THE ANATOMY OF FINANCIAL DEFAULTS

An examination of large-value banking defaults, the institutional mechanisms facilitating the accumulation of non-performing assets, the accountability of lending authorities and the possibility of collusive financial misconduct.

Borrowers have defaulted. Lakhs of crores of rupees are lost. The public record does not prove a single grand conspiracy. It proves something more useful to a prosecutor and a legislator  : a repeated pattern in which the same three failures recur together, each one protecting the other two. Borrowers obtain and divert public money; bankers sanction, conceal or reward it; and supervisors detect it, record it and then fail to act in time. Where all three are present in one account, coincidence stops being a sufficient explanation.

This analysis proceeds in six steps.

1. The loss is real and mostly unrecovered. Banks wrote off ₹10,09,511 crore in the five years to March 2022, and recoveries from written-off loans have run at roughly a fifth to a quarter of the amounts written off each year.
2. Documented cases, some found prima facie by a tribunal and others alleged in charge sheets that await trial, suggest the borrower and the banker were possibly acting together, not merely failing together : a ₹64 crore transfer the day after a ₹300 crore loan (ICICI and Videocon); a ₹600 crore loan to the banker’s family firm (alleged) against ₹3,700 crore of bank money (Yes Bank and DHFL); 21,049 fictitious accounts to hide one group’s loans (PMC Bank and HDIL).
3. The regulator repeatedly saw the problem and let it run : inspection findings on IL&FS from 2015 with no penalty; two years of Yes Bank under-reporting before its chief was moved; sample-based inspections that a bank could game; warnings on SWIFT that were not enforced until after the PNB loss.
4. The State has been slow to act on what it was told and has added layers of protection at the investigation stage : a list of high-profile fraud cases sent by the RBI Governor in February 2015 with no disclosed outcome; prior approval under Section 17A of the Prevention of Corruption Act since 2018; a pre-investigation advisory board for bank frauds since 2019.
5. The recovery end closes the loop : resolutions at haircuts above 95 per cent, compromise settlements now permitted even for accounts classified as fraud or wilful default, and multi-year gaps between forensic findings and an FIR.
6. The remedy must therefore address the links, not just attack the parties. Prosecution must reach the sanctioning level and the supervisor; recovery must follow the money to the promoter and the family, wherever the money is held, including through trusts and offshore accounts; and prevention must remove the discretion, secrecy and delay on which each link depends via self-executing provisions that do not require human agency to activate but are automatically triggered on default events.

I. Method : how a nexus can be inferred

A bad loan is not evidence of a crime. Banking is the business of taking risk, and an honest sanction can fail. Rajan put the difficulty precisely in his 2018 note to the Estimates Committee : in many cases of aggressive lending it is hard to tell banker exuberance, incompetence and corruption apart. The analysis must therefore use a test that separates them.

Four indicators, taken together, distinguish possible collusion from error or misjudgement.

1. Benefit. A person on the lending or supervising side, or someone close to them, receives value from the borrower, directly or through a connected entity.
2. Knowledge. Adverse information was available to the decision-maker at the time, in an appraisal note, an audit observation or an inspection report.
3. Deviation. The decision departed from the bank’s own norms or the regulator’s directions : limits exceeded, conditions waived, accounts kept out of the core system, losses not recognised.
4. Protection and delay. After the loss surfaced, the response was slower or softer than the norm : late fraud classification, late reference to investigators, settlement on easy terms, or an institutional barrier placed in the way of inquiry.

One indicator alone proves little. A loan that fails despite proper appraisal shows none of them. Knowledge plus deviation can suggest recklessness. Benefit plus deviation is the core of a corruption case. All four in one account, across borrower, banker and supervisor, is what this paper means by a nexus. The cases below are tested against these four indicators and nothing else.

Two cautions apply throughout. Several of the cases are still at trial, and an FIR or a charge sheet is only an allegation, not a finding. Where a tribunal or court has made a finding, the analysis says so; where it has not, the facts are stated as alleged, subject to what will become known at trial. The adjudicating process will reach its conclusions based on evidence tendered and facts established from which the courts would draw appropriate inferences and arrive at conclusions.

Facts are stated as at 9 November 2026, from the public records and press reports listed under Sources at the end. Every person and organisation named is presumed innocent until proved guilty, and nothing in this paper is intended to prejudge any pending proceeding.

II. The arithmetic of loss

The headline improvement in asset quality has been bought largely by writing loans off, not by recovering them. The RBI reports the gross NPA ratio of scheduled commercial banks at a multi-decadal low of 2.2 per cent at end-March 2025. The Government’s own figures to Parliament show what lies beneath it.

Year	Written off (₹ crore)	Recovered from written-off loans (₹ crore)	Recovered as share of write-off
2023-24 (provisional)	1,70,269	44,893	26.4%
2022-23	2,08,037	45,431	21.8%
2021-22	1,74,966	33,534	19.2%

Source : Ministry of Finance, Rajya Sabha Unstarred Question 1672, answered 6 August 2024 (RBI data). Shares computed.

Three further facts complete the picture.

• Banks wrote off ₹10,09,511 crore in the five financial years to March 2022, as the Finance Minister told the Rajya Sabha on 13 December 2022. In the same reply, staff accountability had been fixed against 3,312 officials of AGM rank and above over that period. The reply did not say how many were above General Manager, or how many faced criminal action.
• Public sector banks alone wrote off ₹12.08 lakh crore over ten financial years, per the Ministry’s reply of 22 July 2025.
• The RBI’s Financial Stability Report of June 2025 shows the ratio of write-offs to gross NPAs rising to 31.8 per cent in 2024-25, from 29.5 per cent a year earlier.

The point for this analysis is narrow. A write-off is an accounting step and does not extinguish the borrower’s liability, as the Government correctly says. But a system that recovers about one rupee in four or five of what it writes off, and fixes responsibility on a few thousand officials for ten lakh crore of losses, has not yet shown that it is pursuing either the money or the people.

III. The borrower and the banker : the documented cases

Five cases show the first link of the nexus in operation. In each, the record goes beyond a failed loan to a benefit, a concealment or a departure from norms on the bank’s side.

1. ICICI Bank and Videocon : alleged payment a day after disbursement

According to the CBI, ICICI Bank sanctioned credit facilities of ₹3,250 crore to Videocon group companies in violation of norms during Chanda Kochhar’s tenure. The sharpest fact concerns one ₹300 crore loan. On 8 September 2009, the day after it was disbursed, Videocon’s promoter Venugopal Dhoot transferred ₹64 crore from Videocon Industries, through Supreme Energy, to NuPower Renewables, a company managed by her husband Deepak Kochhar.

In July 2025 the PMLA Appellate Tribunal, upholding the Enforcement Directorate’s attachment, found substance in the allegation of a quid pro quo between the sanction and the transfer. That was a prima facie view for the purposes of attachment, and the tribunal recognised that the final determination rests with the trial court. The criminal case remains to be tried. In February 2024 the Bombay High Court held that the CBI’s arrest of the Kochhars in December 2022 was illegal; the tribunal’s order also reversed an earlier PMLA adjudicating authority’s decision in her favour; and she has challenged the sanction to prosecute her. On the four indicators : benefit (the transfer), deviation (the alleged breach of norms) and protection (the allegations first surfaced in 2016 and were investigated only after they re-emerged in 2018) appear present on the allegations, subject to proof at trial.

2. Yes Bank and DHFL : public money out, family money in

Between April and June 2018, Yes Bank invested ₹3,700 crore in short-term debentures of DHFL. The CBI alleges that DHFL’s promoters then paid ₹600 crore to DoIT Urban Ventures, a company held through Rana Kapoor’s daughters, disguised as a builder loan. The ED states that the loan was secured on properties worth only ₹39.66 crore. DHFL did not redeem the debentures. Rana Kapoor has denied that the loan was a kickback, and the allegations await trial. DHFL itself, now under new ownership, was discharged from the money-laundering case in February 2026 under the immunity the IBC gives a company whose resolution plan has been approved; the case against the individuals continues.

The structure alleged is the classic one : an institutional decision by the banker, and a private return routed through a family-owned entity on security worth a fraction of the advance. Benefit and deviation are both alleged on the face of the charge sheet.

3. PMC Bank and HDIL : concealment built into the books

PMC Bank’s own complaint and the police remand papers show that, in the data submitted to the RBI for the year ended 31 March 2018, the bank replaced 44 loan accounts of the HDIL group with 21,049 accounts claimed to be fictitious. These existed only in the advances master indent given to inspectors, not in the core banking system. The RBI told the Bombay High Court that the loans had been sanctioned and renewed by the managing director without mention in the minutes of the loan committee or the board.

The managing director’s own letter put HDIL at about 60 per cent of the bank’s loan exposure. Mumbai police placed the loss at ₹4,355.43 crore. Knowledge, deviation and deliberate concealment from the supervisor all appear in the bank’s complaint and the RBI’s affidavit before the High Court. The parties accused have yet to be tried.

4. PNB and Nirav Modi : a control gap left open for years

PNB’s Brady House branch issued letters of undertaking to Nirav Modi and Mehul Choksi group firms without sanctioned limits or margin, and staff kept them out of the core banking system. PNB says the activity began as early as 2011. Overseas branches of other Indian banks lent on the strength of those letters, and PNB’s loss was put at about ₹13,000 crore.

The bank has blamed two junior employees. Such things of such magnitude usually do not operate at the level of junior employees. That account does not explain how messages worth thousands of crores went unreconciled for about seven years, or why the bank had not linked SWIFT to its core system despite RBI warnings (Section IV). According to press reports, the RBI later told the Finance Ministry that PNB may have misled it about its readiness on SWIFT integration.

5. ABG Shipyard : eight years from default to FIR

ABG Shipyard borrowed from 28 banks and institutions led by ICICI Bank, largely between 2005 and 2012. The account was classified as an NPA in July 2016 with effect from 30 November 2013. A forensic audit was ordered in April 2018; according to SBI’s complaint, Ernst & Young reported in January 2019 that funds had been diverted and misappropriated between 2012 and 2017. SBI filed its first complaint in November 2019. The CBI registered the FIR, for ₹22,842 crore, in February 2022.

SBI denies any delay and says its process was followed. Whatever the explanation, the sequence illustrates the fourth indicator : from default to FIR took more than eight years, and from the forensic finding to FIR three years, while the assets that might have been traced had every opportunity to move. The allegations against the company’s former promoters await trial.

IV. The regulator : warnings given, enforcement withheld

The public record does not show or suggest any regulators took any bribes. It shows something that, for the depositor, has the same effect : the supervising regulator knew, recorded what it knew, but inexplicably failed to act until the loss was beyond prevention. That is the form of regulatory failure that may be called institutional tolerance, and the evidence for it is documentary.

Yes Bank : two years of known under-reporting

The RBI’s own audits found that Yes Bank had under-reported gross NPAs by ₹4,176 crore for 2015-16 and ₹6,355 crore for 2016-17. For 2016-17 the bank reported ₹2,018 crore; the RBI’s figure was ₹8,373.8 crore, more than four times as much. The RBI curtailed the chief executive’s term only in September 2018, allowing him to continue until 31 January 2019, and gave no public reasons.

The logical consequence is stark. The ₹3,700 crore DHFL investment of April to June 2018, later alleged by the CBI to have been rewarded with a ₹600 crore kickback, was made by a management whose reporting of bad loans the regulator had already twice found understated by thousands of crores, and had still left that management in office.

IL&FS : findings from 2015, no penalty

The Serious Fraud Investigation Office and the Ministry of Corporate Affairs records show that the RBI had pointed out, in inspection reports from 2015 onwards, that IL&FS Financial Services breached group exposure norms and miscalculated its net owned funds. No penalty was imposed. A roadmap was sought in November 2017, and compliance allowed until March 2019. The group began defaulting in 2018.

Meanwhile, per the SFIO, IFIN routed ₹2,797 crore to a group company through other group entities between November 2015 and October 2017 to stay inside concentration limits on paper. The SFIO asked the RBI to conduct an internal investigation into why no action was taken; the sources reviewed for this article show no published outcome.

PMC Bank : an inspection design that could be gamed

The RBI’s inspections relied on samples drawn from data the bank supplied. As the RBI itself told the High Court, the sample did not contain the undisclosed HDIL accounts. The managing director’s letter added that earlier inspections mostly checked the top few borrowers by branch. An inspection that lets the inspected bank choose the universe from which the sample is drawn cannot find a concealment designed by that bank.

PNB : guidance without verification

The RBI stated after the PNB loss that it had warned banks about potential misuse of SWIFT through confidential communications. Yet the binding deadline to integrate SWIFT with core banking, 30 April 2018, came only after the fraud. Four months after that deadline, the RBI was still seeking explanations from banks that had not complied. Laxity can reward laggards.

Parliament’s verdict and the RBI’s resistance to scrutiny

In February 2016 the Standing Committee on Finance recorded that the RBI “does not seem to have quite succeeded, as a regulator” in enforcing its own guidelines on stressed loans. In 2018 the same Committee asked why early warning signals were not captured before the Asset Quality Review.

The RBI has also resisted the one mechanism that would let the public test its supervision. In Reserve Bank of India v. Jayantilal N. Mistry, decided on 16 December 2015, the Supreme Court held that the RBI must disclose bank inspection reports under the RTI Act. The RBI’s later disclosure policy exempted them; in Girish Mittal v. Parvati V. Sundaram, decided on 26 April 2019, the Court found the exemptions contrary to its directions and warned the RBI. Banks’ applications to recall the 2015 judgment were dismissed on 28 April 2021.

The inference is limited but firm. On this record, the regulator’s failure is not one of ignorance. It is a failure to convert knowledge into timely, enforceable action, combined with resistance to the disclosure that would expose that failure.

V. The State : the unanswered list and the new shields

The third link is the executive. Its role on the record is two-fold : it was told of high-profile frauds and has not disclosed what it did, and it has since placed procedural gates between evidence and investigation at precisely the level Parliament wanted reached.

The Governor’s list

In his note of 6 September 2018 to the Estimates Committee, former Governor Raghuram Rajan said he had sent the Prime Minister’s Office a list of high-profile fraud cases, urging coordinated action to bring at least one or two offenders to book, and that he was not aware of progress. He added that the system had been “singularly ineffective” in bringing even one high-profile fraudster to book, so that fraud was not discouraged.

An RTI reply from the RBI later dated that letter to 4 February 2015 and said it had also gone to the Finance Minister’s office. The PMO declined to say what action followed, calling the request a roving enquiry. Whatever the reasons, the most senior warning the system has produced has had, more than a decade later, no publicly known outcome.

Four gates before a senior banker is tried

A borrower suspected of fraud can be investigated on an FIR. A senior public sector banker now passes through up to four gates first.

1. Fraud classification by the bank, which must now follow a hearing on the forensic findings after the Supreme Court’s March 2023 decision in State Bank of India v. Rajesh Agarwal. This is a safeguard for borrowers and is correct in principle; it also adds time.
2. The Advisory Board for Banking and Financial Frauds. Since the CVC’s order of 15 January 2020, public sector banks must refer suspected frauds above ₹50 crore involving officers of General Manager rank and above to this board before any enquiry begins. In January 2022 its scope was extended to frauds of ₹3 crore and above, at all levels. The order followed the Finance Minister’s assurance of December 2019 that bankers need not fear the CVC, CBI and CAG.
3. Prior approval under Section 17A of the Prevention of Corruption Act, inserted in July 2018. No police officer may enquire into or investigate a public servant’s decision or recommendation in official functions without the previous approval of the competent authority. On 13 January 2026 a two-judge bench of the Supreme Court split on its validity : one judge would strike it down under Article 14, the other upheld it subject to a condition. The question awaits a larger bench.
4. Sanction for prosecution under Section 19 of the same Act, which already existed.

Each gate has a respectable purpose : to protect honest commercial judgment from hindsight. The difficulty is cumulative. The gates sit at the point where Parliament’s committees asked accountability to move upward, from the junior officer to the sanctioning authority. They are operated by the executive and by bodies drawn from the same institutional world as those under scrutiny. And they apply to the banker but not to the borrower, so the investigation of the two sides of one transaction proceeds at different speeds.

The result is an inference the State has not rebutted : the system has made it slower and harder to investigate the sanctioning banker at the very time the evidence most often pointed to the sanctioning level. The people who deploy, or play around with, funds deposited by the public, are placed more difficult to reach.

VI. The recovery end : how the loss is closed out

A nexus that ends in a write-off needs a final step : a way to close the account without anyone answering for it. Three features of the present recovery system supply that step.

Resolution at almost nothing

In the Videocon group insolvency, admitted claims were ₹64,838.63 crore and the approved plan paid ₹2,962.02 crore, a haircut of 95.85 per cent. The NCLT, approving it in June 2021, observed that the bidder was paying almost nothing and was surprised that the bid was so close to the liquidation value of ₹2,568.13 crore. Dissenting lenders appealed, and the NCLAT later set the approval aside and sent the matter back to the committee of creditors.