And the RBI needs to accept its part of the blame.

India’s bank loan frauds continue to pile up. This time it’s the state-owned Oriental Bank of
Commerce which has lost at least Rs 109.08 crore to alleged misappropriation by sugar refiner
Simbhaoli Sugars.

The quantum of money lost is not as large as in the Punjab National Bank-Nirav Modi case, but it
further exposes the systemic issues in Indian banking.

In this case, loans sanctioned to one of India’s largest sugar refinerieswere fraudulently diverted,
a case filed (pdf) on February 22 by India’s top investigative agency, the Central Bureau of
Investigation, said. Subsequently, the firm was extended another loan to clear its earlier dues, which
also remains unpaid.

So, what is Simbhaoli Sugars and how did this whole operation go about?

A bittersweet history
Started in 1933 by Sardar Raghbir Singh Sandhanwalia in partnership with three others, Simbhaoli
Sugars set up one of the first sugar plants in northern India, in Simbhaoli, Uttar Pradesh. Gurmit

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Singh Mann, the top accused in the Oriental Bank fraud, is a third-generation descendant of
Sandhanwalia, and has headed the firm since 1972.

The firm produces specialty sugars, ethanol, distillery, clean power for captive use, and also acts as a
technology consultancy. It has the capacity to crush 19,500 tonnes of cane per day, across three
plants in Simbhaoli, Chilwaria, and Brijnathpur.

The company has seen turbulent times since 2006-’07 due to the volatility in global sugar prices and
domestic production. According to its financials, it faced growing losses between 2012 and 2017 on
account of falling price realisation and rising finance costs.

As of March 2017, the consolidated losses of Simbhaoli Sugars stood at Rs 60.21 crore, while its
total current liabilities of over Rs 1,800 crore (pdf) far outweighed its current assets.

Then came the fraud

The latest chain of events began as an attempt to help sugarcane farmers.

To support cane production, India’s central bank, the Reserve Bank of India, had in 2011, facilitated
priority-sector lending for individual farmers and self-help groups.

Simbhaoli tied up with Oriental Bank to extend support to over 5,700 farmers to the tune of Rs 3
lakh per head (the overall exposure being capped at Rs 150 crore), the CBI FIR states.

A memorandum of understanding was signed between the bank and the company on January 18,
2012, according to which the firm would act as a corporate guarantor for farmers, providing them
seeds, fertilisers, and equipment.

The company submitted the farmers’ loan applications to the bank, and got them approved. Oriental
Bank disbursed over Rs 148 crore between January and March of 2012 from the farmers’ loan
accounts to the company’s account.

However, Simbhaoli then transferred Rs 97.85 crore out of its account in Oriental Bank to its other
bank accounts with the State Bank of India, Punjab National Bank, and UCO bank. It later came to
light that the company had used the funds for purposes other than supporting farmers, including
clearing earlier dues to suppliers.

In fact, Oriental Bank has claimed that Simbhaoli issued and submitted improper verification
documents, or know-your-customer certificates, for individual loan accounts. The Oriental Bank
staff never bothered to complete the KYC-compliance procedure, the CBI says.
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In January 2015, the lender filed a recovery suit on the loans with the Lucknow debt recovery
tribunal. Following this, the company gradually began paying back its dues.

It was around this time that Simbhaoli approached Oriental Bank for yet another loan to clear its
earlier liabilities.

Later that month, a consortium of banks led by the State Bank of India extended the sugar refiner a
corporate loan of Rs 110 crore to clear its outstanding dues with Oriental Bank, holding its movable
and immovable assets as collateral. The loan was also backed by the personal guarantees of its
directors and promoters, including the son-in-law of Punjab’s chief minister, Amarinder Singh, who
is a deputy manager at the firm.

But the pertinent question is, how was a defaulting company sanctioned an even larger loan?

How they slipped through

Once a borrower is declared a non-performing asset, it should be fairly difficult for the entity to
secure fresh loans, R Gandhi, a former RBI deputy governor, said.

“The RBI has a system of collecting information from all the banks about credit facilities concerned
with large borrowers, that is, [loans worth] more than Rs 5 crore. And that is disseminated to other
banks,” Gandhi told Quartz. “These are large credits, which would go to their senior committee [for
approval]. There, one of the standard requirements is to show to them what is the status of this party
in the large credit database, and in the fraud database. If they don’t show it, that means they are also
complicit.”

In May 2015, Oriental Bank reported the misappropriation of funds to the RBI, but by then, the
damage was done. The Rs 110 crore fresh loan also turned into an NPA by November 2016, the CBI
FIR says.

In an exchange filing (pdf), the company clarified that the first complaint to the CBI was filed in
September 2015, and an amended complaint was again filed two years later. However, it’s not clear
why the probe agency began investigating it only now, three years after the fraud was first
discovered. Emails sent to bank officials remain unanswered.

The RBI needs to accept its part of the blame, Ashvin Parekh, managing partner of Ashvin Parekh
Advisory, said. Banks themselves are equally at fault, particularly in the second round of lending, he
added.

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“It shakes up the confidence in Indian banking; particularly state-owned banks being involved makes
us really worry,” Parekh said.

CBI files case against Simbhaoli Sugars, officials for bank fraud
The CBI on Sunday registered a bank fraud cases against a Uttar Pradesh based private sugar
company, its top officials along with unknown bank officials for allegedly causing loss of Rs 109
crore to Oriental Bank of Commerce, officials said.

According to Central Bureau of Investigation (CBI) officials, the Hapur-based Simbhaoli Sugars Ltd
in 2011 fraudulently diverted funds received as loans for sugarcane farmers and self help groups.

CBI also conducted searches at offices of the company and residences of its officials at eight places,
including one location each in Hapur and Noida, and six locations in Delhi.

"Searches are being conducted at eight premises including residences of Directors, factory, corporate
office and registered office of the company in Delhi, Hapur and Noida," CBI spokesperson Abhishek
Dayal told IANS.

The agency has named the company's Chairman and Managing Director, its Directors, CEO, Chief
Financial Officer and unknown bank officials and other private persons, under charges of criminal
conspiracy, cheating, forgery slapping sections under Prevention of Corruption Act for causing loss
to the bank.

Officials said that the Bank sanctioned a loan amounting to Rs 148.60 crore in 2011 to the private
company for financing individual, Joint Liability Groups, Self-Help Groups under the tie-up
arrangement under the RBI Scheme to 5,762 sugarcane farmers supplying sugar produce to said
private company during the period from January 25 to March 13, 2012. It has been alleged that the
company has diverted funds for personal use.

According to complaint, the account turned Non Performing Asset (NPA) on March 31, 2015 and
was later declared as alleged fraud by the bank to RBI on May 13, 2015 for an amount of Rs 97.85
crore.

It was further alleged that in addition to the existing NPA as on March 31, 2015, the bank, under
multiple banking arrangements, had sanctioned another corporate loan of Rs 110 crore to the sugar
company on January 28, 2015, to pay its outstanding loan of Rs 97.85 crore, and adjusted the total
liability of Rs. 112.9 crore of said private company on June 30, 2016 by way of deposit of this new
corporate loan.

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The corporate loan, too turned into an NPA on November 29, 2016, thus resulting in its first
outstanding loan of Rs 97.85 crore (as alleged fraud) and the corporate loan of Rs 109.08 crore (as
fresh outstanding).

CBI is now investigating the matter, officials said.

It is alleged that the company has diverted the loan funds intended for farmers

In an alleged case of fraud perpetrated by Simbhaoli Sugars Ltd, the Enforcement Directorate (ED)
has attached its assets worth ₹109.80 crore. The attached assets include the company’s land,
buildings and plant and machinery of a distillery unit in Simbhaoli, Uttar Pradesh, the ED said in a
press note.
The CBI has filed an FIR against Simbhaoli Sugars and others for cheating and defrauding Oriental
Bank of Commerce (OBC) on the pretext of financing sugarcane farmers. According to the FIR, the
bank loaned the company ₹148.59 crore for providing assistance to 5,762 farmers, but the funds
were diverted by the company for other purposes.

Firm faced liquidity crunch

The ED launched a probe under the provisions of the Prevention of Money Laundering Act (PMLA),
2002. It conducted searches at the offices of the company at Noida and Simbhaoli, resulting in the
recovery and seizure of incriminating documents. “Investigation revealed that the company was
facing a liquidity crunch and approached the bank for sanction of loan under the interest subvention
scheme of the Reserve Bank of India under a tie-up arrangement with 5,762 farmers for financing
them for pre- and post-harvest assistance,” the press note said.
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The company and OBC signed an MoU on January 18, 2012. “The funds paid by the company to the
farmers were not remitted to the accounts of the farmers. Therefore, per the terms and conditions of
the loan, the liability was shifted upon the company, which failed to repay,” the press note added.
There were serious irregularities in the KYC documents, it further said. The loan then turned into a
non-performing asset with ₹98.7 crore (principal) outstanding, and the bank filed a recovery suit
before the Debt Recovery Tribunal (DRT).

Diversion of funds

Investigation revealed that the company diverted the loan funds into various other accounts. It finally
used it towards repayment of outstanding loans — including external commercial borrowings,
operational expenses and payment of cane arrears — which should have been paid from its sales
revenue. The company “thus laundered the funds intended for assistance to the needy farmers, in
utter violation of the terms and conditions and the intent of the loan,” the note said.
Instead of settling the entire loan liability, Simbhaoli Sugars induced OBC to withdraw the
application before the DRT and grant it a fresh corporate loan of ₹110 crore on January 28, 2015, to
clear the previous loan dues, with subservient first pari passu charge on all the movable and
immovable fixed assets and personal guarantee of the company’s directors and promoters, said the
note.
The company again deliberately failed to repay the corporate loan and, at the time of the FIR, ₹109.8
crore was outstanding (principal). “The company had offered a one-time settlement of ₹14.69 crore
against the entire outstanding. This highlights an ingenious modus operandi of money laundering by
taking huge loans from banks and later settling them at heavily discounted sums, thereby causing
huge wrongful losses to such lender banks,” said the note.