Cheques and balances by Sucheta Dalal

Cheques & Balances by Sucheta Dalal

January 21, 2000

NPA: Get tough to be credible

The RBI’s fears on NPAs carry no weight and its worries seldom translate into stringent action against lenders who are guilty of blatant evergreening of loans

In the last couple of weeks, several newspapers have reported that the Reserve Bank of India (RBI) is worried about banks’ failure to reduce non-performing assets (NPAs) or to prevent the formation of new NPAs by strengthening credit appraisal norms and post-credit monitoring of accounts. It was also reported that the Parliamentary Standing Committee on Finance had “flayed” financial institutions (FIs) for showing lenience towards willful defaulters and for failing to initiate stringent action against those ‘siphoning off’ funds.

If these venerable bodies are so worried, why does it not translate into tough action to check NPAs and force recoveries? Simply because the RBI’s fears carry no weight and its worries seldom translate into stringent action against lenders who are guilty of blatant evergreening of loans and fudging accounts.

Here is an example. In September last year, financial institutions (FIs) in line with an RBI decision, wrote to all their borrowers seeking to amend all loan agreements by inserting a new section regarding “right to disclose/publish the names of the borrower and its directors as defaulters”. This section was to give the lenders an unqualified right to disclose the names of defaulting borrowers to the RBI through any medium which the lenders may, in their discretion think fit.

The Industrial Development Bank of India (IDBI) was one institution which sent out such letters which the borrowers were expected to sign and return to it as confirmation of the loan agreement being modified. Three months later, reliable sources tell me that 95 per cent of IDBI’s borrowers have flatly refused to accept this modification and said so in writing. Even more curiously, the IDBI seems to have little interest in pursuing the issue.

The borrowers’ defiance and the IDBI’s indifference are good indicators of why NPAs continue to burgeon. Obviously, the problem is not about accounts that have already been classified as NPAs. Those names are now well known. The All India Bank Employees Association has published the defaulters list as a voluminous tome which the RBI chooses to ignore. The same list is also available on a couple of Internet websites.

It is pointless for the RBI to worry about companies which already figure on the defaulters list - these NPAs totaled Rs 60,000 crore in case of commercial banks and Rs 18,146 crore of ten financial institutions duringFY 2000. It is worried about large, well-known corporate groups whose defaults are common knowledge in banking circles but now acknowledged because of extensive evergreening of accounts.

The RBI recently commissioned a study which has listed policy change and low credit appraisal skills among the numerous reasons for mounting NPAs; but corruption as well as political pressure and patronage are clearly much larger factors that influence lending decisions. How else does one explain the fact that FIs and banks not only cover up NPAs, but continue to increase their risk by guaranteeing the lending of foreign banks and institutions. Moreover, they also protect such borrowers by hiding information from the public. In fact, the hidden NPAs and the inability to correctly assess the risk attached to FI and bank loans is one of the main reasons for investor disenchatment and languishing share prices.

Dabhol Power Company (DPC) is a good example of how FIs hide information from the public. A few weeks ago, all newspapers (barring one) carried almost identical reports about the IDBI having lowered interest charged to Enron’s Dabhol project from 16.5 per cent to 14.5 per cent which were clearly based on an informed briefing. When contacted for precise information, the IDBI did not bother to respond, probably because the truth was very different from the news reports.

Documents available with me show that the interest rate reduction was effective from November 1 last year and that the interest charged was in fact a high 21 per cent. It had been reduced to 16.5 per cent on payment of compensation by DPC at 50 per cent of the interest differential amounting to approximately Rs 684 crore. This interest differential will allow IDBI to show a substantial improvement in its bottomline during the current fiscal year, providing yet another reason for hiding correct information.

The moot question is, why would a company with a gold-plated deal and multiple guarantees including a sovereign guarantee pay a steep 21 per cent interest rate, when the prevailing prime lending rate (PLR) at the time of sanctioning DPC’s loans was only 17 per cent? Clearly, since interest rates were pass through, Enron had no incentive to negotiate a lower interest rate for the project. Also, if wanted to benefit from the security provided by the counter-guarantees, it would have to share the benefits and rights under the guarantee with Indian financial institutions.

Instead, Enron was smarter. It paid the highest interest rate and persuaded Indian FIs to guarantee nearly $300 million of foreign borrowing in Phase I alone. In the Second phase, too, Indian FI’s have direct loans of $333 million, while the guarantees to foreign lenders take the total exposure up to a whopping $856 million. Enron is just one of the most recent and controversial examples. There are plenty of others. The Essar Group is another major example. Apart from their own large exposure to the group companies, FIs have also guaranteed loans by leading foreign banks - some of these guarantees too have been rolled over and others paid for. Transparent lending, sharing of information about borrowers and a clear picture of group liabilities are just the basic imperatives. After that comes the will to pursue defaulters and to demand and enforce personal guarantees, or to force industrialists to bring back money that has been siphoned off or diverted to their private companies. But the response to IDBI’s September letter shows that industry is not even willing to permit stage one which is permission to disclose defaulters names. Clearly, the RBI and the lending institutions will have to get a lot tougher if their threats and worries are to carry any credibility.