Commentary/ Mani Shankar Aiyar

Was there a political nexus to Gopalakrishnan's failure?

Warning signals about things being wrong at Indian Bank were received as early as 1992-93 when Indian Bank was discovered to have suffered erosion of assets in the amount of Rs 1.02 billion. In subsequent years, erosion of assets and the size of non-performing assets rose precipitously as follows:

In 1993-94: Erosion of assets -- Rs 11.5 billion; NPAs -- Rs 27.2 billion.

In 1994-95: Erosion of assets -- Rs 14.7 billion; NPAs -- Rs 28 billion.

NPAs constituted a full one-third of Indian Bank's advances during the last three years: 36 per cent in 1993-94; 30 per cent in 1994-95; 35 per cent in 1995-96. This happened despite Indian Bank's MoU with the RBI in 1994 through which Indian Bank undertook to reduce NPAs to not more than 23 per cent of its advances.

Such reckless lending policies wiped out in a single year the recapitalisation of Rs 20 billion granted by the government in 1994-95. The RBI has since refused permission for any further recapitalisation. Indian Bank's recapitalisation requirements now exceed the entire amount for recapitalisation of nationalised banks provided for in Chidambaram's Budget.

Before the scandal broke, RBI inspection reports and recommendatory notes had drawn attention to the following deficiencies:

• repeated violation of RBI guidelines in making advances;

• not taking into account serious adverse remarks by auditors;

• credit expansion for in excess of budgeted provision;

• credit expansion despite serious distortion in credit:deposit ratio;

• extensive tapping of call money market;

• excessive exposure to particular business houses;

• non-adherence to RBI norms in respect of income recognition and asset classification;

• accounting for interest income on NPAs on accrual basis in contravention of accounting norms;

• inclusion in interest receipts and other receipts of ineligible items;

• short provisioning by classifying NPAs as 'standard loans';
• Inadequate or even misleading information to the board;

• non-reporting of fraud cases to the board in a situation of increasing frauds;

• perfunctory inspection, leading to poor inspection reports on internal controls;

• no monitoring system for overseas branches of Indian Bank;

• improper management of credit portfolios;

• uninhibited exceeding of borrowing limits for single/group borrowers;

• exceeding delegated powers by sanctioning authorities and ex post facto approvals by higher authorities in a routine manner without proper application of mind;

• excessive operating expenses leading to operating losses exceeding Rs 2.23 billion;

• sanctioning of loans on oral instructions of the CMD.