Cheques and balances by Sucheta Dalal

Cheques & Balances by Sucheta Dalal

July 09, 2000

Imprudent lending and role of CBI, CVC

Last week most newspapers reported that public sector bankers are wary of the role of the Central Bureau of Investigation (CBI) and the Central Vigilance Commission (CVC) in scrutinising decisions relating to loan waivers and waiver of penalty on non-performing assets (NPAs) or bad loans. Today, the bad loans of banks and institutions have soared to a mind-boggling Rs 60,000 crore; it is also reported that the creation of fresh NPAs continues to outpace recovery.

These NPA figures are not all due to genuine business failures or legal problems with loan recovery. Most of them are evidence of how public sector bankers have recklessly funded fanciful projects by industrialists who are incapable of implementing them. They also signify large-scale leakage of project funds.

Today, banks with exposures running into several thousand crores of rupees to these groups are at their mercy as they wage a desperate battle to hide their own NPAs and to keep their credit rating intact.

There is so little accountability in government controlled financial institutions, that no senior official has ever been hauled up for imprudent lending which endangers the health of these institutions. All chairmen responsible for these loans have retired and gone away and the present ones too are primarily concerned with hiding the problem until their own retirement. If this were not enough, bankers are now demanding immunity from CBI and CVC scrutiny. On the surface, they only want protection from a witch-hunt by the vigilance agencies, but then almost every investigation is always dubbed a witch-hunt and no banker is promising transparency and disclosure as a condition for immunity.

The repeated losses of Indian Bank and the losses of United Commercial Bank, United Bank of India and the Industrial Finance Corporation of India who are all seeking yet another bailout from the exchequer, are testimony to how indiscriminate lending had pushed these organisations into the red. It is a well-known joke that if you borrow Rs three lakh from a bank you are at the banker’s mercy but when you borrow Rs 30 crore, the bank is at your mercy. The frequent rescheduling of loans to mega projects and the funding of cost overruns is an example of how this works.

The immunity demands by bankers should also be seen in another context. Already, the establishment works overtime to protect industrialists as well as the bankers to lend them money. It is not for nothing that India figures so low on the Corruption Index of Transparency International or that it has dropped a few notches lower in recent months. This did not make it the headline news like the upgrade on the UNDP, human development index. ‘‘Influencing’’ journalists or withholding advertisements to the publication easily checks adverse media reportage. It is even better, because some large media houses are owned by industrialists and do not dare cause trouble in the community.

Let us look at our own example of how the system works. On June 25, the Ruias of the Essar Group, sent me a box of sweets to celebrate the birth of their grandson — the child of director Prashant Ruia. They had already served a legal notice on me and this paper alleging that my coverage of the institutions’ lending to the group and the various attempts to have the financial institutions bail out its $ 250 million Floating Rate Note were defamatory to the group. (The sweets were returned). While the Ruias were offering sweets, they were also in the process of filing a criminal defamation case against us in Surat and not in Bombay where the group is headquartered.

On June 27, a police official served the criminal defamation summons. In the next week, the Essar group was frequently on the front pages of business newspapers. Look at why it made news.

On June 27 itself, Marathon Power of the US, which had an MoU to acquire Essar’s 525 MW Hazira power project finally waked away. The exit had been prolonged with a 100-day time-frame to complete negotiations followed by another 200 days’ extension which ran out on June 27. The sale of the power project was to be one way in which Essar would reduce the exposure of banks and institutions to the group. The institutions have always been aware that the deal would never go through if Essar Steel demanded concessional power tariffs from the project, and the steel project itself would be unviable if it paid commercial power tariffs.

On June 28, the Industrial Development Bank of India (IDBI) met to consider yet another Rs 350 crore loan to Essar Oil’s Rs 7,300 crore Vadinar refinery project. It, however, deferred a decision on the funding. IDBI’s exposure to the Essar group alone is already over Rs 2,300 crore, if one adds the loans by other FIs and banks it would be a multiple of this number. The exact details have always remained hidden under the cover of banking secrecy regulations.

On June 30, Essar Steel was in the news. This time to say that its losses had soared to a hefty Rs 581 crore as against Rs 496 crore in the previous year. That is not all. Earlier in the month, on June 11, newspapers reported that the financial institutions had ‘‘agreed to give fresh assistance of Rs 1,154 crore to the Essar group’’. In fact, ICICI documents available with this paper say that the promoters (the Ruias) had expressed their inability to fund any part of the current overrun by fresh equity. The FIs had agreed to fund the Essar Shipping terminal project, the Vadinar Power Company and Essar Oil refinery project.

They had also agreed to fund the interest payable by the group, said the report.
This is by no means going to be the end of Essar’s visits to the financial institutions for more money, so it is clearly imperative for it to stop an analysis of the banking sectors or reportage of the waivers and concessions granted to it. In fact, Essars’ hectic lobbying for funds and its efforts to use political pressure to obtain funds have been well documented by none other than Mohan Guruswamy, a key player in the negotiations. Claims of loss of prestige seem a little strange in the circumstances.

In fact, the industrialists’ attempt to gag the media coupled with the immunity sought by bankers from vigilance agencies should clear the field for a continuous flow of public funds into the hands of business groups. When the institutions collapse under the burden of these loans, they will in turn be bailed out by the exchequer and the people will pay again.