Fraud shows just how easy it is to dupe banks in India on latest case.

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 Rs109.08 crore ($16.87 million) to alleged misappropriation by sugar refiner Simbhaoli Sugars.

The quantum of money lost is not as large as in the PNB-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 refineries were fraudulently diverted, a case filed (pdf) on Feb. 22 by India's top investigative agency, the Central Bureau of Investigation (CBI), 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 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, power production for captive use, and also provides 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 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 Rs60.21 crore, while its total current liabilities of over Rs1,800 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 (RBI), 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 Rs3 lakh per head (the overall exposure being capped at Rs150 crore), the CBI says.

A memorandum of understanding was signed between the bank and the company on Jan. 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 Rs148 crore between January and March of 2012 from the farmers' loan accounts to the company's account.

However, Simbhaoli then transferred Rs97.85 crore out of its OBC account 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, including clearing earlier dues to suppliers, other than supporting farmers.

In fact, Oriental Bank has claimed that Simbhaoli issued and submitted improper verification documents, or know-your-customer (KYC) certificates, for individual loan accounts. The Oriental Bank staff never bothered to complete the KYC compliance procedure, the CBI says.

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 Rs110 crore to clear its outstanding 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 with 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 an NPA, 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 Rs5 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 Rs110 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 CBI was filed in September 2015, and an amended complaint was again filed two years later. However, it’s not clear why probe agency began investigating 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.

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