KAAND: The Bank Relationship Kaand TACTIC: Borrow from public sector banks, use one loan to service another, restructure before the NPA tag arrives
THE TACTIC IN ONE PARAGRAPH A borrower secures multiple loans from public sector banks (PSBs), often against the same underlying asset or future cash flows. Instead of deploying capital into productive use, the funds are rotated—new loans service old ones, creating an illusion of repayment. When cash flows dry up, the borrower approaches banks for restructuring under RBI’s "corporate debt restructuring" (CDR) or "stressed asset resolution" schemes, delaying the non-performing asset (NPA) tag. The cycle repeats until the borrower either recovers or collapses, leaving banks with haircuts. The tactic thrives on regulatory forbearance, weak collateral enforcement, and the reluctance of PSBs to recognize losses upfront. A 22-year-old might think of real estate developers juggling construction loans, infrastructure firms rolling over project finance, or conglomerates using group companies to cross-subsidize debt.
HOW IT WORKS IN INDIA SPECIFICALLY This tactic is uniquely effective in India due to three structural features: the dominance of PSBs, regulatory forbearance, and judicial delays. First, PSBs control ~60% of banking assets, and their lending decisions are influenced by political and bureaucratic pressures, not just commercial logic. Second, RBI’s periodic "asset quality review" (AQR) cycles and restructuring schemes (like the 2015 Strategic Debt Restructuring or the 2019 Prudential Framework) create moral hazard—borrowers know banks will delay NPA classification to avoid balance-sheet stress. Third, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, is slow to enforce collateral due to judicial backlogs (over 40 lakh pending cases in debt recovery tribunals). Finally, the gap between RBI’s oversight of banks and SEBI’s oversight of listed entities allows borrowers to window-dress financials—banks may restructure loans while the same entity raises equity or debt from markets, masking distress.
THE HISTORICAL RECORD The tactic has been documented in multiple high-profile cases. In 2018, the RBI’s AQR revealed that Kingfisher Airlines had borrowed ₹7,000 crore from 17 banks, with funds diverted to group companies and unrelated ventures. Banks restructured the debt thrice (2010, 2012, 2014) under CDR before declaring it an NPA in 2016. The promoter used fresh loans to service old ones, while banks delayed action to avoid recognizing losses. The outcome: banks recovered ~6% of dues; the promoter faced no personal liability due to delays in the Insolvency and Bankruptcy Code (IBC) process.
Another case is Essar Steel, which borrowed ₹49,000 crore from 22 banks. Between 2011 and 2016, the company repeatedly restructured debt under CDR, using fresh loans to service old ones. Banks delayed classifying it as an NPA until 2016, when the IBC was invoked. The resolution plan, approved in 2019, saw banks take a 90% haircut. The promoter, however, retained control of other group assets, illustrating how restructuring schemes can shield personal wealth while socializing losses.
In 2020, Yes Bank’s collapse revealed a variant of this tactic: the bank itself lent to stressed borrowers (like DHFL and IL&FS) to help them service old loans, masking its own asset quality issues. RBI’s subsequent moratorium and reconstruction plan showed how interbank lending can be used to delay recognition of systemic stress.
THE INSTITUTIONS THAT ENABLED IT No tactic survives without enablers. PSBs, under pressure to meet lending targets, often overlook due diligence—documented in the 2014 Vijay Mallya case, where banks ignored red flags in Kingfisher’s financials. Auditors, like those at PwC in the Satyam scandal or Deloitte in the IL&FS case, signed off on financials despite glaring inconsistencies. Rating agencies, such as ICRA and CARE, maintained investment-grade ratings for stressed firms until the last moment—Essar Steel was rated "AA" just months before default. Boards of PSBs, often staffed with bureaucrats or political appointees, rarely questioned lending decisions. The Banking Regulation Act, 1949, limits RBI’s ability to supersede PSB boards, leaving governance weak. Finally, debt recovery tribunals (DRTs) and the National Company Law Tribunal (NCLT) are overwhelmed, allowing borrowers to exploit delays.
THE CURRENT STATE The tactic persists, though with modifications. The IBC (2016) has reduced the window for endless restructuring—over 2,000 cases have been resolved, with banks recovering ~32% of claims. However, the Prudential Framework for Resolution of Stressed Assets (2019) still allows banks to restructure loans without classifying them as NPAs, provided they make a 10% provision. This creates a loophole: borrowers can secure fresh loans to service old ones, then restructure under the framework. The RBI’s June 2023 circular on "compromise settlements" further incentivizes banks to avoid IBC by offering haircuts upfront. Meanwhile, PSBs continue to lend to stressed sectors (real estate, infrastructure) under government pressure, ensuring the cycle repeats. Nothing has fundamentally changed—only the instruments have evolved.
WHAT TO WATCH FOR 1. Evergreening in financials: Check if a company’s "other income" includes interest from related parties or group companies—this often masks debt servicing via fresh loans. 2. Frequent CDR or restructuring: If a borrower has been in CDR multiple times (e.g., three restructurings in five years), assume the debt is unsustainable. 3. Asset-light balance sheets with high debt: If a company pledges the same asset (e.g., land, receivables) to multiple lenders, it’s a sign of overleveraging. Cross-check with ROC filings for charges on assets.
This newsletter describes documented business tactics and systemic patterns based on public records, regulatory orders, and published financial journalism. It does not make allegations against any individual or entity. Readers are encouraged to consult primary sources and form their own conclusions.