Some Borrowed, Some Stolen

Now, and at long last, it’s sunny side down for liberalisation. Top Indiancorporates, who, for many years, have been crying themselves hoarse for more reform andliberal practices, could finally see their day of reckoning dawn. Many of them, it turnsout, have not paid up their loans borrowed from Indian banks and key financialinstitutions running into thousands of crores-approximately half of the country’sfiscal deficit. And the Reserve Bank of India (RBI), the apex banking institution, is nottaking too kindly to this defalcation.

Says a bank official: "Various industrialist associations like FICCI, ASSOCHAM andCEI have for long deftly made their cases but have been rather quiet on the business ofreturning loans. It is time their bluff is called." Last fortnight, the RBI, in anunprecedented move, put out a long list of defaulters which almost reads like thewho’s who of Indian industry-JK Synthetics, East West Travel and Trade Links, HarshadMehta, Mackinnon Mackenzies and Co Ltd, Mafatlal Engineering India Ltd, Bengal Ferroys andSteel, Modi Industries Ltd, MS Shoes East Ltd, Binny Ltd, Remington Rand of India Ltd,among others. In a number of cases, the same company figures as a defaulter to severalbanks and financial institutions, all at the same time. These honchos and their companies,according to the list, owe Indian banks and financial institutions over Rs 55,000 croreand there is no recovery in sight.

The release of the list also has other ramifications. The Central VigilanceCommissioner N. Vittal is keen to book these companies under the Prevention of CorruptionAct. Officials say that at a time when politicians and bureaucrats are being pilloried bythe CVC there is no reason why industrial houses, basking in the warmth of the market andspouting the liberalisation mantra, should be allowed to get away. Vittal wrote to RBIgovernor Bimal Jalan asking for his consent to prosecute some industrial houses, now thatthe "cleansing process had begun". Jalan told a seminar in Mumbai that"there is no difference of view between the RBI and the CVC on the issue ofpublishing a list of defaulters".

According to the RBI, the worst-hit include a clutch of financial institutions whichhave borne the brunt of frenzied borrowing. Among them are the Industrial Credit andInvestment Corporation of India (ICICI), Industrial Development Bank of India (IDBI) andthe Industrial Financial Corporation of India (IFCI). The apex bank has also claimed thatif the trend is not reversed soon, recovery will become very difficult, if not impossible.

While emphasising that genuine problems of certain companies which cannot pay back needto be taken into consideration before penalising a defaulter, Jalan is of the view thatgreater interaction between the government and the private sector is required to settlethe problem of non-performing assets (NPAS) and that the government cannot be expected tosolve this critical problem all by itself. According to officials, the government isactively considering seeking assistance from the CBI’s economic offences wing.

JALAN, in fact, has gone a step ahead. Taking his cue from Vittal, he published a longlist of defaulters, last fortnight, running into several hundred pages and generatingdiscomfiture all around. The list of those affected include 19 nationalised banks, theState Bank of India, its associate banks, private sector banks, foreign banks andfinancial institutions. The last have been the worst hit by the lopsided borrowings andrecovery systems. RBI officials themselves are quite upset over what economic analystseuphemistically refer to as NPAS. By the look of it, NPAS seem to be growing.

The deputy governor of RBI, S.P. Talwar, addressing officials recently, emphasised thispoint: "We at the RBI are concerned with the trend of incremental NPAS of the bankingsystem, particularly with respect to public sector banks...The increase by way of NPASover the past few years calls for immediate corrective steps on the parts of banks forimproving the recovery performance...The RBI has come out with detailed guidelinesindicative of compromise settlement of chronic NPAS and the banks have been advised tosettle the problem of loan repayment expeditiously through settlement advisory committees.I am aware of the legal impediments in effective enforcement of recovery procedures andthe RBI is separately pursuing legislative enhancements and improvements."

The apex bank has, since then, announced the setting up of a working group inconsultation with the government under the chairmanship of former SBI chairman M.S. Verma.The group is meant to suggest measures for revival of weak public sector banks. TheConfederation of Indian Industries (CII) on its part has prepared a special report on theIndian financial system which recommends the closure of so-called ‘weak banks’.But that could be missing the wood for the trees. When the CII delegation met PrimeMinister Atal Behari Vajpayee this January with their recommendations, he reportedly toldthem candidly that if the report was to be made public, some of them would be exposed andcould get into trouble.

According to public sector bank union sources, around 200 corporates are responsiblefor a total default of over Rs 11,000 crore. "The name of some prominentindustrialists occur again and again as directors and proprietors of defaulting companies.The total default could well exceed Rs 55,000 crore and this does not include the compoundinterest that is levied on such amounts," says an important union leader.

The RBI move, meanwhile, has sent shock waves through banks and financial institutions.According to an ICICI spokesman, two definite steps have been taken to recover outstandingloans. One is to identify the probable NPAS and keep up a regular dialogue with themanagement of the corporate house concerned and the second is to resort to legal remedies,a time-consuming process mired in red tape and procedural delays.

SAYS IDBI planning division’s K. Kameshwar Rao: "We are not in this RBI listfor any fault of ours. People have taken money from us and they have not paid back. Thatis a big problem and we are trying to solve it. We are a three-star company and we runvery well. But this is a different problem." Agrees a Hongkong Bank spokesperson:"People have taken loans from us and not paid back. That is, after all, not ourfault."

Hongkong Bank is one of those premier foreign banks whose defaulters have forced themon to the RBI list. The others in this list include ABN-AMRO Bank N.V., Abu DhabiCommercial Bank Ltd, American Express, anz Grindlays, Bank of America N.T. and S.A., Bankof Tokyo-Mitsubishi Ltd, Citibank N.A. and literally all other important foreign banksoperating in India.

Politicians, particularly on the left, say the move to identify and charge topcorporates is more than welcome. Says CPI’s Gurudas Dasgupta, a veteran of many suchcampaigns: "This has become a pattern of our economic life. Bank defaulters should bejudged by criminal law and a special court should be established for prosecution. If anycompany is found to be a defaulter, then that corporate house should not be allowed totake loans in future." Adds CPI(m)’s Nilotpal Basu: "Recovery law should bemade more stringent. Just like in England and other European companies, we should pass astringent recovery act. Those who are talking of corporate culture and corporategovernance are not following what they are preaching. There’s a critical need toamend the banking secrecy act. It is giving protection to corporate criminals who arebleeding the economy dry." They say it would be a good thing to speculate what wouldbe the country’s state of fiscal deficit if all the loans are returned. Says anofficial: "After all, the total fiscal deficit in the country is only marginallyhigher than the money that corporates need to pay back."

And this is a problem that does not merely have to do with the big corporates. Someofficials say there is need for internal assessments in banks themselves. In-houseinquiries reveal that often loans are given to dubious companies ‘onconsideration’ by bank officials. In the RBI list on display, many companies thathave defaulted are either non-existent or do not deserve to be given loans, such is theirlow credit rating. "Investigations reveal that in at least 40 per cent of cases,loans have been given to companies that have no track record of mentioning what they do intheir application forms. Included in this are so-called corporates and buccaneers whobelieve in beginning operations only after a hefty loan is granted. In other words, withpublic money. As a result, even if the company fails to take off, the money that is wastedis never the individual’s," says an RBI official.

Most believe that the publication of the RBI list may lead to an overhaul andsystematic changes. Says CII’s Omkar Goswami: "Why are banks not taking promptaction against defaulters? If any financial institution or bank has moved the courtagainst defaulters, then there is no problem in making that name public." But why isthis happening? Explains Goswami: "Systematic and wilful default, thanks to poorbankruptcy procedures, failure of agencies like the Board of Industrial and FinancialReconstruction and the absence of a proper recovery procedure have debased thedisciplinary power of the loan. The CII believes that there should be a radicalrestructuring and strengthening of the banking system and procedures. There has to be someamendment in banking secrecy laws as well."

But what about the number of important CII members who figure on the RBI list? IsGoswami maintaining double standards? Says he: "This is a matter between the companyconcerned and the bank. It is upto the bank to start a dialogue with the company and takeappropriate measures." The question is, what constitutes appropriate measures? With alegal system thoroughly entangled in red tape and a maze of legal details to deal with,RBI officials say it is often difficult to chase defaulting corporates. Says an official:"There is little care for mounting interest rates and the overall effect it wouldhave on the economy. I think by publishing the defaulters list, the RBI has opened up aPandora’s box."

Detractors of the move, however, claim that instead of improving recovery procedures,the bank has been further liberalising and easing the lending processes, both toinstitutions and individuals. They point to the finance ministry’s announcement thismonth liberalising guidelines for external commercial borrowings. The steps includeenhanced limits for infrastructure funding.

But bank officials say that on the contrary such a move would provide a fillip to thestate sector "because after all their tendency to default is less than corporates anyday." But clearly, many see the RBI’s list as a step in the right direction. Thelist also indicates that liberalisation is not all about feelgood laissez-faire and that acritical appraisal of its negative fallouts need to be conducted. Particularly, in view ofthe free market homilies sung during Union budgets.