Inside the world of brokers and the art of ‘phone banking’

For example, Yes Bank, which was the “lender of last resort” in its heyday, mastered the art of lending to those who could never get a bank loan.

Its CEO Rana Kapoor strongly believed in “phone banking”. He was in direct contact with the borrowers on the one hand and on the other hand to get the work done by the top executives of the business. This was a “direct dealing” method. ,

The first round of discussions usually took place at his residence. The proposals will then be brilliantly presented to the credit committees, dissecting all the positive and negative aspects of the borrowers. But the loans will actually be sanctioned by changing the weightage on various aspects.

The bank knew that such loans would go bad, but Kapoor was confident that he could park it with another bank or a [non-banking financial company or NBFC] and buy them back later. This was a “swift” practice within banking norms, which allowed loan sales. If Kapoor was selling something, it was understood within the industry that he would buy it back. But there was nothing in writing.

He was mediating between banks and NBFCs using the letter of the law on bad loan norms of two sets of financial intermediaries. For banks, a loan becomes bad when the borrower fails to pay the interest or principal on it for 90 days. For NBFCs in those days this limit was 180 days. Now, RBI has started treating banks and NBFCs on almost equal terms with regard to regulations.

Yes Bank had two safety valves for such bad loans. One of them was the exorbitant processing fee for sanctioning such loans. Duty was the first means of revenue collection. The second was the very high interest rate. At its peak, Yes Bank was enjoying much higher returns than any other bank, earning interest on the amount lent as well as charging hefty processing fees. As a result, the actual cash flow can be as high as 80 percent of the principal. This is the reason why when a loan becomes bad after a few years, the bank may take a risk and write it off.

Let’s get back to the story of the brokers.

Indeed, bribes may defy small loans for firms, but is it easier to “manage” large loans because there are so many committees involved in approving such loans? After all, one cannot bribe all the senior officials who are members of such committees.

But “speed money” can sometimes change hands thanks to the rapid evaluation of loan applications and sanctions.

Also, the decisions may be affected when they take such risk through other debt instruments such as investments. An equally important concern for an investigating agency was the settlement of bad debts in the pre-bankruptcy law days. Often such loans were arranged at heavy discounts. Of course, the beneficiaries (read: corporate borrowers) wouldn’t mind bribing the bankers to get it done. But even the smartest brokers can’t have a field day forever.

In August 2014, when the Central Bureau of Investigation (CBI) arrested a broker in Delhi for his alleged involvement in paying off Sudhir Kumar Jain, CMD of Syndicate Bank. 50 lakh for sanctioning a loan to a steel company, another Mumbai broker celebrated his arrest.

According to some of his friends, he claimed that he had played a role in the arrest by passing secret information to the investigating agency.

In November 2010, when the CBI arrested a Mumbai-based broker for his alleged involvement in a similar scam, the Delhi-based broker opened a bottle of champagne. They worked together for two years in 2008 and 2009, before falling out over profit-sharing. The profit was huge. The Mumbai broker’s firm’s presentations and annual reports show that it was instrumental in syndicating 50,000 crores across all sectors between 2008 and 2011. He had a monopoly over the government-owned insurance company and several public sector banks. He also tried to use the media to fabricate stories against his former ally-turned-enemy.

I am not naming anyone for obvious reasons. I was in touch with one of them and many of their employees, friends and “fans”, former directors on the boards of group companies, regulators, bank executives and associates, to get a closer look at their world…

Incidentally, these brokers did not target the banking community alone. Insurers, mutual fund managers and even heads of private equity funds fell into his net. For example, a fund manager of an asset management company owned by a large insurance conglomerate often traveled abroad at the expense of a Mumbai-based broker, who believed he was doing something wrong with his three W’s—wine, women and money. Can also buy – not necessarily in that order, though. The fund manager also got two high-end cars—a Ford Endeavor and a Porsche—registered in the name of the broker’s NBFC, and used to live in a flat provided by the broker.

quoted with permission from Roller Coaster: A Case With Banking Tamal Bandyopadhyay, published by Jaco Publishing House,