Vijay Mallya to Vinod Kambli: How Syndicate Bank-like scams can be avoided

An upright bank manager paid with his life when the CBI hounded him for years on suspicion of giving export loans with an eye on kickbacks. A pusillanimous fellow at the best of times, the CBI harassment made his life hyper-tensed. He died of it. His parents who survived him rued their celebrations marking his first day in the bank some twenty years ago. The export-oriented unit could not repay the loan because the foreign importer did not pay up. It was a classic case of contagion effect but the CBI couldn’t be blamed either because it often is at its wits’ end and cannot tell between an honest loan gone sour and dishonest loan gone sour. Many Indian drug firms have lost their money when they made naked exports, i.e. exports sans letter of credit or other forms of credit enhancement. Survival made them chart this ruinous path.

Mass loans going by the name of loan melas do not, however, give as many sleepless nights to bank managers because both the investigative agencies and courts alike resign philosophically to the fate of such loans given as they are under political compulsions. Banks should not after all take the rap for the mindless largesse given by politicians. But they do take the rap when huge individual loans are given to industries at the behest of politicians pulling the strings unobtrusively from behind, leaving no trace of their involvement.

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The point is bank managers extending loans are damned if they do; damned if they don’t. Pink papers’ dirge often is bank managers fearing CBI raids are sitting on pile of cash when they should be lubricating the economy and that they prefer instead to invest in gilt securities thus more than meeting the statutory SLR requirements. Banks thus find themselves between the devil and deep sea or between rock and hard place, if you like the Americanese more.

Discretionary power is the bane of any system. Power to impose penalty ranging from 100% to 300% of the tax evaded vested on the Commissioners of income tax, make them salivate. They ask the assessees in dulcet terms if they want them to impose a 300% penalty. Quick to get the message, they settle for 100% penalty plus a hefty amount to the Commissioner of course paid on the sly under the table. A bank manager too enjoys tremendous discretionary power though beyond the specified threshold he has to seek regional office clearance. Discretionary powers must be wrenched away and replaced with transparent norms.

A check list of documents and qualifications must be announced transparently on a bank’s website. This should serve as the guidepost to the wannabe borrowers. A borrower wanting to take loan at the prime lending rate must meet such and such norms etc. Auditors must be taken to task for being lax in valuations and auditing should it turn out that the value placed on securities were exaggerated. All these of course would cast bank loan norms in stone. But it is better to be rigid and uncompromising and drive away some of the genuine borrowers than be flexible and encourage compromises. When public or taxpayers’ money is involved, rules indeed must be cast in stone.

It is not as if there aren’t other factors that play a role in our NPAs. Starry-eyed banks suspend disbelief when faced with socialites and celebrities. Vinod Kambli reportedly owes a cooperative bank in Maharashtra a huge sum but he is not only blas about it but had the temerity to beat up the bank officials who came calling. SBI and a clutch of other banks made an ass of themselves by extending huge loans to the now defunct Kingfisher Airlines and repeatedly rescheduling them under the euphemism corporate debt restructuring despite losses writ large on such loans right from the inception. For all one knows its flamboyant promoter Vijay Malaya must have pulled political strings also. But the banks compounded their folly in extending and rescheduling their loans to Kingfisher by converting a part of the outstandings into shares despite knowing they were not worth the paper they were written on.

We have mollycoddled industrial loans long enough. It is time we read the riot act to our industrialists. Jaitley does not have to legislate afresh. He must ask banks to dust up Securitization Act, 2002. Seize the assets of defaulters, period.