From commoners' pockets

World Inequality Report 2022 stated that on an average, an adult coming from the bottom 50 per cent of Indian population (in terms of income) earned around 53,000 rupees annually. The Government of India has allocated Rs 73,000 crores for MNREGA scheme for roughly around seven crore rural folks who would toil hard around the year to get a minuscule fraction of this sum to sustain their families. For reaching 35 per cent development status, over Rs 1,000 crore has been pumped into the Central Vista project over years. The government had allocated Rs 6,400 crore for Pradhan Mantri Jan Arogya Yojana (PMJAY) for 2019-20. And of course, Ishan Kisan was sold for Rs 15.2 crores in IPL auctions recently. These are random and crazy numbers with which our fascination doesn't seem to end anywhere.

Now, what about this crazier stuff that we came across a fortnight ago — ABG fraud amounting to around Rs 23,000 crores! It is an amount that two crore Indians (from the bottom 50 per cent population) will have to work a whole year to amass. It is one third of what goes into sustaining the livelihood of seven crore individuals through MNREGA across a year. It is multiple times more than what is being spent on constructing the new temple of Indian democracy. It is more than 20 times the estimated cost of building Ram Mandir. It is also around three times what India spends on its flagship health programme annually. And then again, this money is enough to buy 1,500 Ishan Kisan (s)!

We have an idea that so much money is stolen. But stolen from whom? Without churning the yarn too much — from the people of India who already have their pockets curtailed on account of heavy inflation, and who are still struggling to recover from the wounds inflicted by the pandemic.

The innocent government is left clueless as most of the loans given to ABG Shipyard were during the UPA rule. Banks are also helpless as they are busy with their onerous task of carrying out internal investigations and audits which, of course, should take years. And if everybody else does, why won't the CBI take its luxury time! It appears people also are left with a singular choice of letting the matter fade away from memory, and move on until the next shock comes at some time in future to give a reminiscence of sorts.

Still, in this article, we shall retrospect how things shaped India's biggest bank fraud and what are the structural loopholes that have allowed such developments. We shall go beyond the singular case and see if a better future can be expected.

Rise of ABG Shipyard

While still in his teens, Rishi Kamlesh Aggarwal — a graduate from Purdue University — laid the foundation of ABG Shipyard through an acquisition whose downfall is tormenting us almost 37 years down the line. He acquired a small ship-building unit — Magdala Shipyard Ltd. — at the banks of River Tapti in Surat. The primary motive was to get into the business of ship building and ship repair. With the onset of the 1990s, each year started turning out to be a milestone for the young entrepreneur. By the mid-1990s, he had started getting domestic and export orders.

The pace of development can be gauged from the fact that by the year 2000, the company started getting government orders. Soon, it entered the rich Gulf market. Company's growth appeared unassailable and Rishi Agarwal became the doyen of the Indian shipping industry. The company swelled further with the acquisition of a small UAE-based company — Cross-ocean Ship Repair Limited. Just a year later, it acquired Vipul Shipyard but the big gain would come with acquisition of a BSE-listed company — Western India Shipyard Ltd — in Goa.

At the beginning of 2010s, it was at the peak of its business and had even entered into the construction of naval ships and marines. But what awaited it was a downfall that the Shipyard would never manage to recover from.

Decoding the fall

The decline of ABG Shipyard can be attributed to several factors. The prime factor, as reported by ABG itself, has been the 2008 financial crisis. This argument indeed holds water. In the period between 2000 and 2008, trade was booming across the world and shipping was the prime transport medium. As a 2008 UNCTAD newsletter would highlight "the shipping is the faithful servant of global trade and a fulcrum of economic growth, facilitating an estimated 90 per cent of global trade volume". This booming trade demanded for a great number of ships and containers. And to cater to these container demands, shipping companies started gushing big money — primarily loaned from banks that were lured with the prospects of big profits. This was the trend the world over, particularly in the East that had emerged as a fresh hub of production.

And then came the 2008 crisis that would turn the world upside down for the shipping industry for two reasons — 1) inspired by the economic boom, shipping companies had sort of peaked the supply of containers; and 2) The economic downturn had reduced the demands of goods and also affected the supply side as production suffered. It was reported that throughputs in Singapore and Shanghai — world's largest ports — decreased by 13.5 per cent and 11 per cent respectively in 2009. China, a manufacturing hub by then, had also registered a significant export drop.

As noted above, the phenomenal rise of Rishi Agarwal-led ABG Shipyard was aligned with the economic boom and the downfall followed the crisis. As per a 2010 article in 'The Journal of Commerce, Maritime News', Danish shipping company Maersk lost USD 373 million. The traditional German shipping company Hapag-Lloyd's lost more than USD 300 million in the first quarter of 2009 and needed close to USD 2.5 billion to stay afloat. Many other companies also registered heavy losses.

But certainly, the downfall of ABG Shipyard cannot be attributed solely to the external factor of economic recession. It was also as much a question of personal impropriety.

A sharp divergence could be seen in the post-2008 era. While the shipping companies were sinking globally and going bankrupt, ABG Shipyard was believed to have maintained confidence among the bankers.

The way it happened

Notably, despite the fact that the shipping industry was hit globally and shipping companies were going bankrupt, Rishi Agarwal went on with the same momentum. Perhaps he wasn't ready to submit to the dictates of time. Even in the post-economic crisis era, Agarwal's charm was intact and he could show big order books to banks for garnering loans. The banks, too, kept lending for a couple of years in hopes of profit.

Such hopes wouldn't fructify and the accounts of the company will be declared non-performing assets (NPAs) in 2013. The consortium of banks appointed a third-party global professional service firm — Alvarez and Marsal — for Corporate Debt Restructuring of ABG Shipyard, with a total recast package of Rs 11,000 crore. CDR, as is known, is a framework that is aimed at "preserving viable corporates that are affected by certain internal and external factors and minimise the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme". It basically moderates the interests on loans, extends the period over which loans can be repaid among other things.

Back then, CDRs were failing badly and the consortium of banks had framed a relatively stricter repayment structure for the company. The third-party firm was roped in at heavy expenses because the amount and complexity of the loan was too big for the banks to handle!

As part of the restructuring package, the interest rate on ABG Shipyard's loans was reduced by 100 basis points to 11 per cent and a two-year moratorium on its repayment schedule was granted. The company had to then repay its loans in 32 structured, quarterly installments before 30 June 2024 —apart from bringing in Rs 300 crore in equity.

Despite stringent monitoring by the Chief Risk Officer (CRO), the plan failed to achieve its purpose. The allegations are that ABG Shipyard violated the CDR through deceit. The renowned forensic audit company, Ernst and Young, in its audit report for a period between 2012 and 2017, alleged fraud on the ABG Shipyard in January 2019. The audit report revealed a complex web of transactions on the part of ABG Shipyard to companies associated with it or its promoters. It is this complex web that the CBI is currently investigating into to extract real answers. Following the audit report, the State Bank of India filed two consecutive FIRs and other banks followed. Now, after three years down the line, the issue has come under the spotlight. Almost a decade has passed since the company went into the tailspin, and now an investigation is being initiated. How much time will it take to bring culprits to the book, nobody knows.

Wider problem of bank frauds

ABG Shipyard is indeed the biggest fraud in the banking history of our country. Punjab National Bank Fraud was another big one. The ABG fraud case has forced us to raise our eyebrows and utter a claim — how can this happen under the nose of a leading banking system in the world.

But one must hold nerve because, Business Today reported in December last year, that 3,14,270 cases of banking frauds were reported during FY08 to FY21, involving Rs 5.31 lakh crore. Of this, only Rs 56,502 crore has been recovered. The ABG fraud is only a small part of the problem. The amount of people's money going into drains is unimaginable.

Banking system has particularly been prone to frauds all throughout — given it deals with such huge sums of money. But, in the aftermath of economic liberalisation in the country in 1991, the banking sector was particularly thrown into competition of sorts. MK Singh, in his 2005 study, 'Bank frauds—what every banker needs to know', noted: After independence, the banks have passed through three stages. They have moved from character-based lending to ideology-based lending to today's competitiveness-based lending in the context of India's economic liberalisation policies and the process of linking with the global economy.

This competitiveness has, in a way, forced banks to run after profits, many times compromising with caution.

Two things need to be understood in this context: 1) Banking fraud in India has been a persistent threat over the past few decades. The big frauds that were exposed recently represent only the tip of the iceberg. 2) Both commercial banks and public sector banks are equally vulnerable to fraud.

Madan Bhasin's 2016 research article — 'Frauds in the Banking Sector: Experience of a Developing Country' — in 'Asian Journal of Social Sciences and Management Studies' throws some light around the time when ABG Shipyard was plunging into losses and defaults. It noted that the public sector banks alone cumulatively lost a massive sum of Rs 22,743 crore due to cheating and forgery in three years ending March 2013 — this amount is equivalent to the current fraud, even without taking inflation into account. A 2014 study by Pai and Venkatesh noted that in 2012-13, Rs 13,293 crore of fraud was detected in all PSU banks in the country.

Marking a distinction between public and private sector bank frauds, Madan Bhasin analysed that "while the private and foreign bank groups accounted for a majority of frauds by number (82.5 per cent), the public sector banks accounted for nearly 83 per cent of total amount involved in all reported frauds."

Cutting straight to the present, as per an RBI response to India Today's RTI query, only Rs 1,031 crore was recovered from 83,638 cases of banking frauds in FY21, involving Rs 1.38 lakh crore.

The scenario of banking fraud has particularly gotten worse in the post-demonetisation era. Business Today reported that while 5,071 cases of frauds were reported during 2016-17, it jumped to 40,062 cases in 2017-18. The amount involved in the fraud has also come a long way from Rs 23,927 crore in FY 2017 to 1.38 lakh crore in FY 2022. Researchers have been flagging the ineptitude of the Indian banking sector in handling sophisticated fraudulent methods that deploy new technologies. The forced digitisation through demonetisation could be a prominent factor behind this steep spike in bank frauds.

Way forward

While it is difficult to predict when the investigations in ABG Shipyard fraud would reach completion, one thing is sure that it will solve only a part of the problem.

This mega fraud incident should be taken as an opportunity and a challenge to fix the leakages through which huge amounts of public money is allowed to drain away. Improvement needs to be made on three levels — technological level, legal level and implementation (particularly monitoring) level.

On the legal front, newer legislations like bankruptcy and solvency code have marked significant improvements but still tighter regulations may be required. On the technological front, the banking system needs to improve a great deal when it comes to security issues. As Ernst and Young have pointed out: "The evolving fraud landscape around banking and the increase in fraud-related losses requires automated detection systems and robust fraud defence processes."

But to start with, the well-defined RBI guidelines need to be implemented in right earnest.

Views expressed are personal