New Delhi: Don’t let the fact that India has a staggering Rs 7,50,000 crore worth of stressed financial assets frighten you. Nor even that this is an under-reported figure.
What is far, far scarier is that the system, through corporate debt restructuring (CDR) schemes which are disbursed by a CDR system created according to the recommendations of a committee headed by the Deputy Governor of the RBI and comprising of the country’s top bankers actively facilitates and legitimizes lending to sectors and corporates with “high impairments”.
According to documents available with Firstpost, a company called B. L. Kashyap and Sons (BLKS), which made history for the largest ever Provident Fund (PF) evasion of Rs 593 crore, instead of being punished, was handsomely rewarded in December 2014, with a whopping Rs 840 crore of debt restructured at extremely favourable terms. This is despite the fact that PF evasion is a serious criminal offence and both the CDR Cell master circular as well as RBI guidelines specify that companies found to be involved in any kind of fraud or diversion of funds should not be eligible for CDR schemes.
The goodies doled out to BLKS include:
# A fresh working capital term loan (WCTL) of Rs 62 crore with automatic sanction of fresh WCTL to finance any future invocation of Bank Guarantees (BGs);
# A fresh corporate loan of Rs 27 crore to pay the company's liabilities such as statutory tax dues, pressing creditors and salaries of directors and employees;
# Concessional interest rates of 1% above base rate despite being a D-rated company (interest rates are what an A rated company would get);
# Holiday for interest payment up to 15 months financed by another loan called funded interest term loan (FITL);
# and lastly, sacrifice/ write off of Rs 37 crore by all lenders.
But such a generous dole-out to a company involved in the biggest provident fund scam, failed to raise the hackles of the banking regulator. Upon flagging the issue, the RBI instead chose to absolve itself of any responsibility in the CDR disbursal mechanism (despite evidence to the contrary) by “pointing out that CDR Cell does not function under RBI”. RBI governor Raghuram Rajan has further declined to comment on detailed questions emailed to him while those mailed to the CDR Cell were not acknowledged. In effect, even the question of how BLKS, whose PF evasion was widely publicised, became eligible for a CDR package has met with total silence from both concerned parties.
Stressed assets are an unhealthy mix of gross NPAs and restructured loans. Of these, CDRs, designed as a panacea, a rehabilitation mechanism for ‘temporarily’ distressed corporate advances, are fast emerging as a Pandora’s box that no one wants opened.
As per performance details available on the CDR website, the cell has restructured loans amounting to Rs 4,03,000 crore, with additional loans worth Rs 2,000 crore in various stages of implementation. The cell does not share any further data, including the share of public sector banks. However, since public sector banks contribute nearly 70% of credit, they are likely to account for at least Rs 2.84 lakh crore worth of these restructured loans.
Considering the staggering amounts of taxpayers' money involved, it is incomprehensible that the CDR Cell, under the RBI, responsible for restructuring loans worth roughly Rs 4.05 lakh crore, functions completely opaquely and does not consider itself to be a public authority. According to the CDR cell, "The CDR cell is neither established nor constituted by or under the Constitution or any other law made by the Parliament or any other State Legislature and is a self empowered body”. This implies that the CDR Cell is not accountable to Parliament, and as per the RBI’s reply to an RTI query by former Information Commissioner Shailesh Gandhi, has never been audited by the RBI, which claims it has no information regarding who audits the CDR cell.
Impact of CDR Cell
The CDR cell was created under the ostensible ‘noble’ cover of helping stressed companies out of financial distress so as to safeguard job creation and economic growth. However, the structure, opaqueness and increasingly questionable CDR awards to dubious and fraudulent firms by the CDR cell raises disturbing questions.
In a direct conflict of interest, the CDR Cell core group comprises of chairmen of various public sector banks whose performance is linked to reduction of NPAs and credit growth. This structure, without any active regulation by RBI, incentives banks to pour good money after bad money under the cover of CDR. The merit of this argument is borne out from the fact that almost no new case has been referred to the CDR cell since the RBI ended forbearance from 1/04/2015, requiring banks to make provisioning for loans that are restructured.
Other structural defects include opaqueness regarding techno commercial viability reports and forensic audit reports. "Viability of business" is among the most critical conditions for eligibility of a company to restructure its debt and these assessments are left to consultancy firms whose fees are paid by the borrowing company, while the reports are not open to public scrutiny. Similarly, forensic audits to assess financial bungling are left to chartered accountants paid for by the applicant firm with no format provided/ role played by the ICAI. While in 2014, RBI guidelines did specify that for high value CDRs techno commercial viability reports would be scrutinised by the IBA, there is no way to assess its effectiveness in the absence of performance audits.
RBI caught napping?
A formal framework for restructuring of debt is a legitimate requirement to give flexibility to a company's management in case of a genuinely erroneous decision. But because restructuring of debt almost always involves sacrifice of public money, it is both logical and prudent to have a statutory framework allowing policy makers and taxpayers to evaluate the merit of such decisions through transparent cost benefit analyses.
It is these opaquely disbursed CDR largesses which allow canny ‘billionaire bankrupts’ like Vijay Mallya of Kingfisher Airlines to host 3-day-long destination birthday parties for 600 guests and Pramod Mittal of Ispat to boast of having one of the five most ostentatious weddings in history for his daughter. These examples, which are responsible for India battling ever-expanding income disparities and multiple cases of sick companies with super affluent promoters, make transparency a completely non-negotiable requirement.
Yet neither the RBI nor the CDR Cell, run by the country’s top bankers, thought it worth their while to answer whether a cost benefit analysis of the impact of restructuring of loans of BLKS had been carried out; whether the RBI or any other body had conducted any performance audit to confirm if the CDR Cell is functioning as per prescribed guidelines on restructuring of BLKS and other companies; whether BLKS, as a listed company which has to place audited financials in the public domain to ensure protection of investor interest, has had any forensic audit/special investigative audit carried out for allocation of the CDR package; in the absence of any established format for carrying out a forensic audit by the ICAI or any other competent authority, whether selective audit disclosures by a chartered accountant who is paid by the restructured company itself constitutes conflict of interest; or why techno commercial viability report for companies like BLKS, restructured through CDR packages are not placed in the public domain.
Far more damning is the RBI’s silence on questions like how it ensures self-regulation in the CDR Cell when the core group comprises of those very bank chiefs whose incentives are linked to reduction of NPAs; how as the custodian of financial stability the RBI could overlook assessment/ regulation in the misuse of CDR for evergreening of bad loans, leading to the vaporization of public money with serious risks to financial stability; and finally, since actual NPAs are much higher than what is disclosed and CDRs form a substantial chunk of these stressed assets, how much would unregulated CDRs be responsible for the scarcity of capital or capital remaining stuck in over-leveraged private companies, placing unwanted brakes on the development engine.
According to recent reports, the NPAs of 37 banks grew 26.8 percent to Rs 3,36,685 crore in the 12-month period ended September 2015 as compared to a growth of 16.9 percent a year ago. Yet, this growth is not indicative of growing transparency.
The RBI has asked banks to reveal details of the top 150 loan defaulters of India Inc by March 2016. The banks are resisting the move as this is likely to spill out much murkier numbers, considering banks have been found to be lending more to sectors and corporates with high impairments, pointing to glaring lacunae in prescribed credit appraisal standards.
Banks tend to dress up their balance sheets by either writing off as much as 50% of their NPAs in some years, or converting them to often questionable CDR packages, so the fact that banks have strong motive in resisting transparency is well known.
What is incomprehensible, is the fact that the banking regulator, which has outwardly been making all the right noises about under-reporting of NPAs, has been itself found to be actively covering up for these banks. Dismissing the RBI’s plea for exemption under the RTI Act, the SC recently slammed the RBI for denying information about banks and financial institutions for their action against loan defaulters, including industrialists, sternly reminding it of “its statutory duty to uphold public interest and not the interest of individual banks".
The SC bench headed by M Y Eqbal, while upholding the Central Information Commission's (CIC) order to SBI and other banks for disclosure of information under the RTI Act, pointed out that the, "RBI is clearly not in any fiduciary relationship with any bank. RBI has no legal duty to maximize the benefit of any public sector or private sector bank, and thus there is no relationship of 'trust' between them. RBI has a statutory duty to uphold the interest of the public at large, the depositors, the country's economy and the banking sector".
The SC said many financial institutions have resorted to acts that are neither clean nor transparent observing that, "The RBI in association with them has been trying to cover up their acts from public scrutiny. It is the responsibility of the RBI to take rigid action against those Banks which have been practicing disreputable business practices."
Given the serious questions raised about the structure and working of the CDR cell, and now direct evidence of the RBI’s own complicity, there is a distinct likelihood of a large portion of the Rs 4.05 lakh crore of restructured debt being eroded. The growing anxiety to write off such vast quantities of “unsustainable” bad debt, may also be not so much to “clean up the books” as the RBI Governor claims, but to put the lid on a well-executed scam so no further questions are raised.
So while externally the government is making efforts to kick-start the economy, the rot within the financial system is likely to stymie those efforts in the absence of sufficient capital, which has been wilfully forsaken to favour a few individuals at the cost of the national exchequer.