I headed a team of reporters probing a darker side of India’s rise: a potentially destabilising rise in unpaid loans and interest to India’s big banks — a crisis that is today more alarming than 2002, the Reserve Bank of India (RBI) warned last week. The official term is non-performing asset (NPAs). The sum involved 11 years ago was more than Rs. 1.1 lakh crore — in today’s money, that’s in the range of Rs. 3 lakh crore, enough to build an expressway in every state, a school in every village — and the defaulters included some of India’s wealthiest people.
If you and I don’t repay a couple of car-loan installments, the bank is likely to snatch your car. A marginalised cotton farmer might struggle to even get a loan. Yet, here were India’s rich, not only defaulting, but getting banks to pony up more money for their crumbling companies.
In small towns, we found angry workers and rusting factories, but the owners led unchanging, caviar lifestyles. We found heated swimming pools, rooftop helipads, foreign homes, fast cars — and humungous loans. Some frantically tried to persuade us from running stories.
One day, I had a Mercedes-borne visitor at my office in Delhi. It was Pramod Mittal, younger brother of global steel baron Lakshmi Mittal, and he had a complaint — not about his refusal to pay the Rs. 6,000 crore he owed banks but that a story might affect his ability to get more money.
"Arre yaar," Pramod Mittal said, after running through many financial arguments, "Timing galat hai, hamara GDR vagera hone wala hai (the timing is wrong, we’re going to float global depository receipts)."
For a while, the banks did tighten lending, and Parliament passed a law that allowed company assets to be more easily seized. For a while.
Over the next 10 years, the ability of Pramod and brother Vinod to attract money was undiminished. “Instead of trying to get back their money lent to Ispat, the banks helped the promoters to continue their unviable ways,” business analyst and author Alam Srinivas wrote two months ago in Governance Now.
Banks found an easy way to hide bad loans. Instead of writing off loans or forcing anyone to pay up, they offered an ingeniously named scheme: Corporate debt restructuring. Those who could not pay were given a moratorium, maybe a year or two, on payments, after which they could repay at lower interest rates. A part of the loan became equity, meaning banks became shareholders in these failing companies.
Ispat Industries got their debt restructured in 2003 and 2009, with promises to complete unfinished parts of their steel projects and even sell expensive flats, Srinivas wrote. It was only in 2010, when the Mittal brothers asked for another debt restructuring that banks — after more than a decade of throwing good money after bad — forced them to sell the company. A year later, in an Istanbul palace, Pramod organised for his daughter one of the biggest, fattest Indian weddings the Turks had ever seen.
The Mittals represent but one example of the quiet, high-stakes game quietly enriching individuals and companies that should either be shut down today or forced to sell their assets, including flats and planes. Instead, surging NPAs and restructured debt deny money to other sectors of an already stressed economy. This is not very different from 1997, when loans first started to go bad in a big way — except the bad debts in 2013 are much larger.
In the quarter ended September 2013, the NPAs of 40 listed banks rose 38% over the same period last year to Rs. 1.28 lakh crore. Collective net profits dropped by more than Rs. 4,500 crore. But a bunch of private banks bucked the trend. This means state-run banks find it hard to resist demands for loans — or “debt restructuring”— from politically connected companies. Indeed, loans that masquerade as restructured debt will, according to the credit-rating agency Crisil, reach crisis-level at Rs. 4 lakh crore by the end of 2013.
Years of generous lending means some of India’s biggest names are now saddled with the biggest debts, at a time of falling demand and policy paralysis. Adani Power, Reliance Power and GMR are some of the companies who must repay thousands of crores — the amounts between two and 18 times larger than their 2013 profits — in 2014, which will be a “year of reckoning”, warns an August report from the Credit Suisse Group. Many loans are unlikely to be called in because the companies are — to use the American usage of the term — too big to fail.
These debts, of course, do not affect the lifestyle of rich defaulters a whit. One high-profile instance is Vijay Mallya, the chairman of the UB Group, whose defunct Kingfisher airlines owes money to, among others, banks, airports, oil and aircraft-leasing companies and thousands of unpaid employees — who can only fantasise of salaries while the latest Kingfisher calendar rolls out other fantasies.
This trend reflects a troubling obsequiousness from those willing to keep handing out money to the rich and powerful. It is particularly galling in a poor country where banks immediately blacklist poor and middle-class defaulters.
If you have not heard of a blacklist of incorrigible business defaulters, it’s probably because they have arranged for a new loan.
Samar Halarnkar is a Bangalore-based journalist
The views expressed by the author are personal