Essar Power, Damania Airways, Jindal Strips, Arvind Mills and Videocon Narmada Electronics are among the companies which had been sanctioned bridge loans by American Express Bank in gross violation of banking regulations, states a Reserve Bank inspection report. The department of banking operations, the inspection arm of RBI, had carried out financial inspection of the Indian offices of American Express Bank with reference to its position as on December 31, 1994.
The credit appraisal section of the report states, The bank (American Express) had not adhered to RBI guidelines regarding sanction of bridge loans, fund based/non-fund based facilities outside consortium, granting of limits for investment in units/shares and sanctioning of loans against third party foreign currency deposits. The Ruia-owned Essar Power had been granted a bridge loan of Rs 50 crore to finance its project.The loan was to be paid out of term loan expected to be sanctioned by IDBI, the request for which had been pending with it. American Express had violated the RBI normsby linking bridge finance to loan sanction by term lending institutions.
The bank had also sanctioned bridge loan amounting to Rs 51 crore to Jindal Strips for the company's investment in units/shares against its Euro issue without obtaining the necessary approval from RBI. The inspection report states, The sanctioning of bridge loans to manufacturing companies against the Euro issues without the approval of RBI which was different from the declared purposes of issues was in gross violation of RBI guidelines.
Arvind Mills, the flagship company of Sanjay Lalhbai group, was also sanctioned a bridge loan of Rs 40 crore for investment in securities against its proposed Euro issue. Videocon Narmada Electronics was sanctioned a short-term loan for Rs 81 crore in April 1994 by the bank. The RBI report alleges that the bank had not probed the genuineness and need-based aspect of some of the proposals before sanctioning the limits. The Dhoot-owned electronic major had already raised Rs 450 crore from the primary market to finance a project, a part of which had been deployed in UTI units and inter-corporate deposits. When resource gap developed, the firm resorted to borrowing instead of liquidating its securities.
The bank also sanctioned the facility without insisting on liquidation of Videocon's securities which helped the company to divert a substantial amount to the stock market. Similarly, Tata Sons Ltd was given a demand loan of Rs 24 crore in January 1995 to enable it to increase its holding of shares of Tata group companies which was against RBI norms.
