For the first time ever, a government investigator has had the courage to call out to the Reserve Bank of India’s (RBI) weak supervision. The Serious Frauds Investigation Office (SFIO) has blamed RBI for its failure to detect what turned into a massive systemic scandal at Infrastructure Leasing & Financial Services (IL&FS).
The financial sector continues to reel from the repercussion of the IL&FS failure, what with Dewan Housing Finance Ltd (DHFL), finally, defaulting on its interest payment on bonds and the consequent downgrade decimating net asset values (NAVs) of a slew of debt mutual fund schemes. The deleterious impact of IL&FS’s failure even extends to pension fund investments by several private companies.
In the past three decades or more, this is the first time that RBI has been seriously questioned for its lapses even though the damage inflicted on our financial system, because of its repeated failures as a regulator, have been huge. Way back in 1992, the securities scam was primarily about the way RBI ran the government securities (G-Sec) market and failed to upgrade turgid systems and manual processes for trading in government securities.
A decade later, RBI was sleeping at the wheel during the Ketan Parekh scam as well. Every entity that colluded with Ketan Parekh and other scam accused had set up overseas corporate bodies (OCBs) in tax havens with $10 capital and were using them to pump money into the Indian capital market. RBI was blissfully unaware, mainly because it does not ever seek market feedback or engage with stakeholders.
And, yet, every time a major financial scandal erupts, RBI quickly gets into high gear and begins to hand out punishments and penalties. Nobody has questioned how it goes about doing that either.
So here are some interesting aspects to SFIO’s action.
The SFIO charge-sheet filed in the IL&FS Financial Services (IFIN) case says, “Action at the right time may have prevented ballooning of the matter… RBI had repeatedly pointed out non-compliance with group exposure norms and wrong calculation of net owned funds (NOFs) in inspection reports from 2015 onwards. But no penalties were imposed and IFIN was allowed to continue operations without corrective measures. It is only in 2017 that RBI even bothered to increase the pressure and seek classification of group companies to arrive at net owned funds.”
Interestingly, SFIO has attached RBI’s inspection report to the detailed 800+ page charge-sheet filed against IL&FS Financial Services (IFIN) last week. For transparency activists, this is a breakthrough development, since RBI continues to defy Supreme Court’s orders and has flatly refused to provide inspection reports. This time, it is partly in the public domain.
Although SFIO has drawn attention to RBI’s failure, its actions seem tentative. It has merely asked RBI to probe officials in the department supervising non-banking financial companies (NBFCs) for not having acted against IFIN, although major discrepancies were noted in its books as early as 2014. It also asked RBI “to take appropriate action and also initiate suitable policy measures to prevent such fraudulent actions.”
This is like the Securities & Exchange Board of India (SEBI) repeatedly asking the National Stock Exchange (NSE) to appoint its own forensic auditors and conduct investigations in the algo-trading, or co-location scandal. The outcome, not surprisingly, was a weak and wishy-washy report, which SEBI tried to cover up with a biggish penalty.
Will the outcome of SFIO’s directive be any different? Well, see for yourself. Over a month ago Moneylife filed an RTI application asking RBI for the names and designation of officials responsible for monitoring and inspection of IL&FS, action taken against them, if any, as well as a record of any discussion or meeting since July 2018 with regard to the failure of this systemically important shadow bank.
RBI responded by asking us to direct the query to its regional office and the department of non-banking supervision (DNBS) – as if to suggest that the top brass has not even taken cognisance of its own failure in this debacle.
We filed a second RTI application with the DNBS only to get another rejection. RBI refused information under Section 8(i)(j). Under this clause, it can refuse to part with information unless the matter pertains to an issue of larger public interest to justify the disclosure.
Apparently, RBI’s public information officials (PIOs) are still not aware that there is a larger public interest involved, although major infrastructure projects are at a standstill and the entire financial sector is reeling under the impact of IL&FS’s defaults. If that weren’t enough, the information was denied under Section 8(i)(h), which permits denial if the information “would impede the process of investigation.”
When Moneylife filed a first appeal, the matter turned into a farce. The appellate official now chose to deny information under Section 8(i)(g) of the Act, which justifies denial of the names of inspecting officials if it is likely to “endanger the life or physical safety of any person.”
However, the PIO has been asked to reconsider the earlier denial on the ground that it would impede investigation.
I suspect there is another reason why RBI is stonewalling us about information on its failure to rein-in IL&FS. And that is because protection for IL&FS came all the way from the top. Remember a former governor as well as the IL&FS board ignored persistent letters from a whistleblower. This included pseudonymous ones as well as those from known sources and foreign institutional investors.
In December 2018, I wrote about The Destructive Impact of RBI’s failure to Act in the case of New Tirupur Area Development Corporation (NTADCL), where RBI mysteriously and brazenly buried repeated pleas by AIDQUA Holdings (Mauritius), Inc (AIDQUA), a global investment fund which has a 27.89% shareholding in NTADCL.
AIDQUA’s letters in 2013-14 were addressed to an RBI executive director and RBI’s refusal to intervene is also documented. Had it looked at the forensic audit, IL&FS’s dubious method of working and egregious flouting of rules would have been exposed long before its actions led to a collapse. NATDL continues to operate with the same management and without a proper managing director.
As is the case after every major scam or sting operation, RBI begins to investigate after the damage is done and responds with bans and penalties. After the SFIO filed an 840-page charge-sheet, RBI has threatened to cancel IFIN’s licence to operate as a non-banking finance company (NBFC). It has also barred SR Batliboi & Company (associate of Ernst & Young) from handling audits of commercial banks for just one year, starting 1st April.
It is important to note that the only stakeholder entity that RBI engages with is the Indian Banks Association (IBA), which is an unregistered, voluntary association of banks, with doubtful legal standing. Yet, RBI empowers it to take all decisions pertaining to banks, right from deciding service charges for depositors, to negotiating wages and now, even appointing forensic auditors to banks.
This time, however, an accounting firm from Chennai has written to the finance ministry and the RBI governor, among others, to record its objection. It says, “IBA, being an unregistered, unauthorised body, has neither any responsibility, nor any accountability, considering the fact that it is not a body formed under RBI, to be conducting empanelment of firms for the purpose of forensic audit.” In fact, being unregistered, IBA does not even have to follow Central Vigilance Commission’s guidelines of ensuring a level playing field. Will the government or RBI respond? We will be watching the developments.
Unfortunately, as long as the RBI governor’s job remains a much desired posting for our secretaries, nothing will change and the country will keep paying for the regulator’s repeated failures to supervise and stop the corrupt nexus between banks and big business leading to systemic failures and massive defaults that cost India a few lakh crore of rupees every few years.
A rate cut, which is almost certain in the second bi-monthly monetary policy statement for 2019-20, is unlikely to stimulate demand in the near term due to the absence of quick resonance in the financial market, India Ratings and Research said on Wednesday.
Despite the RBI cutting policy rate by 50bp so far in 2019, banks have not adjusted their lending/deposit rate accordingly. On the contrary, a number of banks have raised their deposit rates to mobilise funds. At the core of this mismatch between the RBI's action and the banks' inability to pass on the benefit to the borrowers is the slowdown in household savings. Increased government borrowing and elevated small savings rate have rendered deposit/investment mobilisation by banks/NBFCs expensive, the India Ratings report.
India's consumption demand is also still not a pronounced credit fuelled or leveraged demand. Outstanding personal loan (excluding housing loan)/PFCE (Private Final COnsumption Expenditure) ratio was 35.7% in 4QFYE19 (28.2% at 1QFYE12).
However, Ind-Ra believes, more than the rate cut it is the transmission of the rate cut into the economy that has emerged as a bigger challenge.
"It is well known that the impact of the monetary policy on the Indian economy is felt with a significant lag, but the situation at the current juncture has become further complicated due to the ongoing crisis in both – the banking and the shadow banking sectors. While banks are struggling with high NPAs, NBFCs are struggling with solvency issues leading to credit freeze", the rating agency noted.
GDP growth fell to a five-year low in FY19. Even on a quarterly basis, GDP witnessed a growth slowdown over 4QFY18-4QFY19, continuing the trend observed over 1QFY17-1QFY18. On the other hand, inflation is undershooting RBI's targeted 4% mark consecutively for nine months now. With the softening of global crude oil prices and adequate food grain stock, there is clearly a scope for the RBI to announce at least a 25bp rate cut. This will be the third consecutive rate cut adding up to 75bp reduction in the policy rate so far in 2019, it said.
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.
Dewan Housing Finance Corp Ltd (DHFL) has missed its interest payment deadline of 4 June 2019 on a set of outstanding bonds owing to fund shortage but may pay the over Rs1,000 crore over next seven days, say media reports. The non-banking finance company (NBFC) has delayed payment of interest to mutual funds and other entities.
Last year in June, the housing finance company had raised about Rs11,000 crore through public issue of bonds. These non-convertible debentures (NCDs) offered investors annual yields of 8.90% to 9.10% across maturities. Interest payment of these bonds was due on 4th June.
Quoting sources, a report from the Economic Times says, "UTI Mutual Fund and some private sector lenders, including Axis Bank and IndusInd Bank, were among the investors that bought DHFL debt sold last year. Some individual investors are also said to have invested in these."
In a report, CNBCTV18 says DHFL is likely to make payment within the seven days grace period as missed deadline does not constitute default, but only a delay. This report cites a statement issued by DFHL on the delay in repayments.
However, the statement quoted by CNBCTV18 is neither available on the company website nor in its regulatory filing.
Quoting the DHFL statement, the report says, "The company is taking all steps necessary and shall ensure that the payment fallen due by way of interest is paid within the above-mentioned Cure Period of seven (7) working day. Hence this is a delay & NOT default. The company is committed towards ensuring repayment of all its obligations within the stimulated timelines".
"Since September 2018, DHFL has repaid close to Rs40,000 crore of financial obligations. While DHFL had to stop premature FD withdrawals as a policy, in order to conserve liquidity (as allowed by regulations), the company preferred to uphold customer interest and processed all normal maturity payments as well as all cases of medical exigencies. With regards to NCD repayments, DHFL has fulfilled its payment obligations of Rs5,416 crore till date," the DHFL statement quoted by CNBCTV18 says.
According to Economic Times, the delay in payments will require MFs to mark down their net asset values (NAVs) by about 75% in the DHFL instruments in order to avoid any redemption pressure by wealthy investors.
Last month, the crisis ridden home finance company has stopped accepting new deposits and premature withdrawals.
“In view of the recent revision in the credit rating of our fixed deposit programme, acceptance of all fresh deposits, as well as renewals, has been put on hold with immediate effect,” read a DHFL e-mail to its customers.
Premature withdrawals would be allowed only in cases of medical or financial emergency, the DHFL communication said.
DHFL had about Rs8,400 crore of loan repayments and securitisation payouts coming up in the next few weeks. DHFL’s available liquidity in April is pegged at Rs2,775 crore even as the company is seeking to sell more assets. The NBFC also assured its stakeholders that it would honour all upcoming payments and have already repaid Rs30,000 crore since September 2018.