AUDITSCAN
L'Affaire Indbank: Just The Tip Of A Scamberg

By M.V. Ramakrishnan

Bad loans are a basic risk inherent in banking. All over the world, this has always been true of the business of lending and borrowing money. Massive provision of bank finance for reckless industrial and real estate adventures was one of the main reasons for the awful mess made by the East Asian countries
(including Japan) of their economic affairs towards the end of the century. In that region, the phenomenon was exposed mercilessly to universal public view because of the sudden and intriguing decline of their vigorously flourishing economies. Elsewhere in the world, it still stands only partially revealed because there has been no overall crisis of an equally sensational nature.

In India, the heavy losses caused by irrecoverable debt have been more visible to the public in the case of government finance and industrial development corporations than in the case of banking sector. Year after year, the Comptroller and Auditor General of India (CAG) comes up with graphic audit reviews on the affairs of such public sector undertakings, particularly those owned by the state governments, selected at random. His reports are presented to the respective legislatures and receive a fair measure of publicity. But the CAG's functions do not extend to the banking system even in the case of the nationalised banks, and their transactions usually elude even such selective public exposure and scrutiny.

A rare exception to this rule is the case of the Indbank Merchant Banking Services Ltd.--a subsidiary of the Indian Bank--which is constituted as a government company and therefore attracts the CAG's audit under the Constitution. In a recent audit report on Central government transactions, the CAG has revealed several instances of Indbank's inter-corporate deposits and loans turning sour. And he has traced the root causes of the whole trouble, which provide a clue to the reckless approach which had governed the dubious ethos of the mother bank itself--the Indian Bank--whose affairs had become so murky in the not-so-distant past.

INTER-CORPORATE DEPOSITS

The CAG's detailed comments on serious irregularities committed by Indbank in the context of placing short-term inter-corporate deposits with private companies are summarised in the following table: INTER-CORPORATE DEPOSITS

The CAG winds up the whole issue in his audit report as follows:

''[Indbank] sought to underplay the flouting of guidelines and norms and assumption of bad risk, and stated that ICD placement was used as a leverage for getting merchant banking assignments, and that the overdue amounts had arisen due to external reasons beyond the control of the company.

''The reply is not tenable. The violations of guidelines, instructions and norms cannot be justified for getting additional business.... While deviating from these, the company undertook unusually high risks which ultimately resulted in the deposits turning into non-performing assets... The losses could
not be attributed to external reasons...''

HIRE-PURCHASE & LEASING

Similar details in respect of serious irregularities in the sanction and disbursement of loans extended by Indbank to private companies offering hire-purchase and leasing services to the public are summarised in the following table: HIRE-PURCHASE & LEASING

As in the case of inter-corporate deposits, the Comptroller and Auditor General holds Indbank's violation of its own guidelines and its failure to adopt prudent business norms, as well as its extreme slackness in monitoring and following up defaults, as the main factors causing these fiascos.

Looking at and beyond the CAG's report, one cannot avoid the impression that Indbank's dubious transactions, which he had somehow been able to scrutinise, constitute only the tip of a huge scamberg called Indian Bank floating in a vast ocean called Indian banking which eludes his audit vision.

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