Now that the RBI governor has spoken his mind, it is time that our banks to take it as a cart Blanche to go hammer and tongs against large numbers of wilful loan defaulters to move ruthlessly at them. This is first part of a two part series

Finance Minister P Chidambaram, speaking on 6 March 2014 after a performance review meeting with public sector banks (PSBs) and financial institutions, stated, “Non-performing assets (NPAs) at end of March 2013 were 3.84%. For March 2014, it is likely to be higher... They will have to focus on asset quality, credit appraisal and also on recovery... Banks have managed to recover Rs18,933 crore during April-December 2013 and accounts worth around Rs22,000 crore have been upgraded.” On an earlier occasion, he had said, “We cannot have an affluent promoter and a sick company. Promoters must bring in the money. We wish banks take firm steps to recover NPAs.”
 

The last part relating to ‘upgrading’ is rather disconcerting as the methods employed by the banks tantamount to pure and simple window dressing of their bad accounts. The commonest of them is back door write-off of substantial portions or parts of the stressed loans by adopting the corporate debt restructuring (CDR) route by resorting to restructuring them under a fresh nomenclature called “re-greening” without classifying them as NPAs. While this can hold well in cases of genuine business downturns, it shouldn’t be blatantly applied across the board for cases of massive wrong doings like Kingfisher Airlines and Lanco Infra.
 

This has given rise now to two patently unhealthy practices that should not be permitted, a) relieving promoters of personal guarantees and b) conversion of debts into equity as they go contrary to Reserve Bank of India (RBI) governor Dr Raghuram Rajan’s assertion upon taking charge on 4 September 2013 that “the promoters do not have the divine right regardless of how badly they manage an enterprise nor the right to use the banking system to recapitalize their failed ventures.”
 

a) Relieving wilful defaulting promoters of personal guarantees, more particularly of those promoters, who have already feathered their own nests using bank funds, deliberately do not pay despite adequate cash flow and enough net worth, siphon and dispose off borrowed funds, misuse sale proceeds of assets, constantly falsify hypothecated stocks and debtors, fudge books of accounts and inventory records, misrepresent and falsify, remove securities without the knowledge of the banks and indulge in patently fraudulent transactions.
 

b) Conversion of debt into equity at absurd valuations to reduce the outstanding dues only that result in diluting the valuable tangible security into being left holding absolutely dud, much below par shares as investments. The delinquent managements will be only too glad to be done with the worthless shares by reducing their equity holdings as was done again by Kingfisher Airlines and Lanco Infra by bringing down substantially their holdings to as low as 25% from 66%.    
 

The Rajan effect
 

In a full page interview to the Economic Times while speaking about RBI’s priorities, the RBI governor Dr Rajan very rightly pointed out that he cannot “ignore the fact that India has changed and to use those same rules of the thumb, I think creates problems.. If uncertainty has increased, you will have more restructures but we have to be careful that those restructurings are genuine and not strategic and do not occur because of malfeasance. The public in many ways does pay a price for restructuring because these are public sector banks that are taking the hits on the debts they have given. The public has the right to know that their money is being used in a fair way.”  
 

Shilpa Sinha, in her article “Revolution on Loan restructuring” writes about “Good reasons if the RBI governor has his way in transforming the banking system and treats loan recast and defaulters.” She goes on to quotes his interview – “I think they have to make their decisions without fear or favour…Inefficient management teams have to be thrown out and lenders’ rights over ownership of defaulter’s assets have to be established.” 
 

Now that the RBI governor has spoken his mind, it is time that our banks to take it as a cart Blanche to go hammer and tongs against large numbers of wilful loan defaulters to move ruthlessly at them. The list of names of NPAs is already in circulation has to be put out in public domain along those of restructured loans. 
 

Immediate crack down of high flying wilful defaulters required
 

The Mahapatra Committee appointed by the RBI require corporates seeking loan structuring to heighten promoter’s stakes by not less to 25% of the reduction in the value of security. This is in toughening the banking regulator’s stance seeks to curb bankers’ attempts at mollycoddling chronic defaulting corporates, who always deemed it their birth-right to milk banking system. This however, is spelling utter disaster and going to prove that such mindless magnanimity is tantamount to throwing good money at concessional rates after bad money that went to the pockets of greedy directors.  Insisting on unconditional personal guarantees of the directors and pledge of additional shares of the same and/ or other dud companies is not worth the stamp paper they are written on.
 

Hey days financial boom
 

The heady financial sectors boom of 2006-2008 kick started the risk equity capital - initial public offerings (IPOs), follow-up on public offerings (FPOs), qualified institutional placements (QIPs), private equity (PE) investments and western foreign institutional investors (FIIs) flooded eastwards consequent upon the meltdown there. This deluged our markets with funds of all hues and colours, legitimate and illegitimate irrespective of enterprise valuations (EVs) resulting in massive bank and institutional lending for setting up and for working capital for inadequately evaluated large projects that perforce fell by the roadside subsequently. Most the banks then did not even appraise the projects adequately by considering whether the borrowers held the required land acquisition, environmental clearances and coal linkages. Borrowers ought to be required to approach lenders with revival plans at a much earlier stage of the stress, as is the practice in the US.
 

(Nagesh Kini is a Mumbai based chartered accountant turned activist.)