Need of Strong Framework For Financing Social Loan In India - Poor Case of ADB Bank - With Reference to the ICICI Bank and Five-Star Business Finance Limited ( FBFL ) in India.

 SOCIAL  FINANCE  CHALLENGE   - Research by HR Lab   

* Birendra K Jha                                                                                                                                                                              Practitioner Social Impact Assessment Audit; Practitioner BRSR (SEBI ) Audit- ESG Audit - Sustainability Assurance; Certified Auditor ISO 14001:2015 & OHSAS 18001:2007;  EMail: birendrajha03@yahoo.com

There is a huge gap in the International Principles of the Social Loan Principles ( SLPs), the Loan Markets Association (LMA), the Asia Pacific Loan Markets Association (APLMA) and the Loan Syndications & Trading Association (LSTA). The Indian scenario of "Fraud - Deficiency of Service & Unfair Trade Practice" during Loan Disbursement are not strongly attended in the International Principles. This gap is needed to be filled in the Indian Social Finance Scheme Framework. When case is of women the Indian scenario is high risk area.

Asian Development Bank ( ADB ) has financed   Five-Star Business Finance Limited ( FBFL ) in India  for promoting Social Finance Loan. The ADB Bank  support is for the financing of micro, small, and medium-sized enterprises (MSME) business to eligible women borrowers in the lower-income group under a women-inclusive Social Loan Framework Scheme. This scheme is going to be collapsed if preventive measures as stated here are not adopted by the ADB Bank in controlling and preventing "Fraud - Deficiency in Service & Unfair Trade Practice" in loan disbursement. Some ugly practices, absent in Europe but in India the practices are frequent. For example :  ICICI Bank Fraud case in disbursing loan has broken the ethics;  the case of Wing Commander Brij Mohan Tyagi Vs. ICICI Bank demonstrated  that even though loan is approved this is not disbursed. The corruption is sitting here. Similarly increasing the rate of interest, then what agreed is pandemic culture in India. Last but not the least  the case of P. Sugumar Vs Five Star Business Finance Ltd., demonstrated  that after full and final settlement of loan, the loan borrowers are not returned security paper. The loan borrower is forced to deposit more money against the loan,  showing the ugly Indian Banking culture where  "Deficiency of Service & Unfair Trade Practice" is seen frequently in loan disbursement. 

The ADB Bank  should ensure that the Framework of this Social Finance Scheme   must introduce measures to prevent  "Fraud - Deficiency in service & Unfair Trade Practice". Framework based on International Best Practice of "Social Bond Principles" and "Social Loan Principles" alone are not sufficient for country like India where "Fraud - Deficiency in service & Unfair Trade Practice" are  seen frequently in loan disbursement in India,

This is observed that the lenders do not adopt Fair Practice Code of 2003 of the RBI in loan disbursement. This 2003 Guideline  is not implemented strongly. As stated earlier, lenders have charged high interest rates. This is also seen,    lenders  charged interest from the date of sanction, rather than the date of disbursement. Further for corruption reason loans are disbursed in cheques physically rather that online account transfer.  

 

Apart from that   the Guideline of SEBI and RBI are also needed to be incorporated in the Framework, as under operation needed for the Green Finance - Social Finance.  within the ESG Financing Guideline of the SEBI and the RBI where instances, of Greenwashing, are prevented.   

The Asian Development Bank ( ADB ) should take care and that should be regularly monitored in the Third Party Social Impact Assessment Audit. This is seen Indian Companies are regularly indulged in "non sustainable practice in loan disbursement". For example, after full and final payment of  Loan Account, the financial companies are not returning title deeds paper, de-registering the asset documents or returning signed documents to the loan borrower. In International Practice this is rare. But country like India this is at peak. This difference shall beat entirely the ADB Bank plan to finance women-inclusive Social Finance scheme, if preventive measures are absent in the Framework.  

India has seen high peak corruption in loan disbursement. The CEO of the ICICI Bank was involved sometimes back  in loan disbursement corruption case. This is a proven case. Similarly Banks and financial companies are involved frequently in "Deficiency in service & Unfair Trade Practice". Hence the Framework should must take into account the prevention measure to curb "Fraud - Deficiency in service & Unfair Trade Practice". This is needless to state that  "Fraud - Deficiency in service & Unfair Trade Practice" attract "Adverse Social Impact" and "Adverse Sustainable Impact". 

Proven Case of Fraud - Deficiency in service & Unfair Trade Practice: 

Fraud Case in Loan Disbursement : 

The ICICI Loan Disbursement  scam involves Chanda Kochhar, former Managing Director of ICICI Bank. She  allegedly abused  her position to approve a ₹3,250 crore loan to Videocon Group's Venugopal Dhoot in exchange for benefits for her husband Deepak Kochhar's company, NuPower Renewables. The Central Bureau of Investigation (CBI) alleges that the ICICI Bank, violating its own policies, issued multiple loans to Videocon entities between 2009 and 2011, leading to the loans being declared non-performing assets and a significant loss for the bank. In April 2023, the CBI filed a charge sheet against Kochhar, her husband, Dhoot, and others, and sought court acceptance of the charges. On 23 December 2022, the CBI took  into custody Chanda Kochhar as well as her husband, Deepak Kochhar. By 26 December 2022, Venugopal Dhoot had also been arrested by the investigation agency.  

What We Learn Here From This Case:

If Loan Disbursement Framework is poor, then there is chances of fraud and corruption in Loan Disbursement. The Fraud & Corruption shall beat entirely the Social Finance Scheme.  This needs strong practice of continuous monitoring and evaluation of Loan Disbursement through Third Party.   It should be transparent. Between the financial company and the applicant, internet should be the medium. Entire data should be on Internet who has applied for the loan.  The process should be human contact less.

Case of "Deficiency in Service & Unfair Trade Practice" in Loan Disbursement : 

"Five-Star Business Finance Limited ( FBFL ), which is being financed by the ADB Bank  has been involved in past in  "Deficiency in service & Unfair Trade Practice".  In case P. Sugumar Vs. Five-Star Business Finance Limited ( FBFL ), P. Sugumar was a borrower of fund from the Five-Star Business Finance Limited ( FBFL ). The entity took from P. Sugumar  signed plain documents, signed cheque and "Title Deed". He was paying his  EMI regularly to the financial company. During Covid pandemic P. Sugumar  requested the financial company to close his Loan Account.  The Financial company settled an amount of Rs 1,61,920 as Full and Final settlement to close the Loan Account. After receiving the Full and Final Amount of Rs 1,61,920, the financial company started saying "Unwanted Stories". It refused to return the "Title Deed" and other documents and started demanding money.  This was held by the Hon'ble Commission, Kanyakumari District of Nagercoil, that the said entity  is involved in the "Deficiency of Service & Unfair Trade Practice". The Hon'ble Commission pronounced the order on 11.07.2024. The "Deficiency of Service" & "Unfair Trade Practice" proved. 

What We Learn Here From This Case:

Not to mention, the  "Deficiency of Service & Unfair Trade Practice" both attract "Adverse Social Impact" and "Adverse Sustainable Impact". A clear sin in the SEBI and RBI Guideline. The RBI and SEBI both have warned Indian entity not to allow any activity in the business operation which contribute "Adverse Social Impact" and "Adverse Sustainable Impact". The learning point is that the Social Finance  shall fail completely if preventive measures are not adopted in the  Social Finance Framework that bring "Adverse Social Impact" and "Adverse Sustainable Impact". There should be regular monitoring and evaluation of  Programmes Through Third Party Social Impact Assessment Auditor for the prevention of   "Fraud - Deficiency of Service & Unfair Trade Practice". 

Where ADB Bank Should Be Careful: 

1. The Social Finance Framework should be  extra careful on creating mechanism to prevent  "Fraud- Deficiency of Service" & "Unfair Trade Practice" during loan disbursement.  The Framework should must eliminate these three common illegal practices. 

2. ADB Bank  should be extra careful in lending money to the   financial entities, who have a poor track record clear track record on the  "Deficiency of Service & Unfair Trade Practice". Such activities  bring "Adverse Social Impact & Adverse Sustainable Impact". The entity clearly indulge in unsustainable  practices. When borrower is women, then the ADB Bank needs to be extra careful. 

3. The Framework on such loan disbursement should must have provisions to curb all these illegal practices.  The ADB Bank should must ensure that  the Framework of such scheme should comply not only the benchmark standard  of "Social Bond Principles" and "Social Loan Principles" but, clearly to prevents "Fraud - Deficiency of Service & Unfair Trade Practice" in Loan Disbursement. 

4. Further the Framework should also comply the strong regulation of ESG as maintained for Social Finance in the mandatory guideline given by the   SEBI and the RBI.   For example the Securities and Exchange Board of India (SEBI) aims to prevent fraud and "purpose-washing" related to social bonds. The SEBI circular attracting  the  ESG (Environmental, Social, and Governance) Bonds, ensure  accountability and reduce the ESG risk of misuse. For this SEBI has mandated Annual Compulsory Third Party Social Impact Assessment by Qualified Social Impact Assessor. SEBI in Clause 8 ( a)  mandates that continuously monitoring is necessary on prevention programmers that bring  "Adverse Social Impact and Adverse Sustainable Impact". It says: 

"While raising funds for social objects/ sustainability objects, it shall continuously monitor to check whether the form of operations undertaken is resulting in reduction of the adverse social impact/ sustainable impact, as envisaged in the offer document".

The RBI also through Circular Green Financing Released on April 11, 2023, mandates compulsory Third Party Social Impact Assessment on the Social Bond- ESG Bonds.   

Conclusion:

For Social Finance Framework following points are needed to be incorporated: 

1. International Benchmark Principles adopted in the "Social Bond Principles" and "Social Loan Principles".

2. Since, in the International Principles, there is no strong arrangement and programs  to prevent "Fraud - Deficiency of Service & Unfair Trade Practice". Hence effective prevention Programmes be there to eliminate three illegal activities with effective Monitoring and Evaluation of Programmes through Third Party Social Impact Assessment Audit.

3. Implementation of Fair Practice Code 2003 of the RBI Guideline during loan disbursement.   

4. Last but not the least, strong regulation of ESG Practice,  Monitoring and Reporting are necessary. The ESG Third Pillar "G" is Governance. This prevents anti- social activities.