BENGALURU – Unrecovered bank loans from wilful defaulters have reached a peak in India, raising questions about political interference, corruption and the urgent need to hold banking and government officials accountable. 

Data from credit information firm TransUnion Cibil shows that dues from people who have the financial means but do not repay their loans have risen by at least 1.2 trillion rupees since March 2019. 

The sharp jump owed by wilful defaulters marks an almost 50 per cent rise in unrecovered loans to 3.54 trillion rupees (S$58 billion) as at March 2023, involving 16,883 accounts, with a dozen of the top defaulters owing billions.

Government-owned banks are owed the most – 77.5 per cent of the outstanding amount in June. 

India’s central bank defines wilful defaulters as those who take loans with the deliberate intent not to pay them back, unlike people who might have genuinely fallen into debt. 

Banking expert Hemindra Hazari explained that wilful defaults typically mean that the borrower has committed fraud – siphoning off the funds for personal use or diverting them towards unproductive activities.

“If banks have such a high proportion of wilful defaulters today, it shows that they did poor appraisals of the borrowers or projects during loan approval and did not properly monitor the use of funds after that. It is a sign that the banks are either very incompetent or very corrupt,” he said. 

A third of outstanding loans to wilful defaulters in 2022 was owed by 50 big defaulters, including billionaires who fled the country when banks revealed their fraud, the central bank has disclosed.

Among the first to flee was Jatin Mehta, the founder of Winsome Diamonds and Jewellery, which is seventh on a list of bad borrowers in terms of loan size. He flew to the United Kingdom with his wife and two sons in 2013.

India’s Central Bureau of Investigations has charged Mehta over the swindling of 15 banks. UK courts also found evidence of “major international fraud” of US$1 billion (S$1.36 billion). But 14 Indian lending banks refused to participate in the international litigation and did not submit proof of fraud.

A probe by Indian financial website Moneycontrol found that Mehta continues to be a free man, with the UK courts allowing him to spend £50,000 (S$83,000) every five weeks as living expenses.

In December 2022, India’s Finance Ministry created a furore in Parliament when it revealed that the top 10 wilful defaulters owe 408 billion rupees to banks. The biggest defaulters are absconding billionaires and several of India’s oldest companies. 

Mr Thomas Franco, former general secretary of the All India Bank Officers’ Confederation, said bank practice is for education, home and personal loans to be given against collateral, property and salary, respectively. But banks typically give “large corporate loans – even over a billion rupees – not against security, but based on the company’s performance on the balance sheet and earnings projected”.

“In many cases, the projected figures are inflated,” he added.

This also explains why banks can recover only a minimal portion of the loans by seizing the defaulters’ assets, “because in corporate loans, often, few assets are pledged in the first place”, he said. 

Banks have been able to recover only 10.3 per cent of the 10 trillion rupees written off from defaulting firms.

For instance, flashy billionaire Vijay Mallya, former chairman of liquor maker UB Group and Kingfisher Airlines, owed about 90 billion rupees to 17 banks, but few of his assets were mortgaged to banks except some of his Mumbai houses. He borrowed the money, among other reasons, to expand Kingfisher Airlines. When the firm went bankrupt, he fled to the UK in 2016, where he has challenged his extradition. And even as debt recovery proceedings were ongoing, he illegally transferred money, including US$40 million to his children.

Banks pooled his assets, including shares, helicopters, Kingfisher Airline assets and office equipment like computers, but these accounted for barely 10 per cent to 15 per cent of the total debt.

An official from one of the banks he defrauded told The Straits Times on the condition of anonymity that when no airplanes were bought with the money loaned, “then what is there for the banks to sell?”.  

Diamond merchant Mehul Choksi, whose Gitanjali Gems tops the list of defaulters and owes several Indian banks a total of 140 billion rupees, has been charged by at least four government agencies over financial crimes such as cheating a consortium of banks and destroying evidence. He now lives as a citizen of the Antigua and Barbuda islands, a popular tax haven that India does not have an extradition treaty with.

Banks have written off 10 trillion rupees in bad loans over the past five years. Details of loans written off are, however, not required to be published, a legal gap that “hides the extent of the real crisis India faces”, said Mr Franco. 

A senior banker said political influence was an “unprovable and unavoidable reality”, as the pressure to approve enormous loans came with an assurance that the project or borrower was above board, even if the paperwork said otherwise.

Governments periodically use taxpayer money to bail out banks that cannot recover unpaid loans, analysts said. “We’ve seen this repeating cycle in the past, where bad loans reach a peak, banks go into losses, do write-offs, then with fresh loans their credit score gets better, they give big loans again, and show a profit,” said Mr Franco. 

The State Bank of India, which has the greatest share of wilful defaulters, was the country’s most profitable company in August. The bank’s chairman, Mr Dinesh Kumar Khara, told Reuters in August that the bank is not concerned about rising delinquencies in its unsecured loan book and is well capitalised to support business growth needs.

Over the years, several bank officials have been prosecuted for wilful defaults and fraud. The police arrested at least six staff of Punjab National Bank, for instance, in the multimillion-dollar fraud by billionaire jeweller Nirav Modi and his uncle Mehul Choksi of Gitanjali Gems.

Bank officials said that when fraud is investigated, many junior and mid-level employees involved in processing and following up on the loan are charged and punished. “Unfortunately, most senior sanctioning authorities in the credit committee that is in charge of big corporate loans go scot-free. There is no accountability at all for the board of directors,” said Mr Franco. 

Rare exceptions include ICICI Bank’s former managing director Chanda Kochhar, who is facing charges for corruption in a 32.5 billion rupee loan fraud, and Allahabad Bank’s former managing director Usha Ananthasubramanian, who was arrested over the Nirav Modi case during her tenure at Punjab National Bank. 

In 2018, a parliamentary standing committee headed by Congress leader Veerappa Moily looked into the mounting bad loans and increasing fraud cases, and recommended that loan-sanctioning authorities in the board of directors, including a Finance Ministry nominee and central bank representative, should also be charged in cases of fraud.

But nothing came of these recommendations.

In September 2023, the central bank proposed tightening the period of time for identifying wilful defaulters to within six months after an account is declared a non-performing asset, which is when the interest or principal is unpaid for more than 90 days. There was previously no specific timeline, which led to delays of three to five years in identifying such borrowers. 

Mr Hazari said: “Indian banks should at least stop lending without due appraisals of the project, and seriously monitor the use of funds after disbursing the loans so that they can catch fraudulent activities or inflated project costs before it is too late.”