A few days ago, Reserve Bank of India Governor Raghuram Rajan made an interesting observation. The central bank chief hit out at Indian banks for disguising their bad debts by numerous strategies, including writing them off. He also cited other dubious methods of whitewashing off-colour balance sheets.
We must compliment Governor Rajan for speaking out bravely and fearlessly, and bringing out in the open one of the worst-kept secrets in Dalal Street and in the Indian financial markets. These are the intricate machinations between Indian banks, specifically the PSU banks, and their profligate clients who have borrowed humongous sums of money from the former and conveniently defaulted on the repayments. This is a very apt real-life demonstration of the old adage that a borrower who owes a few thousand rupees to his banker is in real trouble, while it is the other way round if he has borrowed a few hundred crores. This is, in any case, what they teach in the finance and banking 101 courses in the MBA schools these days.
Public sector banks in the country wrote off Rs 34,409 crore of bad debts in the financial year 2013-14, compared to Rs 27,231 crore in the previous fiscal year. This write-off accounted for 34 per cent of the Non-Performing Assets (NPAs) of the PSU banks. These figures were disclosed by the finance minister a few days ago in Parliament but there was little public reaction. It is as if Indians have either become blasé about these enormous fiddles that are taking place openly or are too tired to raise their voices. Governor Rajan’s data was even starker—according to him, the total amount of bad debts written off by desi banks (overwhelmingly PSUs) in the last five years would have paid for all the expenses of sending 15 lakh of the nation’s poorest children to the top private universities in the country.
Some other data has emerged in the last few months. In May this year, the All India Bank Employees Association (AIBEA), the largest union of bank employees in the country, created a media buzz when it released the list of the biggest defaulters of PSU bank loans, amounting to a mind-boggling figure of Rs 70,300 crore. Topping the list of ignominy was Vijay Mallya’s Kingfisher Airlines with a tidy unpaid bill of Rs 2,673 crore. Other big boys with defaults of more than Rs 1,000 crore included lower-profile companies like S Kumar’s Reid and Taylor (Rs 1,758 crore) and Ispat Alloys (Rs 1,359 crore).
The AIBEA, however, released some more damaging data. Total NPAs of the PSU banks (loans and advances that are considered bad or non-recoverable) in September 2013 were a startling Rs 2.36 lakh crore. To compound the crime, the PSU banks had gone ahead with colourable accounting exercises and re-classified bad loans as good loans to the extent of Rs 3.25 lakh crore. Surely, this should be one of the leading contenders of any prize-contest in cooking the books, or “creative” accounting, as they say more politely. It certainly ranks out there with the Enron and Lehman fiddles some years ago. More dismally, the Indian embezzlers were getting bolder with time—the comparable NPA figure in March 2008 was a relatively modest Rs 39,000 crore. Clearly, the UPA I and II regimes were good times for the desi corporates to pull off gigantic fiddles with the PSU banks.
In this situation, it is an easy option for analysts to blame India’s laws and regulations that permit this dacoity. This writer, however, feels that the country’s legal framework is quite adequate and sufficient to prevent and punish corporate and banking crimes like these. In fact, over the years, the structure has been strengthened. To give general readers an overview of the area, there are four major statutes that govern this complex subject—the Companies Act 2013, the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA),the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESIA), and the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012 that amended SARFAESIA.
Despite this plethora of laws, the manner in which Indian corporates have taken the mickey out of the PSU banks gives a new twist to the old phrase of laughing all the way to the bank. The most dismal aspect of the entire saga is the complete failure of all regulatory agencies and organisations of the state, including the finance ministry, the RBI, the Department of Company Affairs, SEBI etc. To this potent mixture, add the judicial/court system and the legal community, and we end up in this shambles. It is futile to classify the culpable parties according to their guilt; this commentator feels that the wrongdoers in this loot and scoot competition rank pari passu (a Latin term, used often by hotshot lawyers, which means something that is equal in all respects). The only victims here are the Republic’s hapless citizens.
The author is a corporate laws and business analyst, based in Delhi