Business groups with political clout bleed banks and FIs (2 December 2001)  

Political rhetoric in India is so completely divorced from government action that it would be dangerous for any sensible person to confuse the two. Let us look at the last couple of weeks alone. Except for the fact that the capital market has declared a bull market of doubtful sustainability, the news on the financial front is nothing to cheer about.

The government has announced a Rs 1,800 crore bailout for Indian Bank and United Commercial Bank. This means that the public will, for the third time each, fund the inability of these banks to turnaround. The loss-making IFCI has already availed of its first bailout and has demanded a second one even while it has announced a hefty net loss of Rs 441 crore.

As for the real biggies – the Industrial Development Bank of India (IDBI) is sending out a quiet message that it will need anywhere between Rs 3,000 to Rs 7,000 crore. Last week it announced that net profit has plummeted a steep 85 per cent for the September 2001 quarter as compared to the same period last year.

As for ICICI, we are told that its conversion to a universal bank will resolve all its problems but what we do know is that its portfolio of loans is exactly as contaminated as the other two institutions. Also, while ICICI projects itself as a dynamic private institution, the source of its funds is mainly the good old provident fund (which has very little transparency), trusts, charities and other such investors who will demand a bailout package if things go awry.

Although government circles acknowledge that the FIs are in their death throes they prefer absurd palliatives to hard solutions. Take a look at some numbers: the Non performing accounts (NPAs) of IDBI and ICICI amounted to Rs 11,352 crore at the end of March 2001. Bad loans are one part of the problem, the more serious one is a mismatch in asset –liabilities, which is estimated at a huge Rs 13,409 crore in one year and would widen over a two-year period.

At the end of March 2001, the total loans and investment of the two FIs were Rs 1,20,771 crore, which is split almost equally between the two. Of this, five industries – namely iron & steel, power, textiles, petroleum and chemicals account for Rs 59,583 crore or nearly 50 per cent of the portfolio.

FIs as a category pay better than banks, but even here the compensation package and operational costs at ICICI are obscenely high, when compared to its NPA portfolio. Clearly, the FIs are in deep trouble. So what is the government doing to restructure them or to tackle the problem?

The Finance Minister (FM) appears to believe that if he maintains a discreet silence, the Opposition too will not notice the problem and he can quietly hand out large chunks of money from the exchequer as a bailout. He did it with UTI (1998), IFCI, Indian Bank and UCO Bank, so why should IFCI (bailout II) or IDBI be a problem? He is also careful to send out the opposite signals. He recently declared that diversion of funds will be declared a willful default; sometime ago he had said that willful defaulters should be put behind bars.

Also, politicians continue to arm-twist the FIs into funding dud companies and doubtful projects. Consider these examples: In the last couple of weeks the Minister in charge of Company Affairs stood up in Parliament to give a clean chit to a business group which has been the most notorious in diverting funds and expending its asset base.

Soon after, a large project of the group with extremely doubtful viability has been cleared and one is brazenly told that over half the project work is completed when the reality is far different. A number of politicians have been working hard to get this project cleared and the funding, which runs into thousands of crores will come from the FIs. In fact IDBI is all set to open a Letter of credit which is anywhere between Rs 1,500 to Rs 1,800 crore.

The promoters, who have been bleeding the FIs for the last five years, have defaulted in most of their companies and sought a multiple restructuring of their loans are being rewarded with an enhanced stake of over 67 per cent in the project.

Is the FM unaware of the dangers of this lending? In fact one of his senior-most secretaries had successfully blocked reckless lending to this group in the past. But he too has apparently been silenced this time.

This group is not the only one to receive such patronage. A couple of months ago, the banking division of the finance ministry called a meeting of bankers and arm-twisted them to lend fresh funds to a company called Parag Bosimi. This is not the first time that banks have been summoned to Delhi to coerce them into bailing out Parag Bosimi.

Some time at the end of 1999 the banking division had ordered banks to withdraw suits filed against it and lend fresh funds. What started out as a Rs 164 crore project in the 1980s to make partially-oriented yarn and polyester filament yarn in Assam had ballooned to Rs 745 crores at last count, which was in 1999. It was classified as an NPA in 1995 and reclassified as a standard account in 1999 due to convenient changes in the Reserve Bank guidelines.

At the last meeting a few weeks ago, the government even attempted to doctor the minutes of the meeting to show that banks had agreed to lend fresh funds. What is Parag Bosimi’s clout? Nobody is quite certain. All we know is that its chairman Hemant Vyas had last hit the headlines in 1992 when he was arrested after the securities scam since he was Chairman of the Metropolitan Cooperative Bank (which was liquidated along with Bank of Karad).

Over the last nine years he has been discharged in most of the cases filed against him. The list is endless. With elections in India’s largest state around the corner, any business group with political clout is able to bleed banks and institutions for more money. Since the general public understands very little about the large financial bailouts the government gets away unquestioned.