The embattled ICICI Bank, which is also the country's second largest private lender, has now been accused by a whistleblower of evergreening loans and deploying other strategies to avert impairment in asset quality.
According to Mint, a whistleblower's complaint has claimed that the bank issued hundreds of letters of credit (LCs) to entities related to its troubled corporate borrowers to help them avoid loan default. A letter of credit is a guarantee that the bank provides to a seller that the bank will cover a payment if the buyer defaults. Thus, it avoided having to set aside higher provisioning for non-performing assets (NPAs).
Evergreening is a practice whereby banks extend even more loans to debt-laden companies to help them repay previous loans and hopefully earn enough revenue along the way to get out of trouble. It has been a pretty common practice in India, contributing to the banking sector's mushrooming bad debt pile, but regulators frown on it.
The whistleblower, an anonymous ICICI Bank employee, who wrote to the bank and the RBI in March, also alleged that the bank had sanctioned a large number of term loans to entities related to 31 borrowers, ignoring the warnings raised by internal auditors. The complaint lists out the names of these 31 borrowers, including Essar Global, Bhushan Steel, NCML Industries, Bhatia Global, Bhushan Energy, Essar Steel and Tecpro Systems. It was also alleged that ICICI Bank issued LCs against fictitious bills to service a number of loans. The charges, if proved, imply round-tripping of funds and hence will be in violation of anti-money laundering norms.
The complaint reportedly added that ICICI Bank has managed to delay provisioning for NPAs arising out of loans worth at least $3 billion. The daily said that the US Securities and Exchange Commission (SEC) began an investigation into allegations on provisions being delayed in June 2016. Since ICICI Bank is listed on the New York Stock Exchange, the SEC has noted the matter as one under "national priority", wherein attorneys have been appointed to investigate ICICI Bank and its top management.
Adding to ICICI Bank's woes, in March, the RBI started a fresh probe on the bank's processes while it sanctioned loans to 55 entities, including Assam Oil Co. Ltd, Videocon Oil Ventures Ltd, Shree Renuka Sugars Ltd, ABG Shipyard Ltd, IVRCL Ltd, Gammon India Ltd and Punj Lloyd Ltd.
In a regulatory filing last week, ICICI Bank claimed that an enquiry has been instituted into the whistleblower's complain but "Based on the procedures performed in the enquiry, the allegations relating to incorrect accounting of interest income and NPA recoveries as fees, and overvaluation of security for corporate loans, were not borne out."
However, the whistleblower isn't the only one red-flagging ICICI Banks's practices. Citing two ICICI Bank officials, the report mentioned one case where for an initial term loan of Rs 100 crore, three loans aggregating to Rs 90 crore were sanctioned to avert impairment over a five-year period. The sources added that "whenever a loan account was overdue for over 60 or 90 days, a fresh loan was sanctioned. To disburse the fresh loan after sanction, the overdue was needed to be regularized". They also alleged that the bank has waived penal interest of borrowers several times in the past to avert impairment.
"When a borrower didn't have enough balance available to make loan payments, temporary overdraft (TOD) was sanctioned to another borrower to pay to the first borrower whose account needed to be saved from being impaired. In one instance, TOD was sanctioned to a service provider of a large borrower. This service provider had no borrowing arrangements with the bank. Unfortunately, the money could not be returned to the service provider. That TOD became overdue and eventually an NPA," said the sources, reportedly backing their statements with proof.
Furthermore, the report added that the bank allegedly often helped a number of debtors by increasing their drawing power for cash credit by increasing their cover period or by changing cash credit to overdraft. It also allowed interchangeability between fund-based and non-fund-based working capital finance limits and provided fund-based sub-limits for non-fund-based limits, and vice versa.
"The technology platform of the bank also has deliberate gaping holes. (ICICI) Bank's term loans are accounted for in a software called SYMBOLS, which is unlike a real-time core-banking system software such as FINACLE. This has been done deliberately to employ accounting activities which can be manipulated as the end-of-day reports can be delayed or back-dated as desired," said the sources.
ICICI bank has refuted these allegations. "The bank uses robust information technology systems to handle its various portfolios like term loans, working capital loans, retail loans, credit cards, deposits, transaction banking, treasury, fixed assets and so on. Systems are deployed because of their specialisation in handling specific portfolios. The use of separate systems for different portfolios is common across many banks in India. The financial reporting for the bank accumulates data from all the IT systems on an automated basis. Hence the allegation that the technology platform of the Bank has gaping holes is a mala fide and irresponsible statement to discredit the bank's state-of-the-art IT systems with the intent to lower the image of the bank in the eyes of its stakeholders," said a spokesperson.
ICICI Bank's share price was down 2.78 per cent today, trading at Rs 271.15 apiece on the BSE.