When Cottage Cheese Turns Sour

What happened last year was stupendous. In financial terms, loan sanctions nearly doubled to Rs 15,600 crore and the disbursements kept pace with this increase. Income rose, profits skyrocketed and the amount of bad loans—or npas—plummeted. But there was a flip side. In its hurry to dole out loans, appraisal norms were set aside. In its bid to force Hudco to meet targets, the urban development ministry forgot the bitter lessons of the past. More important, Hudco became "politicised" like never before.

After poring through hundreds of pages of documents—including minutes of board meetings, internal office orders, and records and ministerial letters—Outlook has managed to uncover this sordid saga. A story of how critical decisions were taken in a matter of hours, how rules were set aside and how money flowed into politically sensitive states.

To get a sense of this tale, cut to December 20, 2002. On that one single day, the Hudco board sanctioned loans of over Rs 5,000 crore. Insiders contend the loans to 50 projects were cleared after a mere 45-minute presentation. The bulk of them (about 30-35 per cent) went to a single state, Karnataka. What happened on December 20 was the biggest, boldest and the most bizarre decision taken in a bid to meet the ministry’s ambitious target. To understand its implication, remember that the total loans Hudco had cleared in the whole of the previous year (2001-02) was just over Rs 8,000 crore.

When quizzed, Hudco’s senior managers were struck by amnesia. "I don’t remember if we cleared so many projects on a single day," said one. But then he added that "even if we did, it wasn’t surprising for us". By end of October 2002, Hudco had sanctioned proposals worth a mere Rs 1,500 crore, while the ministry’s target was nearly 10 times higher, at Rs 14,000 crore. So, when D.K. Biswas, secretary (urban development), took over as the acting CMD on November 8, he was in a hurry. "In those days, board meetings were held every week to clear projects. Anyway, most of them had been in the pipeline, so it was easy to handle the work," explains the manager.

Given this pace, it was inevitable that Hudco did not adhere to its own appraisal norms in some cases. In the case of private projects, where the default rate is 70-80 per cent, Hudco did not insist on regular security measures like personal guarantees from promoters or post-dated cheques and bank guarantees. Outlook is in possession of several such internal case records, which show that the conditions were waived when the projects were cleared. These include many in Karnataka like the hms Institute of Technology (Rs 8 crore) and Karnataka Jain Association (Rs 2 crore).

One can argue that such small amounts won’t make a big difference to Hudco, which deals with loans worth thousands of crores of rupees. But even when it came to large state-owned projects, rules were relaxed. For instance, in 2002-03, Hudco invested over Rs 1,400 crore in power projects, the bulk of it in cash-starved state electricity boards (Gujarat, Karnataka and Rajasthan). Then, there was the controversial investment of Rs 175 crore in bonds issued by the Tapi Irrigation Development Corporation, promoted by the Maharashtra government to build large projects.

In fact, in Tapi’s case, Hudco was super-efficient in releasing the money. On October 4, 2002, immediately after it agreed to invest in the bonds, the finance department was asked "to transfer the funds to the regional office, Mumbai, positively on 5/10/2002", the very next day. The reason: to enable Tapi Irrigation to encash the cheque (No. 025562, drawn on uti Bank) on October 6. The Hudco board conveniently brushed aside concerns about Tapi’s viability or that its rating had been downgraded just weeks before the board decision.

Hudco insiders insist that all projects have been appraised properly and, hence, there are no dangers about possible defaults. "All of them are backed by state government guarantees and, in case of Tapi and a few others, the state has agreed to provide specific budgetary provisions," says a Hudco official. He adds that Hudco has also linked some payments to revenues collected by the state government from the actual beneficiaries. For example, Karnataka has agreed to pay back loans given to build a flyover in Bangalore from an additional cess imposed on petrol and diesel. In some cases, rural roads have been financed only after states have agreed to deposit the cess collected from the mandis in Escrow accounts.

But what’s shocking is that Hudco had been specifically warned against banking on state government guarantees or budgetary provisions. On February 5, 2002, the then secretary (urban development), S.S. Chattopadhyay, had written to Hudco’s chairman saying "mere dependence on state government guarantees may not safeguard Hudco’s financial interests adequately". Just days before, the then joint secretary in the ministry, Pankaj Jain, had written another letter stating that even "budgetary provisions may get revised quite drastically at the revised estimate stage".

Chattopadhyay had stated that Hudco should also limit its exposure to the Centre’s "two-million housing project", aimed at building two million houses every year for the economically weaker sections. Of that, Hudco’s share was one million each year and its cumulative losses in implementing the scheme had crossed Rs 400 crore (as on March 31, 2001). Since the finance ministry was unwilling to subsidise Hudco for the losses, Chattopadhyay had urged the then CMD to increase the interest rates (10 per cent) on such loans: "Hudco should not jeopardise its own financial health to pursue the target...."

Instead of trying to solve such problems, Hudco grew aggressive in 2002-03. It also rescheduled loans and wrote off interest to reduce its npas. Documents indicate that interest waivers themselves accounted for Rs 550 crore during the previous year. In what is an established practice in lending institutions, fresh loans were doled out to potential defaulters so that they could pay back in time. Once again, Outlook has details of such payments made to borrowers like Islamic Academy of Education and mis Millennia Realtors.

So, where will the buck stop now? And does Hudco have a chance to clear the mess and bounce back? At the moment, the government is trying to find a permanent person to head Hudco, instead of an acting CMD. If Hudco’s fortunes have to undergo a change, the new CEO will have to take drastic measures, even if it means slower growth this year. But one needs to bear in mind the fact that this is an election year and psus will, as usual, be used to woo votebanks. If that happens, Hudco will be on its way to turning sick.