Last week a consortium of Reliance Industries Ltd (RIL) and JM Financial Asset Reconstruction Co (ARC) succeeded in their bid for Alok Industries Ltd. This may appear as a great success of a bad loan resolution attempt but it is in fact a sad day in the history of Indian banking. The outstanding exposure of the banking system to Alok is a whopping Rs29,500 crore. Here is RIL-JMF ARC placing a lone bid for less than Rs5,000 crore. Initially it was rejected as it was noticed by the Committee of Creditors (CoC) as too low a bid and hence it chose to liquidate the company and recover their dues. The CoC had then called the consortium and had asked them to improve their bids. Smartly, the bid was improved by a token Rs100 crore and the final bid was placed at Rs5,050 crore, just a tad above Rs5,000 crore.
Pat came an amendment to IBC regulatory framework that if CoC gets at least 66% in favour of a proposal instead of the present 75% levels, then the bid can be considered as acceptable and the proposal can be accepted. RIL consortium worked overtime to convince all the lenders. They had finally succeeded in persuading 72% of the lenders and could thereby breach the amended threshold limit of 66%. Wow! The consortium of banks are indeed very happy to announce that they are willing to take a nominal 83% haircut and offer on a platter a company in which about Rs29,500 crore were sunk by the banks (perhaps taking turns to pump in the money) against which they are getting a paltry about Rs5,000 crore.
Still they feel they have done a great thing by recovering at least 17% of the overall dues.
On the same day, another news headline is that the Indian Bank’s Association (IBA) is taking up the mantle and fighting for the top management of the banks. In their opinion, the investigative agencies of the government have been harassing them on ‘frivolous charges’ and hence the association is contemplating buying insurance to ensure indemnity against such ‘frivolous charges’ and protect the bankers against indiscriminate. What a strange observation!
Banks have queued up in front of Alok Industries (almost all the public sector banks (PSBs) except Axis Bank) and have lent them left, right and centre. Their project assessment skills have been disastrous. Given that these banks have collectively chosen to take 84% haircut, it reflects their collective inefficiency.
Where is the accountability of bankers and bank officers for not monitoring the account, reckless lending, and evergreening the exposure. If they can cover themselves under the garb of ‘adequately provided for’, what else is their job?
The liquidation value for Alok Industries is about Rs4,200 crore. If they know that the bids from private parties will come at around the liquidation value, why in the first place did they publicly announce the liquidation value? It looks like the framework is made with the sole intention of helping these promoters to put the bid as close to the liquidation value as possible, without proper application of the mind!. Banks here work overtime to let public money get wasted. Sometime back, the banks were shouting themselves hoarse that the lone bid was too low and was close to the liquidation value. Why would one take such a massive haircut and accommodate these proposals, was their query. Now there is a complete U-turn.
In the past, banks have taken possession of the properties of Small and Medium Enterprises (SMEs) and have liquidated them. Why not in this case? The transaction has left a good Rs24,000 crore hole through the banks, which is nothing but public money. How is this going to be accounted for? Who will be held liable? If a bank again indulges in reckless fresh lending and not monitoring the deployment proceeds, who shall be responsible? The malaise lies somewhere else:
a. The bank senior management positions are filled by the Public Enterprises Selection Board (PESB), which simply reshuffles PSB general managers. No tangible new knowledge gets added. It all depends upon how much liaison has been done in North Block to get coveted assignments.
b. Nobody has worked on honing up the assessment skills and post disbursement follow-ups and appropriate timely corrective actions. When new unforeseen problems occur, they do not think out-of-the-box. After all, they had all along been churning manpower from one PSB to another and vice versa. Hence, no creativity is happening.
c. Strangely, the government as the biggest shareholder is shying away from their dominant position. Most bankers escape and some get caught (it all depends upon the blessings of North Block and your leanings with the extant forces). The government nominees have no deeper idea and are simply acting as rubber stamps without actively contributing.
d. Given that the bad loan levels are so high till date, the government also does not bother to get lateral talent from the private sector.
The middle level managers have to be adequately trained on project assessment skills and monitoring skills. Today, every bank is looking for a lead banker to take an initiative, who may follow him/her like a herd, so that at the first sight of trouble, any participating banker may report it to their lead banker for suitable corrective action. Nominee directors should be placed for dealing with cases where exposure limits are beyond a threshold and these directors should be held accountable for taking care of the repayment of debt obligations or should find corrective measures and implement them.
The government directors should be experienced retired bankers and should not be career bureaucrats, who have no clue about banking challenges and eventually have little to contribute. Unless these maladies are removed, we may continue to see more bad loans. Simple merger of banks will not do wonders unless fundamental changes are brought in. Otherwise the loot of public money will continue.
(The writer is the Director of New Horizon Institute of Management Studies, Navi Mumbai)