The real tehelka is yet to come

Hear the RBI on how rotten some of our financial institutions are, and Tehelka’s sex leaves you cold

AMIDST all the din of one scandal crashing into another, does anybody remember what the real UTI scam was about? That it wasn’t just about a dud investment of Rs 32 crore in a firm called Cyberspace Infosys, but was about UTI bailing out Ketan Parekh by constantly buying at huge prices the scrips he was pushing. Chances are even fewer still will remember the IFCI problem that surfaced within weeks of UTI, and the bailout the government had to provide it. Or the news that trickled in of a possible problem at IDBI, but was firmly denied by it. But then, why should you, for the season’s flavour is clearly the sex scenes on Tarun Tejpal’s Tehelka and the rumours of even some politicians being caught in the act, on different videos, one must add.

Sadly, we’re losing sight of what could be the biggest Tehelka to hit us in recent times — the crash of some of India’s top financial institutions, and possibly a prelude to a south east Asian kind of meltdown. The fact is, as various RBI reports and correspondence show, India’s financial institutions and banks have been systematically abused (that’s well known), but that even today, few have any worthwhile systems of checks and balances in place. And if you think that’s a vast exaggeration, see what the RBI has to say.
In the case of IFCI (see this paper of August 20), for instance, the RBI inspection report says that IFCI’s non-performing assets (NPAs) are a whopping 53 per cent higher than those stated by it. The RBI then adds that this is largely done by IFCI mis-classifying loans (dud loans are classified as performers), and by granting fresh loans so that old interest and principal amounts can be repaid. Take the relatively less-known Indocount Choongnam Textiles Limited. The RBI says, the company had been defaulting on its principal and interest payments since October 15, 1997. IFCI had, in fact, classified Indocount as a ‘sub-standard’ asset on March 31, 1999, but then upgraded it to a ‘standard’ asset as on March 31, 2000. Why?

Because Indocount sought fresh loans, and changed the scope of its project while doing so — in the bargain, even the old loan got restructured, and voila, you had a ‘performing asset’ even though nothing really changed! Unfortunately this is not restricted to just IFCI. RBI estimates put the level of under-reporting of dud loans at IDBI at around Rs 1,900 crore last year — that’s around a fifth of what IDBI has reported as its NPAs. In fact, very much the same charges that can be levelled against IFCI can be replicated in the case of IDBI. That it has no system yet of rating its customers, or even of tracking its loans. Although IDBI officials are to visit each unit they provide loans to at least once a year, a RBI note points out just 128 units out of a total of 490 cases serviced out of IDBI’s head office were visited in 1999-00. And of the 525 units under the Mumbai branch office, only 225 were visited.

In the case of one sponge iron unit which was given Rs 34 crore in April 1992, there’s been no physical progress so far. So IDBI commissioned a special audit in 1999, but the auditors said they couldn’t complete the audit since the promoters of the project weren’t co-operating. Guess what? IDBI still hasn’t acted on it and the matter wasn’t even reported to IDBI’s board till December 2000 when the RBI last looked into the matter.

It gets better still. An examination of IDBI’s purchase of shares and debentures shows curious patterns. In a very large number of cases, the financial institution has subscribed to equity or debt instruments of various firms that are not able to repay its loans or principal, and this money, says an RBI report, was ‘adjusted towards the over dues of interest/principal instalments defaulted.’ The fact, says an obviously agitated RBI, ‘that there was no repayment of dues by the borrowers through genuine sources and that these accounts had already become non-performing as per the regulatory norms issued by the RBI, was not at all considered by the institution.’ During 1999-00, IDBI bought equity in four companies of which, says the RBI, three were done to convert previous loans and interest. By March 2000, IDBI had invested Rs 850 crore in preference shares, and of this the shares acquired ‘by way of financial assistance’ was Rs 825 crore.

By the way, it’s not just IDBI or IFCI doing this — it’s a common practice amongst other banks and financial institutions. When a loan can’t be paid, the promoters are asked to issue fresh equity; and when no one buys this, the institution steps in. The company uses the money ‘raised’ through equity to repay the institution which now no longer has an NPA, the company’s balance sheet also looks better because it now has a healthier debt-equity ratio!

This is the state of rot in some of India’s top financial institutions. A whole host of banks are already lined up outside the finance ministry’s doors asking for more bailouts — the ministry’s trying to get them to put their houses in order first, but it’s an open question as to how successful it will be. And we’re still obsessed with Tarun Tejpal’s steamy videos.

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