BENGALURU - The finance ministry of India has revealed that banks have written off 10 trillion rupees (S$163 billion) in bad loans over the past five years. The biggest defaulters are absconding billionaires and some of India’s oldest companies.

Answering questions in Parliament on Dec 19, Finance Minister Nirmala Sitharaman said the “recovery of loans was an ongoing process”.

Public sector banks have recovered 4.8 trillion rupees from all unpaid loans, including 1.03 trillion rupees from the written-off loans in the past five years, she added. 

This means only 10.3 per cent of the 10 trillion rupees written off have been recovered from defaulting corporations.

To tide themselves over written-off loans that they cannot recover from borrowers, banks usually count on government bailouts using taxpayer money, analysts said.

When opposition leaders asked for details of the top 50 loans written off and the names of the borrowers, Minister of State for Finance Bhagwat Karad claimed that the Reserve Bank of India (RBI) did not maintain such information.

He said that write-offs were an exercise by banks for the “cleaning of balance sheet, to avail of tax benefit and optimise capital”. They did not benefit borrowers, he added. The defaulting borrowers remained liable to the banks until bankruptcy and insolvency procedures liquidated, seized or sold off their assets. 

The central bank does maintain a list of large borrowers, aggregated from all banks in the country, but it is not known who on the list had their loans written off.

Based on this list, the total number of “suit-filed wilful defaulters” grew 65 per cent from 8,744 in June 2017 to 14,485 in June 2022. The RBI uses the term for those who deliberately use the banking system to not repay dues, unlike people who might have genuinely fallen into debt. 

According to a separate disclosure by RBI, outstanding loans to wilful defaulters as at June 30 stood at 2.76 billion rupees – a third of this amount was owed by 50 big defaulters.

The numbers point to inadequate financial fraud and default laws in India, which result in banks struggling to get their worst debtors to pay up.

“The tools developed to recover these loans were built at a time when nobody thought of such large-scale defaults,” wrote Mr Vishwanath Nair, editor-banking in business analysis publication BQ Prime.

The bankruptcy code developed in late 2016 did speed up debt restructuring mechanisms, but delays remain, he said. 

For instance, an insolvency case took an average of 464 days in March 2021 to be resolved. As at Sept 30 this year, timelines had increased to 785 days, according to the Insolvency and Bankruptcy Board of India.

This gives ample time for defaulters to flee. Most of the top 50 loan defaulters in India are on the run.

Diamond merchant Mehul Choksi, whose Gitanjali Gems tops the RBI’s list of 50 worst defaulters of bank loans, fled India in January 2018.

Choksi owes several Indian banks a total of 140 billion rupees borrowed via his various firms, including 78.48 billion through Gitanjali Gems. But he is now living as a citizen of Antigua and Barbados Isles, a popular tax haven that India does not have an extradition treaty with.

He has been charged by at least four government agencies over financial crimes such as cheating a consortium of banks and destroying evidence.

The second-worst defaulter is Era Infra Engineering, which owes 58.79 billion rupees to Indian banks. Its managing director Hem Singh Bharana allegedly took loans from financial institutions and banks through his construction company and laundered the money. From 2014, the police and financial crimes regulator have charged him with duping not only banks, but also over 30 lending institutions and nearly 3,000 homebuyers to the tune of 160 billion rupees. Bharana’s whereabouts are unclear.

REI Agro is the third-biggest defaulter, owing 48.03 billion rupees to 14 banks. Its directors Sandip Jhujhunwala and Sanjay Jhunjhunwala are under investigation. 

Jatin Mehta, the founder of Winsome Diamonds and Jewellery that is seventh on the bad borrowers list, flew to the United Kingdom with his wife and two sons in 2013. The Central Bureau of Investigations has booked him for swindling 15 banks by allegedly importing gold on falsified guarantees from Indian banks, and selling it to ghost companies in the UAE.

Standard Chartered Bank UK has filed a case against Mehta alleging a US$1 billion (S$1.35 billion) fraud. In November, a UK court said there was strong evidence of “major international fraud”. Inexplicably, 14 Indian lending banks had refused to participate in the international litigation and did not submit proofs of fraud.

Ms Supriya Shrinate, a spokesman for the Indian National Congress, the main opposition party, said a large proportion of India’s fiscal deficit could be funded by recovering money from rich defaulters.

“If the common man fails to pay instalments, he will be named and shamed and recoveries will be made,” she said, but “not much effort” was being made to bring back “38 swindlers” who absconded.

The government has taken some steps to end the frauds. It decided in 2021 to assign staff accountability if loans higher than 1 billion rupees go unpaid. It also mandated a strong early warning system at public sector banks to monitor borrower credit quality on a real-time basis. But analysts call for a systemic overhaul.

A January 2022 Deloitte India Banking Fraud survey suggests that banks need to build new monitoring frameworks to identify red flags in a loan account after disbursement, and have an empowered and independent fraud risk management team report directly to top management.