CHAPTER 11
DEPARTMENT OF BANKING

Bharatiya Reserve Bank Note Mudran Limited

Based on the projections made by the Reserve Bank of India (RBI), Government of India approved (December 1986) setting up of two new note presses, one at Salboni, West Bengal and the other at Mysore, Karnataka. M/s. Mecon (I) Limited (consultants) submitted (December 1987) the detailed project report (DPR) for construction of dwelling units for the employees. Consequent to the incorporation of Bharatiya Reserve Bank Note Mudran Limited (Company), it took over (February 1995) the project which was under implementation by the RBI.

The estimated manpower requirement for the printing presses at Salboni and Mysore envisaged in the DPR prepared by the consultants was 2325 and 2222 respectively. The DPR also envisaged provision for dwelling units catering to 75 per cent of the employees (about 1700 units) at Salboni and 50 per cent (about 1150 units) at Mysore.

The RBI awarded the work for construction of 221 and 213 dwelling units at Salboni and Mysore respectively under Phase-I of the project. The Company awarded work for the phase II of the project for construction of 1380 and 900 dwelling units at Salboni and Mysore in November 1995 and October 1996 respectively. The position of the dwelling units constructed and occupied at Salboni and Mysore is given below:

(Dwelling units in Nos.)

*    includes 512 dwelling units under construction
**    maximum occupation as on 31.3.1999
***    maximum occupation as on 31.3.2001

The Company reassessed (May 1998) manpower requirement of Salboni and Mysore at 774 and 675 respectively after considering certain improvements in the processing of currency notes.

Thus failure to synchronise the requirement of dwelling units for the employees with the changed circumstances resulted in an infructuous expenditure of Rs.62.92 crore as of 31 March 2001.

The Management stated (April 2001) that while the Board note referred to was just indicative of intentions to reduce manpower in practice no material reduction in manpower was realised until 1998-99. The Management further stated that putting the award of civil works on hold would have adversely affected the timely allotment of flats to the newly recruited personnel and any increase in RBI’s indent for currency notes would eventually need additional augmentation of manpower to run the plant in 2 or 3 shifts.

The reply of the Management is not tenable in view of the following:

1. the reduction in manpower requirements was visualised by the Board of Directors of the Company as early as in September 1996 and pending rationalisation of manpower, the Company should have put on hold its original plan to construct 900 dwelling units at Mysore in the second phase for which the letter of intent was issued to the contractor only in October 1996;
2. the Company could have also reworked the requirement of dwelling units for Salboni and should have put the construction of excess dwelling units on hold by paying compensation to the contractor;
3. the Company had admitted that it was utilising only 5 lines of production at each site against 8 and 7 lines at Salboni and Mysore respectively, which indicates the downward trend of the indents placed by RBI; and
4. efforts of the Company to lease out the excess dwelling units to the education institutions, commercial undertakings etc. may not fructify in view of security reason as dwelling units are located in the premises of the Currency Printing Press at Mysore and Salboni.

The matter was referred to the Ministry in May 2001, their reply was awaited (October 2001).

Discount and Finance House of India Limited

The Company continuously renewed call money lending to Madhavpura Mercantile Co-operative Bank Limited without inquiring into their financial health and even in excess of the exposure limit fixed by them, which ultimately rendered the recovery of principal amount of Rs 15 crore and interest due thereon as doubtful of recovery.

As part of its money market operations, Discount and Finance House of India Limited (Company) is engaged in call money lending to banks and other financial institutions. Call money represents borrowings or lending for very short periods, generally overnight subject to a maximum period of 14 days to enable banks and institutions to even out their day-to- day deficits and surpluses. As such, these transactions are not backed by any security.

Madhavpura Mercantile Co-operative Bank Limited (MMCB) had been a regular customer of the Company in call money dealings. The Company had fixed call money lending limit for borrowings by Co-operative bank as 50 per cent of borrower’s net worth, subject, in turn, to 50 per cent of the net worth of the Company. Based on these norms, the Company set a credit exposure limit of Rs. 10 crore for MMCB effective 1 April 1998. While the limit was adhered to during 1998-99, it was exceeded on 15 occasions in 1999-2000 and 12 occasions in 2001-01 and upto a maximum of Rs. 15 crore per day was advanced.

MMCB were indebted to the Company without a break from 1 January 2001, Though MMCB were technically repaying the borrowing at the end of call money tenure of one to three days. The repayment was only a formality and the loan was being effectively rolled over.

On 9 March 2001 MMCB repaid the call money they had borrowed on 8 March 2001 and borrowed Rs. 10 crore for three days @ 8 per cent per annum. Same day MMCB requested the Company for another Rs 5 crore for three days @ 8.50 per cent per annum. The Company acceded to the request though the exposure limit fixed by the Company was only Rs. 10 crore and loan to the extent had already been availed of by MMCB. On 12 March 2001, when repayment of Rs. 15 crore was due, MMCB requested for a roll over which was also agreed to for one day. However, MMCB could not make repayment on due date as they were facing severe liquidity problems and had to down their shutters. Meanwhile, RBI placed management of MMCB under an Administrator on 13 March 2001. Though the Company had taken up the matter of recovery of its dues of Rs. 15 crore towards principal and interest Rs. 1.34 lakh from MMCB with the Administrator on 24 March 2001, the possibility of recovery is doubtful.

Thus extension of call money facility, exposed the Company to undue risk. The Company did not inquire into the financial health of MMCB as warranted by prudent risk management policy before extending the call money facility on a continuous basis even exceeding the exposure limit fixed. This imprudent lending rendered the recovery of principal amount of Rs. 15 crore and the payment of interest due thereon and also for the subsequent period as doubtful of recovery as the MMCB were not in a position to discharge the dues.

The Management stated (May 2001) that:

there were regular lenders and regular borrowers in the money market and volume of transaction on day to day basis varied depending on liquidity available;

1. MMCB were one of the oldest clients of the Company and experience with them was satisfactory until the default on 12 March 2001. They were the second largest Co-operative bank in Gujarat;
2. exposure limits were meant to act as guidelines and could be exceeded with the approval of Managing Director/Executive Vice president; and
3. regular lending were getting repaid on the expiry of contract period together with interest and were not ‘rolled over’.

The reply in not tenable for the following reasons:

1. MMCB’s dependence on call money market was to the extent of the maximum exposure limit of Rs. 10 crore and there was no variation based on liquidity needs. Call money had thus become an alternative source of finance to MMCB rather than means to tide over temporary illiquidity, especially from January 2001. They had also requested for enhancement of exposure limit on 7 March 2001;
2. since repayments were accompanied by fresh borrowings it substantiated, the bank’s inability to liquidate the debt and instead it showed their dependence on the call money on a permanent basis;
3. though exposure limits were to act as guidelines, exceeding the limit when a run on the bank had already started on 9 March 2001, as reported in press was injudicious; and
4. repayments and borrowing were only technical since MMCB were not able to discharge the dues even for a single day from 1 January 2001 without fresh borrowing. When MMCB were ultimately required to discharge the liability on 13 March 2001 without fresh accommodation they defaulted.

The matter was referred to the Ministry in May 2001; their reply was awaited (October 2001).

Indbank Housing Limited

Indbank Housing Limited (IBHL), a subsidiary of Indian Bank obtained approval (December 1993) of the Department of Company Affairs (DCA), Government of India (GOI) for placing their funds as Inter Corporate Deposit (ICD). The approval was valid upto 9 March 2000. GOI stipulated (March 1994) the following parameters for placing the ICDs:

1. the borrowing company had a positive net worth;
2. the borrowing company had earned net profits in the last three years;
3. the borrowing company had declared dividend at not less than 10 per cent on its equity capital in at least two out of three immediately preceding years; and
4. the amount of ICD given to the borrowing company was not to exceed Rs.3 crore at any point of time. This ceiling was not applicable to deposits placed with Government Companies, Unit Trust of India, Financial Institutions, Nationalised Banks etc.

Test check of 10 cases described below revealed violation of basic lending norms and conditions stipulated for placing ICDs. Besides, ineffective monitoring also resulted in IBHL sustaining a loss of Rs.2.73 crore and non-recovery of Rs.39.37 crore as of 31 March 2001. IBHL did not place ICDs after January 1996.

AFI, Chennai promoted for construction of residential accommodation and farmhouses was incorporated on 27 March 1994. The Investment Committee of IBHL sanctioned the proposal on 6 July 1994 for placement for ICD with AFI and placed ICD of Rs.1 crore on the same day for 180 days at an interest rate of 21 per cent per annum. AFI repaid Rs.31 lakh towards principal in three instalments in February, March and April 1996. The ICD was rolled over 4 times during the period from January 1995 to March 1998.

The following deviations/irregularities were noticed:

1. stipulated guidelines of GOI had not been complied with as the ICD was placed with AFI within 4 months of its incorporation merely on the strength of a promissory note;
2. no financial statements of AFI were obtained at the time of placement of ICD; and
3. the ICD was placed on the strength of the satisfactory opinion given by the Adyar Branch of the Indian Bank on 5 July 1994 for the current account opened just 6 days before by AFI on 29 June 1994.

After issue of legal notices to AFI (January 2000 and July 2001) IBHL had not taken further legal action in view of the cost and time involved. While accepting the facts, IBHL stated (August 2000) that it was confident of recovery. An amount of Rs.1.54 crore as on 31 March 2001 (principal - Rs.83.15 lakh, interest - Rs.42.60 lakh and memorandum of interest (MOI) - Rs.27.80 lakh being the interest due from the party but not recognised in the books, as the ICD had become non performing asset) was unrecovered (August 2001).

IBHL placed ICD of Rs.50 lakh with SMP on 12 June 1995 for 180 days at an interest rate of 21 per cent per annum for the purchase and development of land in Villianur. Interest of Rs.11 lakh alone was recovered. Roll over was made twice between December 1995 and March 1998.

The following deviations/irregularities were noticed:

1. SMP was incorporated in June 1992 and had not declared dividend;
2. the norms stipulated by GOI in March 1994 regarding net worth, profit, dividend were not complied with; and
3. although IBHL was holding title deeds by way of immovable properties situated at Pondicherry no equitable mortgage had been created.

IBHL stated (August 2000) that it was confident of recovering the dues through constant follow up. Legal notices were issued in October 2000. As on 31 March 2001 an amount of Rs.1.25 crore (principal - Rs.66.45 lakh and interest Rs.35.94 lakh, MOI - Rs.22.63 lakh) was outstanding.

NEUA approached (March 1994) IBHL for ICD of Rs.2.50 crore to meet their working capital requirements in connection with the various housing projects undertaken by them. The Investment Committee sanctioned the proposal and IBHL placed (22 September 1994) ICD of Rs. 2.50 crore for 180 days at an interest rate of 21 per cent per annum. An amount of Rs. 26.04 lakh towards interest had so far been recovered. The principal amount was rolled over once in March 1995. NEUA failed to pay both principal and the balance interest. A civil suit was filed in March 1998 for recovery of principal amount of Rs.2.50 crore and interest of Rs.2.05 crore. Legal process was still in progress (July 2001).

The following deviations/irregularities were noticed:

1. as NEUA had not declared any dividend, placement of ICD was in violation of conditions stipulated by GOI;
2. financial statements were obtained for two years only and IBHL had earned profit for 2 years as against the norm of 3 years;
3. NEUA was already a defaulter with IBHL as the previously obtained (sanctioned by the Board of Directors during October 1991) housing project loan for construction of houses during 1991-92 to 1994-95 for Rs.6.18 crore was not repaid. Under these circumstances, the placement of ICD was not prudent; and
4. IBHL had created a provision of Rs.2.98 crore as on 31 March 2001 in respect of the project loan as adequate security was not available.

IBHL stated (August 2000) that vigilance action had been initiated against the concerned officials for non-compliance with parameters laid down by GOI. As on 31 March 2001 the outstanding dues amounted to Rs.6.34 crore (principal - Rs.2.50 crore, interest Rs.2.05 crore and MOI - Rs.1.79 crore pertaining to the period after filing the suit in March 1998).

Based on decision of the Investment Committee, IBHL placed two ICDs for 150 days with JRP to fund their hotel expansion project as detailed below:

Both the ICDs were respectively rolled over twice during March/May 1995 and March 1998.

The following deviations/irregularities in violation of conditions prescribed by GOI were noticed:

1. JRP had negative net worth as on 31 March 1993; and
2. JRP had incurred net losses during the preceding 3 years.

IBHL stated (August 2000) that interest charged upto 30 September 1999 had been received and that vigilance action had been initiated against the concerned officials for non-compliance with the directions of GOI. As on 31 March 2001 an amount of Rs.3.85 crore was outstanding (principal - Rs.3 crore and interest - Rs.13 lakh, MOI - Rs.72 lakh).

B)    MRL Constructions Private Limited, Madurai (MRL)

IBHL placed ICD of Rs.2.00 crore with MRL (incorporated on 31 June 1993) for 120 days on 18 April 1995 at an interest rate of 21 per cent per annum for construction of a hotel at Coimbatore. The ICD was rolled over once in March 1998.

No financial statements were obtained at the time of placement of ICD and thus IBHL did not evaluate the proposal in accordance with the GOI guidelines.

IBHL stated (August 2000) that interest charged upto 30 September 1999 had been received and that vigilance action had been initiated against the concerned officials for non-compliance with the directions of GOI. As on 31 March 2001 an amount of Rs.2.07 crore was outstanding (principal - Rs.1.50 crore and interest - Rs.15.37 lakh, MOI - Rs.41.20 lakh).

No legal action was taken for possession of the collateral security of Rs.9.72 crore to realise the outstanding dues from the group Companies.

The main activities of OPI were manufacturing paper bags, poly coated paper etc. The Investment Committee of IBHL sanctioned placement of ICD of Rs.3.06 crore for 180 days on 30 March 1994 at an interest rate of 21 per cent although the purpose of ICD was not mentioned. OPI paid interest upto 25 September1994 amounting to Rs.35.72 lakh. The deposit was rolled over thrice during September 1994 to March 1998. The overdue interest of Rs.3.02 crore was also merged with the principal outstanding while making the roll over in March 1998.

The following deviations/irregularities were noticed:

1. the deposit was placed based on the comfort letter given by Indian Bank;
2. ICD was in excess of Rs.3 crore contravening condition prescribed by GOI;
3. no financial statement of the OPI was obtained at the time of placement of ICD; and
4. as against the dues of Rs.24.10 crore as on 31 March 2000 from the Modi Group (3 Companies) to Indian Bank and IBHL, Indian Bank, Mumbai was holding security, valued at Rs.21.14 crore by way of equitable mortgage of land/buildings and hypothecation of plant and machinery/stock. The assets were not disposed off to realise the dues.

IBHL stated (August 2000) that the ICD was placed to meet the business requirements and relied upon comfort letter issued by Indian Bank. IBHL further stated (July 2001) that the Modi Group had agreed to secure the ICD by extension of equitable mortgage already created in favour of Indian Bank. The amount overdue from OPI was Rs.11.26 crore (principal - Rs.6.08 crore, interest- Rs.3.14 crore and MOI - Rs.2.04 crore) as on 31 March 2001.

MPL was incorporated on 10 May 1991. The Investment Committee of IBHL sanctioned placement of ICDs with MPL for Rs.2 crore on 17 August 1994 and Rs.1.50 crore on 24 August 1994 at an interest rate of 21per cent and 20 per cent per annum respectively both for a period of 180 days to meet urgent requirement for construction of a residential complex. The ICDs were rolled over in April 1995.

The following deviations/irregularities were noticed:

1. MPL had a positive net worth of Rs.1000 only on the date of placement of ICD;
2. MPL had incurred losses in the 2 years of its existence;
3. IBHL had placed ICD with MPL in excess of Rs.3 crore contravening conditions prescribed by GOI;
4. the suit was filed in April 1998 and there was delay in filing suit.

IBHL stated (August 2000) that vigilance action had been initiated against the concerned officials for non-compliance with the directions of GOI. As of 31 March 2001, outstanding dues amounted to Rs.10.89 crore (principal- Rs.3.50 crore, interest - Rs.2.69 crore and MOI - Rs.4.70 crore).

B)    Green Gardens Private Limited, Chennai (GGL)

IBHL placed ICD with GGL for Rs.3.50 crore on 10 August 1994 for a period of 180 days at an interest rate of 20 per cent per annum for promotion of City Centre Point in Gemini Complex, Chennai. The ICD was rolled over twice in February and April 1995. However, GGL did neither pay principal nor the interest. IBHL filed a civil suit in April 1998 for recovery of Rs.6.20 crore as on 31 March 1998 (principal Rs.3.50 crore and interest Rs.2.70 crore).

The following deviations/irregularities were noticed:

1. the confidential opinion on the credit standing of the borrower received from Indian Bank stated that the borrower was having banking transactions with the bank since October 1993 i.e., just 11 months before the placement of ICD;
2. IBHL had violated the conditions prescribed by GOI. The borrower’s three years accounts showed that it had not qualified under any of the conditions for getting ICDs. GGL had a negative net worth; had incurred losses in the preceding 3 years and had not declared any dividend;
3. IBHL had placed ICD with the borrower in excess of Rs.3 crore again contravening conditions prescribed by GOI; and
4. There was a delay of more than 2 years in filing suit (suit filed in April 1998) for recovery of dues, even though the borrower had defaulted the payment of interest right from June 1995 onwards.
5. IBHL stated (August 2000) that vigilance action had been initiated against the concerned officials for non-compliance with the directions of GOI. An amount of Rs.10.95 crore was outstanding (principal - Rs.3.50 crore, interest - Rs.2.70 crore and MOI - Rs.4.75 crore) as on 31 March 2001.

C)    Gemini Arts (Private) Limited, Chennai (GAL)

IBHL placed for development of multi storeyed shopping complex ICD of
Rs.3.50 crore with GAL on 10 March 1994 for a period of 180 days at an interest rate of 20 per cent per annum. GAL paid only the interest due as on 6 September 1994. The ICD was subsequently rolled over twice in February and May 1995. However, GAL neither paid the principal nor the interest subsequently.

The following deviations/irregularities were noticed:

1. IBHL relied on the confidential credit opinion and comfort letter dated 2 March 1994, which were issued by Indian Bank after just four months of business transactions with GAL;
2. GAL had incurred loss during 1992-93;
3. GAL had not declared dividend in any of 3 years at the time of placement of ICD;
4. The limit prescribed for placement of ICD was exceeded; and
5. IBHL had filed suit only in April 1998, after a delay of more than two years even though the borrower was not paying even the interest.

IBHL admitted (August 2000) that though they had been following up with GAL as their efforts bore no fruitful results, the suit was filed as a last resort. As on 31 March 2001, an amount of Rs.10.83 crore (principal - Rs.3.50 crore, interest Rs.2.65 crore, and MOI - Rs.4.68 crore) was outstanding.

JBL incorporated on 29 January 1991, with the objective of construction of residential and commercial complex, approached (May 1994) IBHL for placement of an ICD which was sanctioned by the Investment Committee for Rs.2.50 crore. The ICD was for meeting the construction cost of an on going project of construction of a star hotel at Kodaikanal named ‘Pleasant Stay’. IBHL, based on the “satisfactory” report given by the Zonal Manager, Indian Bank, Tiruchirapalli on 13 May 1994, placed an ICD of Rs.2.50 crore with JBL on the same day for 90 days at an interest rate of 21 per cent per annum. The deposit matured for repayment on 11 August 1994 but because of default by JBL in the repayment of the principal, ICD was rolled over four times during the period from August 1994 to May 1995, with the last due date being 4 November 1995. JBL defaulted in the repayment of the principal and interest was serviced only upto 21 October 1995 amounting Rs.76.89 lakh.

Meanwhile, the Hill Protection Council obtained a stay in the High Court of Madras against the construction of the hotel complex as it was unauthorised and was under orders of demolition by the Court. JBL appealed to the Supreme Court for vacation of the suit and the matter was sub-judice (September 2001).

The principal amount of Rs.2.50 crore was overdue since November 1995. IBHL considered the account as bad and irrecoverable. IBHL did not recognise interest income of Rs.60.44 lakh in the accounts for the year ended 31 March 1997. The principal amount of Rs.2.50 crore and interest of Rs.23.44 lakh upto 31 March 1996 were written off in the accounts as the hotel was under orders of demolition by the Court. IBHL filed in March 1998 a suit in the High Court of Madras for the recovery of dues of Rs.4.03 crore (principal - Rs.2.50 crore and interest - Rs.1.53 crore) and the matter was pending in the Court (July 2001).

Scrutiny revealed the following:

1. before sanctioning of ICD, IBHL had failed to consider the various parameters like net profit, dividend and positive net worth and JBL did not fulfil any of the conditions prescribed by GOI.
2. it was noticed that the roll over of the ICD for 180 days from 8 May 1995 was approved by the Investment Committee only on 4 July 1995, two months after the date of maturity which was not in order; and
3. the ICD was placed with JBL but the construction at Kodaikanal was undertaken by the sister concern M/s. Pleasant Stay (Kodai) Hotels (P) Limited. IBHL failed to enquire into even this basic detail while placing the ICD. Failure to ascertain relevant details of the project resulted in diversion of funds by JBL to sister/associate concern.

IBHL stated (August 2000) that they had relied upon the credit information report from Indian Bank and admitted that they were not aware of ‘Pleasant Stay’ Hotel project during placement of the ICD.

In the cases referred to above it was seen that IBHL had securities only in respect of two parties viz. M/s. Space Makers Private Limited and M/s. New Era Urban Amenities Limited. In respect of the following ICDs, Indian Bank had not honoured comfort letters:

The total outstanding as on 31 March 2001 from these parties amounted to Principal - Rs.22.08 crore excluding interest of Rs.12.85 crore and MOI - Rs.16.89 crore.

Scrutiny revealed that the ICDs were sanctioned by the Investment Committee consisting of Managing Director, General Manager and two Assistant General Managers. Most of the officials were from Indian Bank on deputation to IBHL. These officials had been repatriated to Indian Bank.

The Indian Bank in its reply without commenting on the comfort letters issued by them stated (November 2000) that IBHL ought to have made its own analysis on the credit worthiness of the borrowers. The opinion of the Indian Bank was only one aspect/report of such analysis. Further it also stated that IBHL should have taken securities at the time of placing ICD’s with the borrowers. As regards the accountability for violating the ICD norms prescribed by the Department of Company Affairs by the staff of Indian Bank it was stated that it had already taken staff accountability action against the concerned staff. Details of vigilance action initiated by Indian Bank were awaited (October 2001).

Thus, failure of IBHL to independently assess the creditworthiness of the depositee Companies and relying mostly upon Indian Bank’s reports were apparently questionable. The conditions and guidelines of GOI and IBHL’s Board of Directors were repeatedly violated. Such deliberate omissions to check vital and basic information of the client companies resulted in loss of Rs.2.73 crore and non-recovery of Rs.58.97 crore as on 31 March 2001, which includes MOI of Rs.19.60 crore.

The matter was referred to the Ministry in July 2000; their reply was awaited (October 2001).

Industrial Investment Bank of India

With a view to process a proposal of Medium Term Working Capital Loan (MTWCL) of Rs.12 crore to Beta Napthol Limited (BNL), Industrial Investment Bank of India (Company) asked (March 1997) State Bank of India (SBI), Indore to give their opinion about BNL, to whom SBI had been extending working capital facility at that time. In June 1997, SBI informed the Company that BNL enjoyed a cash credit limit of Rs.37.90 crore and it had no objection against the Company lending Rs.12 crore to BNL.

In July 1997, the Company decided to extend the loan of Rs.12 crore to BNL at an interest rate of 18.50 per cent and repayable in eight equal quarterly instalments from 15 September 1998. SBI requested the Company to disburse the proposed loan to BNL only through cash credit account (CCA) with them. Though it was normal practice to disburse the loan through a non-lien account, the Company acceded to SBI’s request without enquiring the reasons thereof and disbursed Rs.10.80 crore in August 1997 and Rs.1.20 crore in October 1997.

BNL defaulted in payment of interest from December 1997 and failed to repay any instalment of principal. The Company recalled (July 1998) the loan amount from BNL and filed a suit in the Hon’ble High Court of Mumbai in August 1998.

In March 1999, the Company lodged a claim with SBI for Rs.12 crore on the grounds that SBI had utilised the funds to recover their own dues, although they were meant only for BNL’s operational use. SBI rejected the claim in May 1999 stating that they had not given any wrong information based on which the Company disbursed the loan.

Thus, due to non-observance of normal commercial practice in assessing credibility of the new client prior to the disbursement of loan, the Company faces the risk of non-recovery of Rs.12 crore and interest thereon.

The Management, while accepting the above facts, contended (June 2001) that the loss was due to improper approach adopted by some officials of SBI.

The Management’s contention is not tenable because:

1. The Company’s query to SBI on BNL was restricted to working capital limits sanctioned to that client, as well as SBI’s opinion about BNL. SBI responded on a factual note only. Considering this scanty information there were two options before the Company. One, it could have withheld sanction to the loan presuming that SBI was avoiding to give a negative opinion about BNL. Or, two, it could have reverted back to SBI seeking a clear statement about its experience of transacting with BNL. The sanction of loan without assessing credibility of BNL was not a prudent commercial decision on the part of the Company.
2. The Company should have disbursed the loan through a ‘non-lien account’ as per the normal practice so that the fund was utilised by BNL for their intended purposes. The disbursement of loan through CCA resulted in protection of SBI’s funds at the Company’s expense.

Thus, the Company’s failure to observe prudent commercial practices and to assess risks correctly in sanction and disbursement of loan to a new client led to a potential loss of Rs.12 crore and interest thereon.

The matter was referred to the Ministry in July 2001, their reply was awaited (October 2001).