Unless RBI keeps a hawk-like eye on how the loans are restructured well-meaning efforts could turn controversial
“Our simple message is if there is a problem, recognise it and address it quickly. Don’t pretend and extend.” This is what SS Mundra, deputy governor of the Reserve Bank of India (RBI), told industrialists on 23rd September when he asked them to clean up their bad loans very quickly.
Mr Mundra also expressed concern at how corporate leverage had increased substantially in the past few years. Yes, it is something that is worrying everybody—bank officers, bank unions, investors and ordinary taxpayers who watch helplessly as the Central government recapitalises banks with sickening regularity, rewarding them for their inability to rein in bad loans or making big industry repay their debts. In fact, crony capitalists and their friends in government have ensured that the banking system is designed to let off bank chairpersons who extend dubious loans to industry. Even in the most egregious cases, they get away with a ‘letter of displeasure’ or are allowed early retirement.
In August 2014, the All India Bank Employees Association (AIBEA), in a press release, had pointed out that ordinary bank employees face harsh punitive action like dismissal because “there are defined rules to take action against them for any alleged misconduct. But in the case of Executive Directors and CMDs, there are no clear rules under which action can be taken against them”.
CH Venkatachalam, general secretary of the AIBEA, called on the government to frame rules and conduct regulations for executive directors and chairpersons of banks. Strangely enough, despite the separation in the role of chairman and managing director in a few public sector banks, there is no move to increase accountability or pin responsibility of where the buck stops, which is at the very top.
The AIBEA, which had put out a detailed note titled “Loot of Public Money” due to ‘bulging bad loans’ has gone quiet about the massive ever-greening of loans in the past year. In March 2014, it had alleged that bad loans of banks had shot up from Rs39,000 crore at end March 2008 to Rs1,64,461 crore at the end of 2013 while amounts written off in that five-year period were a massive Rs1,18,010 crore. It further said that the incidence of wilful default was increasing and the defaulters were people in high positions—one was connected with a Central minister, two loan defaulters were Padma Shri awardees and one top defaulter who owed Rs6,000 crore to banks was a Rajya Sabha member. The last was clearly a reference to Vijay Mallya.
Although bank unions are silent, many business houses as well as senior bankers are informally expressing shock at the speed with which bankers are offering long-term restructuring of loans under RBI’s 5:25 scheme launched last year. What is the 5:25 scheme? On 15 July 2014, RBI issued a circular entitled “Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries”. The idea was laudable. To paraphrase the circular, it said that banks had been lobbying RBI on behalf of borrowers, that they were unable to extend long-tenor loans (25-30 years) for infrastructure projects with long maturities. Instead, they restricted finance to 12 to 15 years to overcome an asset-liability mismatch. In effect, RBI allowed banks to extend the loans extended to infrastructure projects and core industry sectors to 25 years with periodic refinancing every five to seven years. RBI also spelt out some checks & balances; but when the circular itself is being diluted, it remains to be seen whether bankers treat this as anything but an officially sanctioned ever-greening window.
For starters, the circular said that the 5:25 scheme would be offered only to new projects of over Rs1,000 crore. But, by December 2014, it was extended to existing projects as well. Media reports suggest that a slew of large infrastructure companies with payment difficulties had immediately lined up to take advantage of the restructuring option. Newspapers have reported restructuring of the controversial Bhushan Steel (outstanding debt of Rs35,000 crore), GMR Infrastructure (consolidated loans of over Rs42,000 crore), Jaypee Infratech (combined debt of Rs57,000 crore in three infrastructure projects). Business Standard reported that Reliance Gas Transportation Infrastructure Ltd—an unlisted company owned by Mukesh Ambani—has got its loan restructured and the tenor extended to 2030-31. This is probably the first restructuring by the Mukesh Ambani group and the first under the RBI’s 5:25 scheme. The company, which owns and operates the 1,386-km gas pipeline connecting Andhra and Gujarat is making losses and had a total debt of Rs16,010 crore as of 2014-15.
Don’t Dr Raghuram Rajan’s eloquent and frequent criticism of banks for covering up bad loans, as well as Mr Mundra’s recent criticism, seem at odds with what appears to be happening in the restructuring process at banks? The media has little information on how the loans are being restructured and, hence, the information is published is usually without comment. So far, only Vivek Kaul, writing for The Daily Reckoning Newsletter (on 11th September) has called out the 5:25 scheme for what it really is: The Great Indian Banking Ponzi Scheme!
Mr Kaul says that RBI's stressed advances.” Financial Stability Report released in June earlier this year pointed out: “Five sub-sectors, namely, mining, iron & steel, textiles, infrastructure and aviation, which together constituted 24.8% of the total advances of scheduled commercial banks but accounted for 51% of its total stressed advances”. Within the infrastructure block, the power sector is a big defaulter. Mr Kaul’s number-crunching shows that instead of the logical expectation that “banks would go slow on lending to sectors that have been defaulting on their loans,” what is happening is just the opposite.
Let me quote from Mr Kaul’s analysis. He says, “Bank lending to the infrastructure sector between July 2014 and July 2015 grew by Rs71,600 crore. Within the infrastructure sector lending to the power sector grew by Rs59,400 crore. Lending to the iron and steel sector grew by Rs27,100 crore during the course of the year. Loans to the iron and steel sector form around 4.5% of the total loans and 10.2% of the total stressed advances. What does this tell us? In the last one year, banks gave Rs98,700 crore of the Rs1,20,900 crore that they lent to industry to the two most troubled sectors of infrastructure and iron and steel. This means that 81.6% of all industrial lending carried out by banks in the last one year went to the two most troubled sectors of infrastructure and iron and steel.” And this, as he points out, happened after RBI had red-flagged these sectors!
The rating agency CARE, in its analysis, has warned that “if the scheme (5:25) is not implemented in its true spirit and without appropriate monitoring mechanism, in terms of wilful diversion of funds by the promoters, it could potentially paralyse the critical sectors of the Indian economy.” It further warns that borrowers may misuse this scheme and divert funds to other projects “if they have excess cash accruals available in the initial phase of the project.” That has, indeed, been the history of how large industrial groups have misused loans from development finance institutions and public sector banks. Even corporate debt restructuring or CDR, which was introduced as a one-time exercise, has repeated this with impunity, right under under RBI’s nose. Dr Rajan’s, and the RBI’s, public stand on bad loans are commendable. But past experience suggest that, unless RBI keeps a hawk-like eye on how the loans are restructured a well-meaning scheme could turn controversial.
(Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at email@example.com)