Banks must refocus on their basic lending role 

News: ABG Shipyard, a ship building and repairing company, is alleged to have committed a bank fraud.

Questions are also being raised as to why it took so long to conduct an audit report and for the report to point out mala fide use of funds and legal action to be initiated. 

What is the ABG Shipyard case? 

ABG, a shipbuilding and ship repair company, is alleged to have defrauded as many as 28 banks of almost ₹23,000 crore, which includes big lenders like ICICI Bank, IDBI Bank and State Bank of India. 

Large sums of money were reportedly borrowed between 2005 and 2010 and allegedly diverted over the years from 2012 to 2017 through multiple deals within the ABG group.  

Company is said to have used methods like investments in overseas subsidiaries, assets bought in the name of affiliates and a variety of related-party transactions to secure loans from multiple lenders. 

What are the causes that lead to such corporate scams in India? 

Our banking sector is still state-dominated and this sometimes lead to companies using their links to secure loans and critical factors like Credit risk are ignored by the banks. 

What has been the trend in corporate credit in shipping industry sector? 

Recently, there has been an increase in retail credit due to a low demand for credit from the corporate side.

This is because capacity utilization levels in the private sector overall have been low for a sustained period, curtailing business investment. 

Why sustained corporate credit growth is important for economic growth? 

A boost in corporate credit demand is crucial for economic growth.

– Towards that end, the Government has been focussing on capital expenditure as seen in recent budget and also evident from its offer of production incentives for over a dozen fields. 

This will lead to a renewed investment by private enterprise in the second half of next fiscal year. If this happens many businesses will want to borrow from banks. 

What is the way forward?

Although, Securities and Exchange Board of India (SEBI) has been pushing for transparency in the related-party dealings of listed firms, but there is need for more checks and balances to prevent any such frauds in future. 

Source: This post is based on the article “Banks must refocus on their basic lending role” published in Live Mint on 22nd Feb 2022.