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Horrendous Bad Debts: Will RBI Bite the Bullet This Time?

Updated on 22 June 2017 to include a response from Punj Lloyd on this article.

After three years, the Reserve Bank of India (RBI) has been forced to initiate action against bad loans. On 12th June, RBI’s internal advisory committee (IAC) was goaded to recommend that all accounts with total outstanding loans of over Rs5,000 crore, of which 3/5th were classified as non-performing on 31 March 2016, be immediately referred to the Insolvency and Bankruptcy Court (IBC).

There are 12 large accounts that fit the criteria and account for 25% of the bad assets of over Rs10 lakh crore on the balance sheets of India’s public and private sector banks. For those that are not in the ‘worst’ category, banks have been given six months to come up with a recovery plan. Although RBI did not name the 12 borrowers, the media has speculated about 15 to 16 names. Common among them are: Essar, Bhushan, Lanco, Videocon, Punj Lloyd, Electrosteel Steels, Aban Holdings, ABG Shipyards and Monnet Ispat. Several smaller but notorious names that need stringent action find no mention (Winsome Diamonds and Deccan Chronicle are examples).

In another action, RBI put four banks struggling with bad loans under its prompt corrective action (PCA) programme. These include: IDBI Bank, United Commercial Bank (UCO), Dena Bank and Central Bank of India. The action involves curbs on paying dividend, branch expansion, taking on fresh loan exposure and, in some cases, forced mergers or winding up. This, again, is based on a set of objective criteria worked out by RBI such as the bank’s capital-to-risk-assets ratio dropping below 7.75%. It is expected that a dozen more banks will be subjected to PCA in the coming months. Between subjecting banks to PCA and identifying 12 groups for IBC proceedings, the easy part is done. The tough part begins now. Will it be different this time?

Remember, there is nothing ‘prompt’ about the corrective action against public sector banks. Banks unions and the media have been fairly vociferous about getting RBI and the government to deal with bad loans, even before National Democratic Alliance (NDA) government come to power. But no RBI governor would touch the issue beyond occasional speeches. Meanwhile, public sector banks (PSBs) were further weakened by keeping several of them headless for long stretches, while the rank and file was working under continuous pressure, first, to open Jan Dhan accounts and, later, the demonetisation programme, whose aftershocks continue to hit the economy.

How exactly will the twin actions announced in June move forward? We learn that the 12 big bad loans identified by RBI will get fast-track hearing when referred to the National Company Law Tribunal (NCLT). The corporate groups will have 180 days to hammer out a repayment plan or face liquidation and other recovery proceedings. While this sounds good on paper, how banks handle the legal challenges from the wily and resourceful defaulters remains to be seen. Each big defaulter is in its current position because of its unashamed ability to manipulate the system over a long period of time.

It is important for the government, RBI and the IAC to get the optics right even before serious action begins. This would mean keeping a watch on all corporate groups with a borrowing of over Rs100,000 crore, even if they have not defaulted. According to an industrialist, there are at least six such groups of which some are in deep trouble. And, they do not include an unlisted company like Infrastructure Leasing & Financial Services (IL&FS), which has been amassing debt even while it flies below the radar of all regulators and investigation agencies. Some advance work needs to start in such cases.

There should also be a clear focus and action on two or three of the most egregious defaulters, to get the right start. So far as we know, neither banks nor RBI has ordered a forensic audit into the accounts of any corporate house, even when their massive diversion of loans and public funds is fairly common knowledge. A forensic audit was talked about for Bhushan Steel in 2014, when the Central Bureau of Investigation (CBI) arrested its vice-chairman, Neeraj Singhal, on charges of bribing SK Jain, chairman of Syndicate Bank, in a bribe-for-loan scandal. Nothing much happened thereafter. In less than a year, it was business as usual and banks were looking for ways to give it a 5-year moratorium and 25-year repayment term under the 5/25 scheme launched under RBI governor Raghuram Rajan. Bhushan Steel’s outstanding debt in March 2014 was Rs35,000 crore, which rose to Rs38,529 crore in 2016 March and was Rs42,355 crore in March 2017. Let’s see how things go this time.

Then there is the notorious Lanco group of Hyderabad, floated by Lagadapati Rajagopal, a former member of parliament (MP) of the Congress from Vijaywada. It owes over Rs41,000 crore to banks, having been allowed to expand rapidly into power, construction and engineering during the Congress regime. Mr Rajagopal hit the headlines for using pepper spray on his colleagues in parliament, calling them a mob. In 2014, Moneylife Foundation wrote to RBI governor Raghuram Rajan requesting him to investigate frequent debt restructuring of Lanco group. We wrote, “As savers, we want to question the growing cost of banking services to us, because people like Mr Rajagopal are recipients of reckless lending and frequent restructuring.”

Our plea to Dr Rajan fell on deaf ears and banks went ahead and granted a Rs9,000 crore restructuring package just before the 2014 general elections. Mr Rajagopal was understood to be close to the Congress president. Since then, Lanco Infratech has sold its Udupi power plant to the Adani group for Rs6,000 crore and, in July 2016, claimed to have found a ‘white knight’ in OP Gupta, a utility operator who reportedly got a majority stake by investing just Rs150 crore. This curious story needs to be unravelled with banks getting their money back.

Among the biggest of all is the Essar group, a habitual defaulter, which has repeatedly availed debt write-offs and restructuring from banks during bad times, and pocketed hefty profits and ditched public shareholders during good times. The Essar group’s gross debt exceeds Rs101,461 crore. It has made news for bribing media and illegal phone taps. Even today, a massive bailout sale of its oil and Vadinar Port assets to Rosneft for Rs86,000 crore, virtually forced by borrowers and the government in October 2016, is still to be completed. Ravi Ruia and Prashant Ruia faced an arrest threat over the Loop Telecom deal in the 2G scam and have been ordered by the Supreme Court not to leave the country. That apart, Essar group’s massive overseas transactions and Indian assets have been quietly transferred to hundreds of private entities. Investigations launched by the CBI, etc, have gone nowhere in the past 25 years. A bank chairman, who became a consultant to the group immediately after sanctioning bailout packages on the eve of his retirement, has not been touched by investigation agencies.

Essar Steel had defaulted on a $250 million floating rate loan in 1999 and had tried hard to arm-twist the government to bail it out to “save India from international embarrassment.” In 2007, when the steel industry was booming, Essar Steel controversially delisted its shares by giving retail investors just Rs48 per share. Both, banks and the government, could have reined in the capricious group that was flying high then. They did not.

Can banks recover in full from Essar Steel and these others? Yes, they can. But who will get the strategy right? Most bankers and government officials will remember that the Ruias were among prime minister Modi’s personal guests at his swearing-in ceremony. It is such optics that have helped the group get fresh loans, despite its dubious repayment record since the 1990s. Resolution of bad loans requires determined and painstaking work. Let’s watch how it goes.

UPDATE: The communications department of Punj Lloyd, a loss making company, has written to us to say that it is not among the 12 worst companies identified for action by the RBI.  In a disclosure to the stock exchange it has pointed out that it did not have 60% or more of its assets categorised as NPA at the end of march 2016. This is in the context of the column "Horrendous Bad Debts: Will RBI Bite the Bullet This Time", which mentioned several names speculated about by the media. The companies name had been mentioned by several publications.

User

COMMENTS

Parimal Shah

2 days ago

This time too it may be an eyewash for the small investors and public at large. Only time will tell.

Mahesh S Bhatt

6 days ago

Get Set Crash Ram Ram Mahesh

Sumon Mukhopadhyay

6 days ago

//The corporate groups will have 180 days to hammer out a repayment plan or face liquidation and other recovery proceedings//

The is not true. They will get 180 days + 180 days and further extension, if the company manages to convince the lenders.

Ankur Bhatnagar

1 week ago

There is a very simple solution for all this: get the government out of banking.

If our (taxpayers) money is not involved in banking, why should we care?

Alas! No one is even thinking about this it seems.

REPLY

Sucheta Dalal

In Reply to Ankur Bhatnagar 7 days ago

But our taxpayers money is 100% involved. Every year, the government is giving tens of thousand crores to recapitalise banks. That is to cover these losses. Also there are another set of problems when all the loss making banks turn private -- unless taken over by a strong bank - there could be a run on them. Most have extremely poor networth. It is not so easy!!

Ankur Bhatnagar

In Reply to Sucheta Dalal 6 days ago

The government banks have been reduced to a channel to route those tens of thousands of crores you mention to the cronies. Since granting of loans necessarily includes a subjective assessment, we will never be able to know whether a particular loan was granted in good faith or not. The crooks will always take advantage of this fact. So, let the private banks figure out how to manage money -- and they indeed do a much better job.

Yes, privatising all the banks will not be easy. But there is simply no other way. This is just like selling off Air India -- not easy but has to be done sooner or later. At least people are talking about it and exploring the option. The same needs to be done for the banks too.

PRAKASH D N

1 week ago

The Corporates like Bhushan Steel, Essar Group etc. have been sanctioned thousands of crores without any questions and without verifying where the money has gone. My bank friends tell that the assets created are not even 50% of the money lent. There is no personal guarantee also as RBI made it optional during 2004-2006 when there was too much liquidity in the system. Now if the bank's go for recovery, they have to take huge hair cuts, which will again come on the public exchequer. Recovering from these rogue borrowers will depend on the political will of the ruling dispensation.

REPLY

Sucheta Dalal

In Reply to PRAKASH D N 7 days ago

More importantly, bankers were fully aware that money was siphoned off to buy private assets. Most offices, staff housing etc is owed by the promoters through personal, private companies. Banks and the CBI have to go after this. Unfortunately, most are compromised.

Ramesh Vaidya

1 week ago

This is happening since independence. The problem is we have very few corporate houses. When government wants to push for private investment, banks picks up the tab. All this originates from the license-quota raj. Apart from the corrupt poltician - bureaucrat nexus with theses corporate houses. Any wonder today is grown in to humongous problem, which will consume honest tax payers.

SuchindranathAiyerS

1 week ago

This is an endemic leit motif with Modi Sarkar. Go after "Huge Fish"! But, corruption in India (which includes bad loans) is a bare foot grass roots affair. All the little drops do the HUGE ocean make.

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