we need to look at,” said Rajan at the interaction.
Indeed, “the government should introduce a law prohibiting this practice”, added Ranina.
What the broker said
Brokers have connections in most large banks who act as “champions of the proposal”, said Broker 1. The champion can be the chairman, executive directors or general managers, even regional managers who are close to the chairman.
“He (the champion) pushes for the loan and gets it sanctioned.”
Apart from financial and other inducements, this also helps fast-track a champion’s own career. Loans are business and anyone who brings business to the bank gets rewarded. Eventually, he may become an executive director, even chairman.
“Brokers have known chairmen since they were nobodies,” Broker 1 said.
Once the proposal is sent in, the bank’s chairman will comment on it.
Chairmen rarely write notes on the proposal file like they used to, according to Broker 1. “No one wants to leave a trail.”
Instead, they use post-it notes and there are all sorts of codes, he explained.
For instance, a post-it note on the right side may mean a general manager (who is also part of the chain) discussing the proposal at an approval committee meeting speaks of it glowingly.
A note on the left side may mean he disses it.
Or, a note written in capital letters may mean the proposal is to be accepted.
“The chairman will never say anything,” said Broker 1.
Brokers love committees.
“If the committee passes the proposal, nobody is accountable,” said Broker 1.
And sometimes, all it takes is to induce some members of the committee to just keep quiet.
An official at the enforcement directorate, who is keeping a close watch on the latest development on the banker-brokers nexus, says the problem is of corruption in the system at large.
“The main problem here (India) is corruption. And corruption is a cultural issue. Such incidents will keep happening till the government gets rid of the nazrana (tribute to be paid to the person in power), jabrana (extortion) and shukrana(money paid by way of gratitude after the work is done) syndrome,” said this person, who asked not to be identified.
Broker 1 accepts that corruption often starts at the top. With all the scrutiny by vigilance and law enforcement agencies, and no political backing, lower-level managers are usually scared of taking bribes, but they comply with senior officials who tell them to do so.
Then there are other benefits for the junior officers too.
“We oblige them (the lower-rank officials) by fast-tracking promotions and transfer them wherever they want to go. When and if they become seniors, they remember us. That’s prepaid,” said Broker 1.
Broker 1 pulls out his phone and proudly displays WhatsApp threads showing people whom he said were junior officers asking for a transfer and then sending thank you notes.
“There are three modes of payment. Prepaid, post-paid and value-added. Prepaid is the banker’s past obligation to me, he is returning (to) me a past favour. Post-paid is obligation by us after the job is done, usually money or other favours. Value-added is whatever the banker fancies. Different people have different likings. Not all people want cash,” he said.
The preferred mode of payment is property (or real estate), said Broker 1.
And brokers facilitate any business with banks, not just loans. Broker 1 says that even advertising agencies sometimes approach him to be empanelled with the bank (which means it is one of the few agencies used by the bank).
The problem with banks
Bank chairmen aren’t appointed on merit, definitely not paid enough, and the appointment process sees a lot of political interference, Mint’s Tamal Bandyopadhyay wrote in a two-part column on 4 August and 14 August.
“You need to ask this question—how did S.K. Jain, who was 18th in rank of seniority among 20 people (in Syndicate Bank), become chairman of the bank. You need to ask how he moved from the small Dena Bank, to executive director of Bank of Baroda, the second largest state-owned bank,” said the former chairman of a state-owned bank, who spoke on condition of anonymity.
According to an Indian Express report dated 13 August, CBI has advised the finance ministry that the 2013 appointment of Jain “lacked transparency and smacks of unfair practices”.
A second former bank chairman, who asked not to be identified, said the blame lay with the government’s recruitment, appointment and compensation policies.
With the best retail talent going to private banks (or other businesses altogether), banks started focusing on large borrowers to meet their credit growth targets. These were usually in excess of 20%, the second former bank chairman said.
“The problem was most felt in semi-urban branches. With retail base gone, it was a nightmare for the branch managers to meet targets.”
Soon, brokers stepped in.
“Middlemen stepped in and started approaching banks with high-value proposals. The magic figures of targets started getting met year after year but there was no real training of people to truly appraise loans thoroughly,” added the second former bank chairman.
Given that the finance ministry effectively decides on their appointment, most chairmen of state-owned banks are acutely conscious of the need to keep their political masters happy.
Ministry officials and even other ministers often request loans for people they know, said the second former bank chairman.
“Such requests are like orders, to be acted on in five minutes and reported back in ten minutes.”
The chairmen push the requests down the line as orders.
But they don’t always have their way.
“There are a lot of people who revolt. They may not get promoted further, but there are executive directors and general managers I know who spoiled the game for corrupt chairmen and saved the bank. Sadly, most of them retire in their post,” the second former bank chairman said.
Apart from being political appointments, bank chairmen are also paid a pittance.
Their pay is pathetic, Bandyopadhyay said in a Mint column on 4 August (mintne.ws/1xVtLA1).
“Take a look at the chief of State Bank of India who handles a balance sheet ofRs.22 trillion. And compare it with the chief of any private sector bank who oversees a balance sheet which is one-fifth of the size of State Bank or even smaller,” he wrote. “Yes indeed, the State Bank chief lives in a big bungalow in Mumbai’s posh Malabar Hills but that doesn’t add to the salary. To start with, if the government decides to monetize all benefits that a public sector bank chief earns, their salary will be many times more.”
Did brokers cause bad loans?
To what extent are the middlemen responsible for getting bad loans sanctioned?
“Believe it or not, a good broker does much more due diligence than a bank. We have to know what we are hawking. As an intermediary, if I bring a loan that turns bad, I will have to shut shop,” said Broker 1.
However, he acknowledges that bad loans do get pushed on to banks for a hefty fee of as much as 8% of the loan amount.
This is how a bad loan is structured: if a borrower wants a Rs.20 crore loan for aRs.30 crore project from a bank, he has to usually put in Rs.10 crore as equity. Not everyone has that kind of money. Consider a promoter who has property of Rs.3 crore to pledge and raise equity.
“You come to a broker, we take you to an empanelled valuer. He values the property at, say, Rs.7-8 crore. We then go to the banker for loan. The banker will give you ideas to adjust the valuation to Rs.10 crore and based on that a Rs.20 crore loan will be sanctioned,” said Broker 1.
If the borrower wants more money, the broker takes him to another bank where this Rs.20 crore in his account is shown as equity and another Rs.40 crore is raised.
“So with a Rs.3 crore equity, you have a leverage of 20 times. You may or may not go belly-up after that. If you do, the original value of the property is found to be only Rs.3 crore,” said Broker 1.
That may be true for small loans but, as Pratip Chaudhuri, former chairman of State Bank of India (SBI), explains, for all large projects, lending is done on the basis of the company’s balance sheet. Chaudhuri added that at SBI, loans were given on the basis of ratings from external agencies like Moody’s Investors Service and Standard and Poor’s.
“There is no middlemen involved in loan process, but we have a rule that if a person, who is not part of the company, is accompanying the borrower, the borrower will have to give it in writing that the person is helping them with the loan proposal form,” Chaudhuri added.
The enforcement directorate official quoted earlier agreed that most large loans are given on the basis of the balance sheet, but added that the financials were not always reliable.
“The borrowers often cook up their balance sheet and then pay bribes to bank officials to overlook the manipulation in the balance sheet to sanction a loan,” said the official.
And sometimes even that isn’t necessary, as the cases of Kingfisher Airlinesand Deccan Chronicle Holdings Ltd show. Big borrowers have enough clout of their own, or enough political contacts, to influence banks.
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