How long will banks get away with funnelling public money into hands of dubious industrialists through CDRs?

An Rs8,000-crore CDR package to a politically powerful industrialist on the eve of general elections calls into question RBI’s exhortations to banks to stop ever-greening of bad loans. That it happened even after the AIBEA’s unprecedented action of naming bad loan accounts and demanding that banks ‘stop the loot’ of public funds, only underlines that senior public sector bankers either do not recognise the change in public sentiment or believe that they cannot be touched. How long will banks get away with funnelling public money into the hands of unscrupulous industrialists?

EAS Sarma, former Union government secretary, in a harshly worded letter to the finance ministry, says, “CDR has become a euphemism for regularising banking fraud.” He also says that, since most CDR packages involve huge write-offs by public sector banks, often under pressure from politicians, there must be a CBI or CVC investigation into each case. Mr Sarma cites the example of how a syndicated loan of Rs4,500 crore to a power project was entirely credited to the account of an overseas company and ‘round-tripped’ later as foreign direct investment through the Foreign Investment Promotion Board (FIPB). This could never have happened without the knowledge and active connivance of the consortium of bankers who made the loan.

Now consider LANCO, a construction, power, and real estate company founded by L Rajagopal, a member of parliament with access to the Congress high command. While it thrived in the 1990s mainly because of its ability to bag and restructure government contracts, the company has ratcheted up losses and applied for debt restructuring in July 2013. Despite opposition and reluctance by several banks in the 27-member consortium, the group’s CDR was cleared in mid-December 2013 with the lenders not only granting it a two-year moratorium on interest payments, but also lowering of interest rate, fresh loans of Rs2,500 crore and restructuring of its bank guarantees and letters of credit. In other words, the group is fully funded and geared during election time. Against this backdrop, RBI’s earnestness in getting banks to take serious action against defaulters sounds naïve.