ICICI -- Questions raised by the RBI inspection

ICICI -- Questions raised by the RBI inspection
Sucheta Dalal

The biggest news last week was the strange leak of the Reserve Bank of India's 1998-99 inspection report of ICICI to three newspapers. To bankers and other financial institutions, it was a vindication of their hush-hush charges that ICICI's accounts were not quite kosher and that it was impossible for a single institution to buck the general trend of declining profits and mounting non-performing assets (NPAs).

Last year, IDBI declared a 16 per cent drop in net profits, IFCI went deeper in the red, the nationalised banks declared a even bigger decline in profits and ICICI alone reported six per cent plus growth. Every time eyebrows were raised about ICICI's unusual performance -- bankers, babus and journalists were told that ICICI's accounts were audited to US GAAP specifications. Though this did not end the speculation but it silenced open criticism. After all, analysts could not ignore reports that this paper too has published about ICICI's mammoth exposure to beleaguered groups such as Essar, Jindal, Mittal, Modern, Mafatlal, various other steel companies or those in the synthetic textile business and so many others. The rescheduling of loans, waiver of interest and plethora of other concessions was part of a strategy of aggressive growth in assets which kept NPAs low. But the share price continued to languish, reflecting the skepticism of analysts and investors.

The RBI inspection report has confirmed several of their suspicions. It has pointed out, among other things, that gross and net NPA figures were understated as the inspection team found Rs 1190 crore of additional NPAs. That the net profit was overstated to the tune of Rs 403.01 crore by not taking into account loan losses and depreciation in investment and other assets. Given that its declared net profit is Rs 1080 crore this is a substantial overstatement and a serious charge. The report also points to laxity of managerial practices, inadequate reporting to the board of directors, a lower capital adequacy (11.41 on March 31, 1999 as against 12.46 claimed by ICICI), poor pre-sanction credit appraisal and deficiencies in internal audit and controls.

Typically, ICICI has challenged the findings of the RBI inspectors and offered a detailed response to the RBI's charges. In fact, ICICI has had a clever and strategic response to every issue. Firstly it cultivated an extremely high profile image -- plush offices, fancy salaries and frequent interaction with the media gave it an image makeover which tried to place it apart from the other financial institutions and banks.

At the same time, it cashed in on its public profile as a financial institution (as a simple survey would show that let alone the lay person, many leading brokers and financial intermediaries are also unaware of the negligible government holding in ICICI) to float frequent bond issues and raise several thousand crores of rupees under the "safety bond" brand name, even when the bonds are not secured through a first charge.

Next, ICICI became a leading proponent of good corporate governance thereby killing any speculation that it did not scrupulously practice what it preached. The headline-making acquisitions, mergers, diversification and its challenge to market leaders in housing and corporate finance enhanced its image as a financial powerhouse and a potential market leader. Yet, the share price languished and the market was unimpressed.

The masterstroke was its announcement of a big foray into e-commerce and other high profile internet related businesses. The move had the desired effect and the share price has been moving steadily northwards as the company was sucked into the magic realm of IT valuations. If lucky, ICICI's e-commerce activities could by the magic formula wipe out NPA losses and power the company forward. By anybody's reckoning it is a big and risky gamble which may be questioned only if and when the IT valuation bubble bursts.

The RBI inspection has forced a temporary return to reality and raised new questions. First, that ICICI clearly does not accept the findings of the RBI inspection and continues to defend its actions. Further, one leading business paper quotes "RBI sources" as saying that "we are happy with ICICI's explanations". What on earth does this mean? To me, it means that the ICICI inspection is a closed chapter as far as the RBI is concerned. More dangerously, it means that the RBI inspectors seem clueless about accounting practices followed by institutions. It implies that the RBI inspector has made several serious allegations against ICICI, which have perfectly reasonable explanations. One would then have to conclude that the simultaneous leak of the inspection report to three papers has done grievous damage to ICICI and would be grounds for litigation in another country.

Well it can only be one or the other. Either the Reserve Bank of India ought to send its inspectors for an intensive re-training programme and teach them how to conduct inspections. Or it ought to stand by them and not find ICICI's explanations so easily acceptable. In case of the latter, it would have to lead to some strictures against ICICI or worse and at the least a re-writing of its accounts.

The editorial response to the inspection report as well as that of various bankers and analysts that I spoke to, indicates that the RBI inspector's findings carry more credibility than the explanations. he situation would have been even clearer if newspapers who were the privileged recipients of the leak had also published annexures to the report, where the inspector had detailed specific examples which led to his conclusions about asset classification, income recognition, provisioning etc. These detailed examples used to be part of the complete inspection report earlier, but these days are only attached as annexures. That the newspapers have not been given these annexures, indicates that they were not part of the leak.

This is not the first time that a RBI inspection has passed severe strictures against ICICI. In the past, RBI inspectors have drawn attention to such lapses and quoted several examples when the institution when out of its way to help companies such as the Essar group fund ambitious diversification which are now in serious trouble. There was no known action even in the past.

In the next few months the International Monetary Fund plans to study the supervisory practices of several countries including India. Maybe the RBI would be more forthcoming with explanations about its inspection and supervision when the questions are posed by the IMF.

Author's email: suchetadalal@yahoo.com