Why banks should have woken up earlier to worst kept secrets

  • Suveen Sinha, Hindustan Times
  • Updated: Mar 04, 2016 13:12 IST
Vijay Mallya has gone on to become the symbol of all that is wrong with the way banks lend to companies — a shiny, bejewelled symbol, whose birthday parties can provoke even the usually measured Reserve Bank of India governor into taking a dig.

In the end, it was left to a Bihari cop to blow away the veil of niceness over the mess in banking. CBI director Anil Sinha, speaking at a conference in Mumbai on Wednesday, blamed the banks for dragging their feet.

“Despite our repeated requests, banks did not file a complaint with the CBI (against Kingfisher Airlines).” Eventually, the CBI went ahead and registered a case last July, though loans were given to the Vijay Mallya-run company in the eight years to 2012.

Mallya has gone on to become the symbol of all that is wrong with the way banks lend to companies — a shiny, bejewelled symbol, whose birthday parties can provoke even the usually measured Reserve Bank of India governor into taking a dig. But he is not alone.

The premier investigative agency on its own took action against Pearls Agro, which resulted in the arrest of its chairman, Nirmal Singh Bangoo. Amtek Auto went on to accumulate debts of Rs 21,134 crore, run deep into losses, and default on repayment of bonds worth Rs 800 crore. Bhushan Steel ran up debts of Rs 40,800 crore, before it blew up as a case of bad investment by banks.

Look at that figure again. Does it take that much to realise there is something missing somewhere? The stress in capital-intensive sectors such as power and highways, casting shadows over many a bank, tells its own story.

Banks have a good explanation for this. Their top executives say many of the events could not be foreseen. True, the cancellation of coal blocks, or of telecom spectrum allocation, and the sudden decline in the global demand for commodities were difficult to predict for us. But it should be a little less difficult for them banks. They are in the business of making these calls, on which ride the money of millions of depositors.

All banks tend to get carried away when the going is good. Remember the heady pre-financial crisis days? Nearly every company tried to expand, diversify, and acquire. There was a record run of Indian companies acquiring overseas units; one of them was Whyte and Mackay, acquired by Vijay Mallya. Many of the expansions and acquisitions went bad. So did the loans banks had extended — willingly, eagerly — to fund them.

“It’s about the risk appetite,” says a top banker. True, but it should also be about not biting off more than you can chew. Banks, for some reason, are taking time to wake up to the worst-kept secrets of corporate India.

Project financing in India is a tricky business. Several companies present the cost of their projects to be bigger than it should be. The extra money is used to do other things: finance things that the lenders did not sign up for. Some of it is used to raise more funds, again by overstating the requirement. That yields its own excess portion, to be moved around in other ways. In some cases, bank loans are used to build an international business, without giving the lenders a right on the cash flow from the new channel.

To be fair to the banks, they are waking up to it now. Egged on by the RBI governor, they have become aggressive, and are trying to recover what they can. There are reports of banks appropriating assets of well-known business groups who are not able to repay loans. The due diligence process is being overhauled, with a sharper look at the record of the promoters and the money they bring in through the equity route.

State Bank of India chairman Arundhati Bhattacharya, who was at the same conference as the CBI director on Wednesday, did not respond immediately to Sinha’s remonstrance. But soon after news broke that her bank, which is among a clutch of banks that gave Rs 7,000 crore to Mallya’s companies, has sought an arrest warrant against him. That’s a strong sign of action, but comes three years after lenders first said they would do all they could to recover their loans to Kingfisher Airlines.

Journalist T N Ninan wrote recently that when the first lot of 14 banks was nationalised in 1969, one of the things said was that the government, with the banks’ resources at its disposal, might one day abolish the income tax. What ended up happening was the opposite: tax payers’ money was used to save badly run banks.

It was therefore a relief that finance minister Arun Jaitley’s latest budget put aside just the Rs 25,000 crore — something Project Indradhanush had talked about earlier — to resuscitate state-owned banks. Theoretically, the shaky banks should be asked to fend for themselves by raising funds from the market. But in practice that looks to be a tall order; the shares of many state-owned banks listed at stock exchanges trade much below their book value.

The hope therefore may lie in what the finance minister mentioned, without giving out much details: a blueprint for consolidation, making some banks merge with others.

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