Good Start to Bad Loan Issues but a Long Way To Go
Piyush Goyal, a former nominated director on Bank of Baroda (BoB) and State Bank of India (SBI), probably understands that the dangerous drift caused by the scams and losses at public sector banks (PSBs) which, compounded by actions of the past four years, could snowball into a serious crisis. So it is just as well that prime minister Narendra Modi has given him temporary charge of the finance ministry, until Arun Jaitley recovers from kidney transplant. 
 
Like a good politician, Mr Goyal also understands the optics very well. So his first action on taking charge was to hold a day-long meeting with the heads of 11 PSBs that have been placed under prompt corrective action (PCA) by the Reserve Bank of India (RBI) and go public with his assurance of ‘all possible help’ to come out of the PCA framework as quickly as possible. Under PCA, RBI has placed severe restrictions on 11 PSBs including on distribution of dividends, remitting of profits, expansion of bank network and fresh lending, as well as capped management compensation and directors’ fees. The 11 banks are: Dena Bank, Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce and Bank of Maharashtra; these account for 30% of the deposits and advances of all PSBs. 
 
Remember, Mr Goyal had faced a similar situation on 29 September 2017 immediately after taking over as railway minister. A horrific stampede that killed 23 and injured 39 at the Elphinstone Road railway station (Mumbai) exposed the neglect of crucial infrastructure at the exploding business hub in central Mumbai. Mr Goyal held day-long meetings with railway officials and, once it was clear that the railway corps were unlikely to construct a foot-over-bridge quickly, he called in the army and got it done in record time; it was also a signal to the railway bureaucracy and engineering department that they would have to buck up and mend their ways.
 
In the banking sector, the massive pressure of bad loans is probably a bigger problem than the creaking and outdated infrastructure of the railways, although it does not lead to fatalities of the Elphinstone Road kind. The non-performing assets (NPAs) are officially estimated at Rs8 lakh crore; but, according to Dr KC Chakrabarty, former deputy governor of RBI, a more realistic figure is Rs20 lakh crore. RBI’s new norms for income recognition have already forced a spate of new disclosures from PSBs as well as high-flying private banks. 
 
Mr Goyal has started with a lucky break at the finance ministry. The Insolvency and Bankruptcy Code (IBC), rammed through by the prime minister, delivered its first big breakthrough a day after Mr Goyal took charge at the finance ministry. The controversial Bhushan Steel, whose total debts were a massive Rs46,062 crore (almost equal to the national budget on school education, says a media report), was acquired by the Tatas at Rs36,400 crore and a 12% stake in the company. What makes this truly historic is that the lenders got back most of their principal. Quick to emphasise the significance of the Bhushan Steel acquisition, Mr Goyal tweeted that the price paid by the Tatas (which many think is too high) is four times the estimated liquidation value of Rs14,541 crore.
 
The biggest breakthrough, however, is to the prime minister’s credit. It is probably the first real signal to the crony capitalist club that its unlimited ability to influence government is, finally, over. In the Bhushan Steel case, too, the promoter group, despite being caught bribing the Syndicate Bank chairman for fresh loans, is leaving no stone unturned in trying to delay and sabotage the resolution process through multiple litigations by some proxies. This exemplary display of strong political will was, unfortunately, eclipsed by the many recent banking scams (Nirav Modi and the jewellery scams) and the politics in Karnataka. 
 
Another breakthrough, which went almost unnoticed in the mindless and disruptive public debates that have marked this government’s tenure, is the big victory against the flamboyant liquor baron Vijay Mallya on 8th May. A court in the United Kingdom ruled that a consortium of Indian lenders can impose an Indian court’s decision against Mr Mallya and also refused to overturn a worldwide freeze on his assets. Although Mr Mallya can, and will, probably appeal that decision, a full reversal of the order seems unlikely after the judge disallowed an automatic appeal of the order.
 
Those of us, who have long followed first-hand Mr Mallya’s skill, at gaming the judicial system and ‘influencing’ regulators and investigators handling his cases, understand the political message behind India fighting and winning a good case. Otherwise, from Bofors to Bhopal and innumerable others, our regulatory agencies are legendary for making a hash out of the open-and-shut cases and losing them in international courts. 
 
Although the amount involved in Vijay Mallya’s case (Rs9,000 crore) is significantly lower than in the Nirav Modi-Mehul Choksi case (Rs14,000crore) or the top12 defaulters, including Essar Steel, identified by RBI, the determined action signals that escaping abroad, to live on money stashed in tax havens, is no longer as safe and sure as it was in the past. 
 
But, remember, these are just small, initial victories in tackling mammoth NPAs and the industrialists who owe banks big money are busy with their frantic machinations to bid for their companies through foreign fronts. If allowed, the resolution will be nothing more than a round-robin deal where dubious industrialists will bide their time and buy back their companies once the controversy has faded from public memory—again financed through fresh bank loans.
 
To the government’s credit, the prime minister’s advisers have been open to feedback about such manoeuvres and there seems to be some determination to thwart such collusive deals. The resolution of Essar Steel, which is going well so far, is a big test case. The outstanding debt in this case is over Rs50,000 crore with interest, at the end of 2017.
 
Another big test for the government is how it handles Air India. The bid conditions have disappointed powerful potential bidders and, according to the scuttlebutt, there is a deliberate attempt to arm-twist bidders to favour political favourites. We can only hope that the good work in resolving Bhushan Steel and other cases is not undone by bad decisions in Air India. Although some of the bid conditions have been relaxed, based on feedback, aviation experts believe that the present proposal, which does not realise the value of various parts of Air India’s businesses, is not the best way to sell the national carrier.  
 
A few big resolutions of NPAs will be a big help to the government in its 2019 election campaign. But the turnaround of banks requires a lot more work to ensure that things do not slide back into the messy ways of the past. Mr Goyal is correct in blaming the United Progressive Alliance (UPA) for most of the problems of bad loans, but his own government has done nothing to improve the basic structure of PSBs, make bank management and regulators more accountable and independent, give teeth to the Banks Board Bureau or end the dubious practice of writing off loans of large corporates as a clean-up and tax-saving measure (Dr Chakrabarty has called it the ‘biggest scandal of the century’). 
 
What we have just seen is a very positive first step; but we need a lot more determined and unwavering action to achieve a real turnaround. One banker puts it correctly, if rather facetiously, when he says, “Piyush Goyal’s sound bites are, indeed, good; but will they turn into a symphony or mere cacophony?” Well, the country is watching.

 

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COMMENTS

Karan Gandhi

1 year ago

All the best to Mr. Goyal, more strength to him!

Sunil Prakash

1 year ago

A beginning has to be made . Now the question is for how many days will Piyush Goyal manage his beginning. Will Politicians directly involved will allow him to function effectively? It a nexus of the the politician, the bureaucrat and the industrialist. Industrialist will do it because the Politician wants him to do. Bureaucrat is enjoying because he is getting his booty too with no efforts. he is a puppet in the hands of politician and the industrialist.

Ramesh Poapt

1 year ago

will shri Jaitley occupy his chair again?

S Hariharan

1 year ago

"JENO RAJA VEPARI ANI PRAJA BHIKHARI" Old Gujarati proverb, Modi might well be aware of, applies here very well. Ask all these PSBs to start winding up, with mergers with profitable banks.

S Hariharan

1 year ago

Why not allow mis-managed PSBs to fail? Any re-finance should involve condition of change in management from top. Re-finance should also be act of parliament. Government should not be a safety net for gambling with taxpayers money. With the onset of new generation, less competitive companies/institutions fail and it should not be stopped.

REPLY

K V RAO

In Reply to S Hariharan 1 year ago

It is not that easy to allow psbs to fail.
PSBs have many stakeholders,the most important being the staff. Will they keep quiet?There will be anarchy. PSBs are like a hot ghee phenomenon. We can neither swallow it nor leave it.

S Hariharan

1 year ago

Piyush Goyal must explain what is the help he is going to do for 11 PSB under RBI watch. Lots of money is already wasted by recapitalisation.The arrest of few executive and CEO is not going to change much in the PSB. It's a news item in the papers to be read and thrown into the dustbin. Why is the government with full majority nor in a position to even do a little?
Finance ministry has failed specifically with banking sector which is in the worst phase. If not for government being the owners of the bank all would have closed that is the really position of banks today.

Suketu Shah

1 year ago

Goyal is good FM minister but the work he wl do in 5 yrs as FM ,Dr Swamy will do as FM in 5 months is less.

REPLY

K V RAO

In Reply to Suketu Shah 1 year ago

What Swamy may do has not been mentioned.

Gupta

In Reply to Suketu Shah 1 year ago

God bless us that Modi hasn't fallen for the so called "Doctor" Swamy's charm... don't know what good he can do in 5 months, but one thing is sure that we will be compared with banana republics and bankrupt countries in 5 weeks only.

Gopalakrishnan T V

1 year ago

well written piece. The banks are being made non perforeming with planned loot and this needs to be stopped once for all. Genuine failure of business and bad debts in banks are understandable but the way the loans running into crores and crores are turning bad debts is something beyond comprehension . In this context one is reminded of only what our former Prime Minister Mr Atal Bihari Vajpayee said "We cannot allow peoples' faith in economic liberalisation to be shaken by those who do business with an ethical deficit". Lack of professionalism in banks' Boards and lack of discipline among the large borrowers have contributed to the mess in banks and unfortunately all stake holders of the economy are made to suffer perennially. While the present inititiative of the Government through Insolvency and Bankruptcy Code can definitely bring in solid improvements in the recovery of bad debts provided the same borrowers are not allowed to thwart the scheme through devious means , what the banks need is long term and lasting solution to prevent the formation of bad debts through bringing in professsionalism in banks Boards and corporate borrowers in running their businesses. Effective Corporate Governance in banks and accountability to the parliament can improve the health of both banks and corporates balance sheets and make them substantially contribute to the overall growth of the economy. The acting Finance Minister with his solid finance background and having brought in tangible results in the energy sector can definitely make the banks and the bad corporates perform better and make the dream of the PM to make the economy grow fast and achieve welfare for all a reality. Will it not be a good idea to introduce a built in mechanism to discipline the borrowers and banks and find resources to liquidate bad debts if any by not taxing the tax payers and other stakeholders of banks?

ksrao

1 year ago

In India, the more unviable the industrial units, the more enviable is the life style of the industrialists. Industrialists have learnt the art of leading their units to sickness and themselves to prosperity. Ultimately good money goes down the drain chasing bad loans. The country is having to pay heavily for the well-being of a few. This is untenable. Moneylife's and Sucheta Dalal's efforts in making the banks, public and government aware of this disease and forcing them to treat it are worth appreciating.

K V RAO

1 year ago

It is quite refreshing to know Money Life and Sucheta Dalal ,(who are usually critical of Central government's policies)have appreciated Piyush Goyal's efforts.

Linking these efforts to 2019 elections is a bit far imagination.
Indian electorates by and large have been swayed by freebies and cheap politics.

Good economics has never been a game changer in Indian politics.

On the other hand bad economics
(bank nationalisation,farm loan waivers‌,directed lending,meddling with top appointments in banks,etc)has led to good politics.

This has been responsible for usurping power at the centre and at the states.
K V RAO BANGALORE.

Gupta

1 year ago

Good to see some constructive criticism of the govt along with some credit, where it is due.... we hope that this NCLT process, with all its fits and starts, ends up putting at least some of these big crooks out of business forever... the same people have repeatedly been gaming the system every 10-15 years and each time on a much bigger scale. The fundamental rule of NCLT that a defaulter can't buy another business should be extended to lending by banks in perpetuity so that the likes of Essar or its family under any name are never able to borrow ever again. Expecting these corporate criminals to go to jail might be too much in our country, but hopefully we can at least throw them out forever... to find a positive in a negative to keep the mood good, let's consider the exit of Mallya from India as the guarantee that he won't be able to loot us ever again. Hope all the corporate criminals like him are also thrown out of India if not in jail so that we can start again on a clean slate (70 years late!) and develop a new breed of clean businessmen hopefully!

Chetan

1 year ago

Thank you for superb write-up.

SRINIVAS SHENOY

1 year ago

We all hope Piyush Goel, acts fast to bring all the guilty to justice impartially. He is the right person for the job, as his performances has shown extremely good laudable results, in the power and railway sectors. Wishing and hoping, it turns out to be the first positive step in the banking sector.

jaideep shirali

1 year ago

IBC and the resolution process are a great way to start, but as we can see in some of the NCLT cases, disgruntled suitors are pushing matters ahead to the NCLAT and will approach the SC as well, delaying the process. What is critical is how Mr Goyal will put a stop to rampant political interference once and for all in the lending and operations of PSU banks, because only a free hand to balance business with social objectives will be the long term solution for PSU banks.

Chandragupta Acharya

1 year ago

Very well written. Totally agree - long way to go but a good start at least.

PNB scam: ED issues summons to Nirav Modi's father, sister
The Enforcement Directorate (ED) has issued summons to absconding diamantaire Nirav Modi's father Deepak Modi, sister Purvi Mehta and her husband Mayank Mehta as part of its probe in the multi-crore Punjab National Bank (PNB) fraud, an official said here on Friday.
 
The fraud was committed during 2011-17 by illegally issuing Letters of Undertaking (LoUs) and Foreign Letters of Credit (FLCs).
 
Deepak, Purvi and Mayank have been asked to appear before the ED investigators at its Mumbai office to record their statements in the case as the agency is in the process of filing chargesheet in a special Prevention of Money Laundering Act (PMLA) court in Mumbai, expectedly by the next week. 
 
ED investigators said Nirav Modi's relatives were summoned in the first week of this month and were given 15 days time to appear before it in the ongoing money laundering probe of over Rs 13,000 crore. The alleged banking fraud was committed by the diamond merchant, his group of companies -- Diamond R US, Solar Exports and Stellar Diamonds -- alongwith uncle Mehul Choksi and others.
 
An ED official said that further notices would be issued to the three in case they fail to respond to the first summons, an ED official told IANS on condition of anonymity. 
 
Deepak is reportedly based in Antwerp in Belgium, while Purvi and her husband are settled in Hong Kong. "They were sent the summons through mail," the official said. 
 
Purvi is under ED's radar for her alleged role in round-tripping of Nirav Modi's laundered money via Foreign Direct Investment (FDI) back to India while her husband is suspected of supporting the diamond merchant in similar operations. 
 
The multi-crore fraud was committed in connivance with PNB's Mumbai Brady House branch officers between 2011-17.
 
The ED had started money laundering probe against Nirav Modi, his brother Nishal, wife Ami and others, based on the Central Bureau of Investigation's (CBI) FIR lodged on January 31, following PNB's first complaint against the businessman for allegedly cheating it of Rs 280.70 crore.
 
ED investigators have claimed to have traced over Rs 5,000 crore assets of Nirav Modi so far. The official said that the crores said to have been sent as FDI transactions from Singapore-based firm Islington International Pte Ltd, whose beneficiary owner is stated to be Purvi's husband, are doubtful in nature. 
 
The ED investigations is also based on Income Tax department's February report to the Central Board of Direct Taxes (CBDT) and the Union Finance Ministry against Nirav Modi and his uncle Choksi in which it is reportedly mentioned that nearly Rs 4,900 crore transactions were unexplained.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
 

 

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PNB fraud: ED seizes Rs 85 cr jewellery in Choksi case
The ED on Thursday seized over 34,000 pieces of jewellery valued at Rs 85 crore in connection with its ongoing probe against absconding businessman Mehul Choksi who is accused along with his diamantaire nephew Nirav Modi of defrauding the Punjab National Bank (PNB) of over Rs 1,300 crore, an official said.
 
The seized jewellery was brought from Dubai and recovered during a search at Bharat Diamond Bourse, the world's largest diamond bourse located in Mumbai.
 
"A stock of 34,000 pieces of jewellery was lying in the office of Choksi's Gitanjali Ventures DMCC situated in Dubai. When the stock was brought to India and reached at the strong room of Bharat Diamond Bourse on May 10, the ED officials reached there with a warrant and seized it," an Enforcement Directorate (ED) statement said.
 
The ED's move is part of its money laundering probe against Choksi, who left the country days before a case of fraud was registered against him and his India-based Gitanjali group of companies -- Gitanjali Gems Ltd, Nakshtra Brands Ltd, Gili India Ltd -- by the Central Bureau of Investigation (CBI) in February following a complaint by the PNB.
 
Based on the CBI FIR, the ED registered a case against Choksi who defrauded the bank by illegally issuing Letters of Undertakings (LoUs) and Foreign Letters of Credit (FLCs).
 
Choksi in connivance with PNB's Mumbai-based Brady House branch officials managed to issue unauthorized LoUs aggregating to Rs 3,032.17 crore and FLCs aggregating to Rs 3,106.56 crore in the name of Gitanjali group and the funds so raised for payment of import bills have not been utilised for such purposes, said the ED statement. 
 
Gitanjali group has many overseas subsidiary and shell companies which were used by Choksi for circular trading, said the statement, adding Choksi had devised a modus operandi under which the Indian entities of his firms were importing unfinished goods and raw material like diamonds and pearls from his overseas entities situated mainly in Hong Kong and the United Arab Emirates (UAE).
 
"The same goods were shown to be processed and made into jewellery and again exported by the Indian entities of Choksi to his overseas entities. After dismounting diamonds, colour stones and pearl from the jewellery, gold or silver was sent for melting and converted into bullion and sent back to India directly or through Dubai.
 
"While rotating such transactions, sometimes there were one step transaction and sometimes two or three step transactions depending upon the instructions received."
 
The overseas companies which were mostly used for routing the transactions are Crown Aim Ltd and 4C's Diamonds in Hong Kong and Gitanjali Ventures DMCC and Asian Diamonds Jewellery FZE in the UAE. 
 
Choksi had deputed his paid employees as dummy directors of most of these overseas companies, the statement said. 
 
Gitanjali Ventures DMCC UAE, a 100 per cent subsidiary company of Gitanjali Gems Ltd and Asian Diamonds Jewellery FZE, is engaged in trading of diamond, colour stone, studded jewellery with Gitanjali group companies in India.
 
"As per the instructions received from Gitanjali head office in Mumbai, the payments received from the Hong Kong-based companies were further remitted into the accounts of Gitanjali group companies in India.
 
"Similarly, the consignments received from Hong Kong-based companies also were further exported under 'air to air' export to India. Most of the payments received against these exports were used for repayment of bank loans of UAE based ICICI Bank, Standard Chartered Bank and EXIM Bank.
 
"The quantity of the consignments were split into more than one consignment before it was exported to next destination to avoid detection, and accordingly export documents were prepared for further destination," the statement said. 
 
In the name of export and import, Choksi through his various companies in India and abroad was involved in money laundering activities. 
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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