Mumbai: ICICI Bank Ltd has not satisfactorily answered two serious allegations made by a whistleblower—that the bank inflated profits by at least $1.3 billion over eight years by delaying provisioning for bad loans, and that top executives, including CEO Chanda Kochhar and executive director Vijay Chandok, wilfully breached rules to avoid classifying the loans as bad.
On Friday, the bank failed to fully address these issues in response to a Mintquery, although it denied charges of incorrect accounting of interest income in 31 loan accounts; misrepresenting recovery amounts in non-performing assets as fees; and overvaluing securities for corporate loans.
“In certain accounts, transactions were observed that may have delayed the classification of the account as non-performing under Indian GAAP (generally accepted accounting principles) in earlier years… As mentioned earlier, all the above loans had been classified as non-performing and provided for as per applicable norms by 31 December 2017,” ICICI Bank said in its response, a copy of which was sent to the exchanges.
However, the complaint by the whistleblower, an ICICI Bank employee, made on 20 March and 22 March to the Reserve Bank of India and the Securities and Exchange Board of India (Sebi), has alleged that the bank deliberately failed to set aside funds to cover 31 defaulting loan accounts between fiscal 2008 and March 2016, not fiscal 2017. The bank’s clarification does not answer the whistleblower’s charges as to why in a number of fiscal quarters between 2008 and 2016, the bank’s management deliberately delayed provisioning for 31 loans.
The bank has allegedly inflated profits, primarily by underreporting the quantum of bad loans made to 31 companies, in which impairment was delayed by a quarter to even up to five years, according to the complaint.
In its detailed rebuttal on Friday, ICICI Bank admitted there were some delays in underreporting the quantum of bad loans made to 31 companies. In response to a fresh query sent by Mint on Saturday, ICICI Bank declined to elaborate further, stating that “we have nothing further to add on this matter at this point of time”.
According to the whistleblower, the bank has managed to delay provisioning for NPAs arising out of loans worth at least $3 billion. Effectively, ICICI Bank would have reported losses in some quarters over the eight years, had the bank’s management not deferred impairment of loans, claimed the whistleblower.
It is not known if this points to a systemic failure at the bank and if the bank is also investigating executives responsible. It hasn’t clarified yet if it intimated Sebi about the internal probe as part of fair disclosure norms.
The whistleblower’s allegation of partiality by the bank’s top management in cases of certain loans is also quite serious.
“The bank’s top management has often openly discussed the methods to be used or have been used to avoid impairment of loans… there have been several meetings held at the bank by the senior management to discuss the modus operandi of trying to save certain loan assets in other countries by funding a group company in India. The bank’s discussions in such cases indicate the involvement of Chanda Kochhar in negotiations with the client,” reads the whistleblower’s letter. It adds that the bank has on several instances modified the internal auditor’s observations to mask the fraud from the final audit report at the behest of the senior management.
ICICI Bank did not respond to this charge.
According to the whistleblower, at least three loans, including a $923 million loan made to Essar Global Ltd, a loan of similar amount made to Bhushan Steel Ltd and a $615.38 million loan to Essar Steel Ltd account for 84% of the $2.92 billion in loans made to 31 firms.
ICICI Bank, which is also listed on NYSE and governed by the US Securities and Exchange Commission, on Friday, dismissed this charge saying that its interim internal report found no “material impact” on the bank’s financials, without clarifying the threshold amount that is defined as “material” by the bank. Although GAAP and FASB (accounting methods) do not precisely stipulate a threshold to define materiality, according to auditors and courts in the US, on the income statement, any transaction constituting 5% or more of the company’s pre-tax profit, or 0.5% of sales revenue, is considered as material.
On a balance sheet, any entry of more than 0.3-0.5% of total assets, or more than 1% of total equity, is considered to be material.
Attorneys and accountants at the SEC have been investigating the whistleblower’s allegations for months now. The 20 March complaint states that the bank had engaged in fraudulent activities between 2008 and 2016 to avoid reporting of impairment of loans.
ICICI Bank has not clarified whether the US SEC is conducting any probe based on the allegations made in the whistleblower emails.
SEC considers it an abuse of materiality judgement if it is done to keep stock prices artificially high, or inflate reported earnings or understate the actual value of the asset base.
ICICI Bank has said that further actions in the matter are being and will be taken as directed by the audit committee, without clarifying on whether this initiative is related to either an ongoing investigation and what the role of senior management was in this delay in classifying some of the loans as NPAs.