The Illusion of Leadership

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"Before jumping into large-scale lending decisions, particularly in complex international arenas, a bank must ensure its grassroots staff is trained to handle the portfolio. Appetite at the top without capability at the bottom is a recipe for disaster."

During periods of rapid economic change, banks are often urged to step outside their traditional comfort zones. Whether driven by regulatory push, government policy, or sheer organizational ambition, the temptation to capture exotic portfolios is intense.

However, entering specialized fields like offshore business, international project finance, or overseas construction requires more than just capital—it demands operational maturity, localized monitoring skills, and specialized expertise. Without these, the bank is flying blind.

1. The Trap of Organizational Mismatch

A classic example of this risk occurred at a bank where the newly appointed Chief Executive, arriving with international experience from Malaysia, had a strong appetite for rapid credit expansion. The CEO wanted to lead the bank into every high-profile portfolio popular at the time: overseas lending, offshore financing, and international construction projects.

To support this, the bank established specialized units: a Foreign Currency Banking Unit (FCBU), a Merchant Banking Division, and a Euro Cell. While senior management was thrilled with the prestige of these new divisions, the grassroots branch staff had zero training or exposure to these fields. The middle and junior officers lacked skills to evaluate complex international projects, capabilities to monitor foreign exchange and cross-border cash flows, and understanding of international trade documentation and project milestones.

2. Sourced at a Party, Sanctioned in Haste

The sourcing of the loan was typical of the top-down failures explored in our previous article. The bank's Regional Chief in Delhi attended a private bankers' party, where he was offered participation in a consortium to finance a massive overseas construction project—the construction of a university in Iraq. At the time, both the Reserve Bank of India and the Government were urging nationalized banks to assist Indian firms undertaking joint ventures abroad.

When the proposal reached the Chief Executive, he jumped at it, laying down two non-negotiable conditions: (1) We must lead the consortium (not just participate) and (2) The proposal must be routed through the bank's newly established Merchant Banking Division. To satisfy these leadership conditions, the bank rushed the appraisal, cutting corners on basic credit checks. In record time, the bank sanctioned and disbursed complex credit facilities: foreign currency loans, performance guarantees, advance payment guarantees, and Letters of Credit (LCs) on a Documents Against Acceptance (DA) and usance basis for importing project equipment and materials.

3. The Hot Potato File: Passing the Buck

Because the bank lacked real monitoring capabilities in Iraq, it could not verify the end-use of funds or track the creation of physical assets at the university site. The bank was entirely at the mercy of the borrower's statements.

Predictably, the account began to show weaknesses through diversion of funds (money meant for the university project was diverted to cover the borrower's other stuck projects), material misuse (large LCs were opened to import materials, which were then diverted elsewhere rather than being used at the project site), and LC defaults (the borrower failed to pay the LCs on their due dates, forcing the bank to step in and pay out massive sums).

As the crisis deepened, the internal divisions that were so proudly established began passing the file like a hot potato: the Merchant Banking Division washed its hands of the file, claiming there was no active merchant banking activity. They pushed it to the Euro Cell. The head of the Euro Cell retired. The new incumbent immediately stated that there was no active Euro activity either; it was purely a bad loan that required close monitoring. They pushed it to the Credit Department.

The file eventually landed on the desk of the author, who was the Deputy General Manager of Credit at the Head Office. By then, the credit department had nothing left to manage except the damage: fielding RBI inspection queries and answering calls from anxious participating banks, while interest and roll-over costs on the foreign currency obligations mounted.

4. The ECGC Crisis: A High-Stakes Decision

One major saving clause in the original sanction was that all facilities were covered by an ECGC (Export Credit and Guarantee Corporation) policy. However, as the account deteriorated, the ECGC policy neared its expiry date. If the policy lapsed, the bank would lose its guarantee cover, exposing it to 100% of the massive default liability.

The renewal premium was over Rs. 20 Lakhs (a substantial sum at the time). The Delhi branch, seeing no funds in the borrower's account, refused to make the decision. They referred the matter to the Head Office. The author, as DGM, realized that if the bank did not renew the policy, the entire loss would fall on the bank. Furthermore, the participating banks—already looking for an escape route—would be legally free to wriggle out of their commitments. The recommendation to debit the borrower's account for the premium was hurriedly put up to the CEO.

Initially, the CEO reacted with anger. Seeing only that the department was recommending adding a large debit to an already ballooning bad account, he yelled, "Get out of my cabin!" The next day, however, the CEO realized the strategic logic. He called the author back, apologized for the previous day's unceremonious reaction, and authorized the premium payment. The cover was saved.

5. The Consortium Breakdown: The Cost of Weak Leadership

Even with the ECGC cover intact, the recovery process turned into a legal and diplomatic nightmare. The bank called a meeting of the consortium banks, demanding they pay their proportional share of the debits raised—interest arrears, LC payments, and roll-over costs. Due to continuous defaults, the total outstanding had ballooned to three times the principal limit.

To the leader bank's surprise, the participating banks refused to pay. They argued that their commitment was strictly capped at 20% of the principal limit, claiming their legal departments interpreted the phrase "inclusive of interest and costs" to mean their liability was capped. Because of a Reserve Bank directive at the time prohibiting nationalized banks from suing each other in court, the bank was trapped in endless, unproductive inter-bank negotiations. The only remaining recourse was a long, exhausting legal battle against the borrower.

6. Lessons for the Modern Lending Banker

• Appetite must match Competency: Do not lead a specialized portfolio (especially international or offshore) unless your middle and lower management are trained to monitor it.
• The Danger of "Prestige" Decisions: Insisting on leading a consortium for the sake of institutional vanity, without having the operational tools to monitor the end-use, is a major risk.
• Draft Consortium Agreements with Precision: Ambiguities in cost-sharing and liability clauses will be aggressively exploited by participating banks looking to escape when a project fails.