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The Unequal Fates of Big and Small Loan Defaulters in India

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The Pulse

The Unequal Fates of Big and Small Loan Defaulters in India

Nirav Modi and Mehul Choksi are the latest Indian bigwigs to default and abscond.

The Unequal Fates of Big and Small Loan Defaulters in India
Credit: CC0 image via Pixabay

India’s largest-ever banking fraud scandal has sent waves across the country, even as many are yet unable to comprehend its sheer scale. Through close ties with bank officials and international clout, two jewelers swindled nearly 113 billion rupees (approximately $1.7 billion) from a single branch of the Punjab National Bank (PNB), the second largest public sector bank in India, over several years. The amount is one-third of the bank’s entire market capitalization, and is also equivalent to 8.5 times the bank’s profit for financial year 2016-17.

Even though news reports revealed whistle-blowers alerted the bank as well as the office of Prime Minister Narendra Modi, the two jewelers are since nowhere to be seen, with speculation that one of them may have absconded to New York City. Their passports have been suspended.

One of the men, Nirav Modi, a fourth-generation jeweler, had risen to eminence as a diamantaire for his eponymous brand, with $2.3 billion in revenues. One of its earliest pieces of jewelry was featured on the front cover of a Christie’s catalog and sold by the auction house in Hong Kong for $3.8 million. His jewelry has been worn by actresses and celebrities, including Kate Winslet, Naomi Watts, and Rosie Huntington-Whiteley, while Priyanka Chopra is its brand ambassador in India. Forbes put his wealth at $1.75 billion and ranked him as India’s 84th richest person. He has been a regular feature on the lists of rich and famous Indians since 2013.

On the other hand, Mehul Choksi, who is Modi’s maternal uncle, is the managing director of Gitanjali Gems, and had grown the company, which he inherited, into one of the largest exporters of raw diamonds across the world. He entered the international market by creating a buffet of brands. Choksi is also a partner to Modi’s three companies, all of which are now being examined by Indian authorities.

As reports continue to emerge, it has now become evident that the two men, along with their families, left India between January 1 and 6, this year. The country’s Enforcement Directorate (ED), which is an economic intelligence agency, carried out multiple raids on showrooms, workshops, offices, and the residences of Modi and Choksi, seizing diamonds, jewelry, and gold worth 51 billion rupees ($790 million). The houses of two officials from the PNB, one of them retired, were also raided, as their names were in the police complaint.

According to the information that has been made public so far, the scam involved officials from within PNB who had been handing out fake Letters of Understandings (LoUs) to companies associated with Nirav Modi, allowing him to access massive foreign exchange loans. Neither the SWIFT international interbank telecommunications system nor PNB’s core banking system had any records of these transactions.

The matter was uncovered when companies connected to Modi came to PNB and asked for more LoUs, after one of the officials had retired. This time the bank demanded they furnish cash margins to cover the loans — as is the norm. But the companies told the bank that they had previously received LoUs without margins, which is when the bank realized something was amiss.

What has also generated a lot of activity on social media platforms is Modi’s presence, along with other business people, politicians, and Prime Minister Narendra Modi, at the recent World Economic Forum in Davos. So far, the law and justice minister Ravi Shankar Prasad of the ruling BJP has denied any personal meeting between the two Modis, who are unrelated. This did not prevent the party in opposition, the Indian National Congress, from taking jibes at the BJP: demanding answers on who allowed “Chhota Modi” (junior Modi) to flee the country, and alleging that the Narendra Modi government had failed to prevent the scam.

This allegation is not vacuous: in 2013, Dinesh Dubey, former director of another public sector bank, Allahabad Bank, had written a dissent note to the then deputy governor of the Reserve Bank of India (RBI) – India’s central banking institution – about excess credit being given out to Nirav Modi. His alerts fell on deaf ears. Another jeweler from Bengaluru alleged that he had written to the prime minister’s office in 2016, after he did not receive any response from various other central investigative agencies.

As events unfold, there are still several questions hanging in the air, primarily regarding the extent of the scam and the total amount that was swindled by these men. There are parallels being drawn with flamboyant Indian businessman Vijay Mallya, who also defaulted over a billion-dollar loan and managed to leave India in 2016.

India’s 21 public sector banks are central to the country’s financial health: they account for between 55-60 percent of the entire Indian market. But the inability to tackle bad loans is something that has weakened Indian banks. However, the defaulters seem to be the usual suspects: wealthy and unscrupulous industrialists. Information obtained by Reuters revealed that public sector banks have reported 8,670 loan fraud cases totaling 612.6 billion rupees ($9.58 billion) over the last five financial years, up to March 31, 2017.

Despite this, the legacy of successive governments has been to bail out these defaulters. Given that PNB is a nationalized bank, valid questions arise if this will cost the Indian taxpayer heavily: the class of people who rarely default, and are chased down for their small unpaid bursaries. And then there are the farmers across India, who default on the loans they borrow to improve their agriculture. The inability to repay them has meant that suicides by farmers have been much higher than the rest of the population.

Between 2003 and 2013, the proportion of indebted agricultural households increased to 52 percent from 48.6 percent, with the average outstanding amount per household increasing from 12,585 rupees ($196) in 2003 to 47,000 rupees ($732) in 2013. Importantly, 82 percent of all indebted agricultural households are those who possess fewer than two hectares of land, and nearly half of marginal and small farmer who are in debt owe money to noninstitutional sources.

Even though the government implemented an agriculture debt waiver scheme aimed at waiving the loans of 30 million small and marginal farmers, it covered only formal sources of credit and excluded any kind of informal loan.

Farmers who toil on farmland across India have been taking their own lives for the inability to repay these small loans, which are large enough for them to fall into a cycle of helplessness. And yet, it is the bigwigs like Mallya and Modi and Choksi that seem to have layers of harnesses before their fraud can be detected and brought to court.