By Alam Sriniwas
Published on 6th april 2013
In 2008, Indian policy makers boasted that the global financial crisis would not affect the future growth in this country. In November the same year, the then finance minister P Chidambaram told an international business audience that “we will be back to a high growth rate (of nine percent)” by the end of 2009.
By March 2013, the FM was singing a different tune when he told parliament that “it is not a correct assessment that we were not affected by the 2008 banking crisis.”
This was why he publicly asked the banks last months to go after ‘willful defaulters’, or those (corporate) borrowers who have made a habit of not repaying their loans and allowing their companies to go bankrupt.
By March 2013, the FM was singing a different tune when he told parliament that “it is not a correct assessment that we were not affected by the 2008 banking crisis.”
This was why he publicly asked the banks last months to go after ‘willful defaulters’, or those (corporate) borrowers who have made a habit of not repaying their loans and allowing their companies to go bankrupt.
The ugly fact is that the Indian banks are in shambles. In the past year or so, their levels of bad loans, or those that may never be repaid, have shot up alarmingly. Total NPAs (non-performing assets or bad debt) of 40 listed Indian banks have zoomed by over 40% -- from Rs 1.25 trillion in December 2011 to Rs 1.79 trillion in the same month in 2012.
More importantly, experts question the ability of the banks, the regulator (RBI) and the finance ministry to recover this debt. The reason: apart from the large borrowers, like powerful business persons, the fault for this financial mess also lies with the policy makers and RBI. All three are equally responsible. However, in a bid to distance from the problem, each section blames the other. Thus, Chidambaram’s diktat on ‘willful defaulters’ may be an exercise to divert attention from his blunders.
Banks: From NPAs to CDRs
For several years, the banks found an easy way to hide their bad loans. They neither wrote off the loans, nor admitted they would not be repaid, nor did they force business persons to pay up. Instead, they opted for what is termed corporate debt restructuring (CDR). In such cases, the loans were merely restructured – the promoters were given a moratorium and asked to repay after a couple of years, interest rates were reduced, and part of the loans were converted into equity. This ensured that the loans did not become part of the banks’ NPAs.
According to government officials, Rs 3 trillion worth of debt in only the infrastructure sector has been restructured in the past few years. Bankers complain that the number of proposals they received for CDR packages has risen in the past few months.
In retrospect, CDRs delayed the inevitable in most cases. Several companies that got two rounds of CDRs – loans have to be classified as NPAs after the second round of CDR – ended up being sick or had to be sold to a new owner. The classic case is that of Ispat Industries, which was owned by the Mittals and, in end-2010, sold to Jindal Steel. Its debt history in the past 10 years proves the complicity of the lenders to bail out the promoters. Instead of trying to get back their money lent to Ispat, the banks helped the promoters to continue with their unviable ways.
RBI: Policy sops to defaulters
Obviously, the regulator should have stopped the banks’ practices. Instead, it encouraged it; in fact, the RBI gave more freedom and flexibility to the banks to offer CDRs to corporate entities. First, it set no limits on the number of debt-restructuring packages given to a single company. Second, there were no restrictions on a single promoter, who got several CDRs for different firms in his/her group. There was, thus, no concept of a group approach in debt recast, although a formula is in place for loans. For example, a bank’s loan exposure to a sector or a group is defined.
Thirdly, as per its May 2005 guidelines, the RBI washed its hands off CDRs. The regulator stated that its role in debt restructuring would be “confined to providing broad guidelines” and its officials would not participate in the actual discussions and negotiations between the banks and promoters. The entrepreneurs were thus free to politically and otherwise influence the banks’ CMDs through their connections and get reprieves on repayments of their loans.
Fourthly, the May 2003 guidelines extended CDRs to even the ‘willful defaulters’, the same ones that the FM now wants the banks to take action against. The CDR Core Group, which was carved out of the CDR Standing Forum, which had representatives of the banks, could approve such debt recast to deliberate defaulters if the former felt that the latter would rectify their mistakes. Clearly, this left a huge window of opportunity for the promoters to get their way.
More importantly, in many cases the RBI has encouraged CDRs in a specific sector.
“As part of CDR committees, the banks have a conflict of interest. They are under pressure to show lower NPAs, and thus restructure the loans, and lend more each year. So, one can build a case for an independent authority, and not the RBI, to decide whether to sell the company’s assets, force a change in management, or push the existing owner to initiate critical decisions,” says economist Bibek Debroy.
Policy makers: Crony banking
Moreover, it is difficult to define ‘willful defaulters’. “In India, we consistently see that companies become sick, but not the promoters, whose personal wealth grows. This is unlike the US, where many entrepreneurs become bankrupt. Legally, it may be difficult to have a group concept for debt repayments. One should also not forget that many defaulters have political backing; the part of the reason is crony capitalism and the way it is practiced in India,” says Mitra.
So, it is not just the chairperson of the bank who is responsible for NPAs; it is also the promoters with political connections, and the politicians, who have a huge say in the functioning of most banks, including the private ones. The RBI too with its hands-off approach, which cannot work without adequate regulation and monitoring, has to share the blame. Willful defaulters are a small part of the problem; lack of will and faulty regulations constitute the remaining portion.
Chidambaram meets bankers, borrowers over loan defaults-Mon, Apr 08 2013 Live Mint
Meeting the first of a series of brainstorming sessions aimed at finding ways to accelerate growth in India
Mumbai: Finance minister P. Chidambaram on Monday met senior bankers and top industrialists to understand why existing projects have stalled and fresh projects are not taking off, the first of a series of brainstorming sessions aimed at finding ways to accelerate growth in Asia’s third-largest economy.
As many as 341 projects, including 125 new ones, have been held up for some reasons or the other, Chidambaram said, adding that “the agenda (of the meeting) was to identify the projects that have been stalled”.
These projects, he said, had been held up on account of issues such as land acquisition, gas or coal linkages, environmental clearances, forest clearances and in some cases the inability or the unwillingness of banks to restructure loans given to the promoters.
“These are four or five reasons and these apply to all the projects. We have to deal with them project by project,” the minister said.
Projects have also been stalled because of slowing economic growth and high borrowing costs. India’s economic growth is estimated to have slowed to a decade low of 5% in the year ended 31 March.
The meeting in Mumbai was attended by heads of Mumbai-based banks such as Pratip Chaudhuri of State Bank of India, S.S. Mundra of Bank of Baroda and D. Sarkar of Union Bank of India. The Ruias of Essar Group, Kumar Mangalam Birla of the Aditya Birla Group and Anil Ambani of Reliance Group, among others, represented the industrialists.
Chaudhuri told reporters that a detailed examination of the stalled projects would be conducted by various ministries. Nobody is accusing banks of having failed to extend a helping hand to projects that have been stalled because of economic reasons, he said.
The Mumbai meeting is the first in a series of meetings Chidambaram has planned to seek ways to revive slowing economic growth. After the meeting, Chidambaram flew to Chennai to meet local bank chiefs and industrialists in the Southern city. The finance minister will hold similar meetings in Kolkata and New Delhi.
“It (the meeting) was to gauge the pain points, to know why projects are getting held back. He (Chidambaram) wanted to understand their problems and give them time to resume their projects,” S.S. Mundra, chairman of Bank of Baroda, said.
“There is no ready solution available as the issues cannot be solved overnight,” he added.
Indian banks have seen incidence of both bad debts and restructuring of loans rising. Loans recast under the corporate debt restructuring (CDR) mechanism have crossed Rs.2.27 trillion on a cumulative basis, or 4.4% of total loans given by banks, Mint reported on 6 April.
In 2012-13, banks restructured Rs.77,101 crore of loans under CDR, nearly double the amount in the previous fiscal year, which was about Rs.40,000 crore. Analysts expect 25-30% of the restructured loans to turn bad.
Restructured loans have risen due to the economic slowdown at home and demand contraction in India’s key export markets.
To clear bottlenecks in big projects, the government has set up a Cabinet Committee on Investment, headed by Prime Minister Manmohan Singh. The first meeting of the committee was held in January, when it failed to clear objections by the defence ministry on 31 major offshore oil and gas exploration projects . The committee will again meet this month to try and move ahead on these projects, Chidambaram said last week.
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