Eye Opener Article,
Non-performing assets (NPAs) in the banking sector, or bad loans as they are commonly known, have been making headlines for the past many months now. The economic downturn has certainly weakened the ability of many borrowers to repay their loans on time. Some businesses have been hit hard by regulatory changes. Still, many believe that a good number of bad loan cases are the result of dubious promoters who know the loopholes in the system, connivance with corrupt bankers and political interference. To get a ringside view of the situation, I met up with R, a former bank chairman, over breakfast, at an Udipi joint near his place in suburban Mumbai. For obvious reasons we can’t take names here.
We chatted for nearly an hour. R had worked with the government in different capacities before taking over as chairman of a mid-sized quasi-public sector bank.
Let me cut to the explosive points first, and then tell you the story of the conversation from the beginning. – R discovered that many jobs of bank chairman involve bribing politicians. – He found that from liquor barons to small businessmen, loans go bad because of political influence. – Banks are clandestinely participating in project loans with long gestation periods when they are not equipped to judge the viability of projects and business models. Little wonder, the banking system is now sitting on a volcano of bad loans – maybe as much as 10 percent of all loans “All non-performing loans do not necessarily result from corruption; at the same time, not all bad loans are the result of a slowing economy. It is a combination of factors that causes a loan to go bad,” R said after we had placed our order.
“Every bank has a credit appraisal system, based on which loans are sanctioned. Banks have to check the durability of the business model, promoters’ credentials and other such aspects before lending money. There are instances where the business model may be sound, but becomes the victim of a weak environment.” “Also, banks may have a good credit appraisal system in place, but the officials implementing the system may be corrupt. In some instances, the officials may be honest but the credit appraisal system itself may not be good enough to be able to assess the risks associated with some complex business models. And there are cases where you have corrupt officials and a weak appraisal system – which is the perfect breeding ground for bad loans. “The problem of bad loans has been aggravated by the fact that banks are trained to lend to corporates for their working capital requirements, and not for projects with long gestation periods. So when you lend to a business you don’t understand fully, and with restrictions imposed by the system, that is the starting point for trouble.
“The flaw in the system is that banks are not allowed to make a loan with a tenure of more than seven years, because no depositors park their money with banks for more than that period. But many large projects take more than 10 years to start generating cash flows, and even banks are aware of this problem while agreeing to finance the project. “So many companies pre-date their COD (commercial operations date) of the project, even though there is no chance of it becoming operational on that date. From the COD, the project becomes eligible for working capital loans from the bank. But that is just an eye-wash because the money is actually still being used for project finance. In three years, the working capital loan limit too would be exhausted, and the project would still not have started generating money. “Ideally, only one-third of a bank’s loan book should be exposed to project finance, and the rest should be working capital loans.
But if you look at the loan books of most PSUs at present, it is about 70 percent project finance and 30 percent working capital loans. “Project finance loans are best done best by financial institutions like the erstwhile IDBI and ICICI, which understand infrastructure projects better,” he said. Over a crisp rawa sada dosa, R looked back on his days at his bank fondly, and said his strategy of focusing on small businesses paid off well. “I focussed on lending to small and medium enterprises instead of large corporates. And though loans to SMEs are risky, small businessmen are more honest when it comes to repaying loans. That’s because it is difficult for them to get loans, and even one black mark against their name would make it twice as hard.
And that is why I feel RBI’s strategy of combating inflation by keeping interest rates high could be counterproductive. The RBI benchmark rate may be 8 percent, but the effective cost of loans for SMEs is 15-16 percent. And these businesses account for almost 60 percent of the GDP. How can you revive the economy by hurting the very segment that contributes a major chunk to growth?,” R asked. On the contrary, some of the large corporates turned out to be slippery customers when the economy went into a downturn, he said. R told me how he had a liquor baron literally on his knees when that man tried to default on a loan.
“He was behind on his interest payment, and refused to provide additional guarantees when asked for. First he got a cabinet minister to intervene, and when I refused to budge, he got a Chief Minister to call and put pressure on me to go easy on him. I made it clear that he would be shown no leniency. Finally I called up the liquor baron himself and told him that I was going to dump the shares of his flagship company he had placed with me as collateral, and that I was personally flying down to Mumbai to oversee the sale of the shares. For all that carefully crafted media image of a suave and unflappable industry captain, the man panicked and begged me not to sell the shares. He then flew down to my office and provided the additional guarantees that I had asked for. I then wondered why my counterparts at other banks had not been so aggressive,” R said. R says too often when promoters default on loans and then get their loans restructured on very favourable terms, it is often with the connivance of top officials of the bank.
“Either the chairmen of the banks have taken kickbacks from the promoters or they are unable to withstand pressure from their political bosses. Taking on the ministry is not easy, and more so if you owe your current job to political patronage. Even I got invitations for yacht parties hosted by the liquor baron where the guests would be ‘well looked after.’ I never used to attend them, but I know plenty of chairmen who used to attend those parties. Later it came as no surprise when banks were willing to settle for a lower amount than what they could have got, when loans were restructured,” R said.
“On one occasion, a prominent businessman, whom I kept avoiding because I knew his intent, landed up at my house early in the morning with a travel bag containing Rs 2 crore. I panicked and had to call the guards to have him thrown out,” R says. And R did not mind trying unconventional methods, if he knew there was a good chance of recovering money from errant borrowers. He told me of an incident involving the promoter of a mid-size firm, who had borrowed Rs 70 crore from his bank. “He was not paying up despite repeated reminders. I knew he could pay if he chose to because I kept hearing about his flashy lifestyle. So I did something that no bank chairman would have dared to do. I somehow convinced him to issue a cheque of Rs 5 lakh so that I could show a part payment and issue him a fresh loan. He issued me a cheque, and knowing fully that it would bounce, I deposited it in a branch in the area where my bank was headquartered. We then filed a case against him and he was forced to come over in response to the court’s summons.
Once he came where I wanted him to, I had him arrested using my influence. I told the cops to ‘treat him well’, which they did to good effect. I was surprised to get calls from the offices of chief ministers of two states, requesting that the man be released. I never realised that this apparently small-time businessman was so well connected. But I did not relent. In fact, I went to the lock-up and told him that unless he agreed to repay the loan, he would rot there, without anybody to save him,” R said. “You may find this hard to believe,” R continued, “but the moment he was released, he came to my office with head bowed and palms joined as if in prayer and said: I will do as you say. He finally paid up Rs 45 crore; that was better than getting nothing. On another occasion, a businessman who owed me Rs 60 crore came up to me saying that if he was given another Rs 20 crore and time till March, he would repay the entire amount.
On a hunch, I agreed to the deal, and the man was good on his word. But there were wrong decisions. A businessman owed me Rs 13 crore, and was willing to settle for Rs 9 crore, but I insisted for Rs 11 crore. Eventually he defaulted and the bank got nothing,” R said. R recollected quite a few interesting incidents. He told me of an instance when a ministry official publicly chided PSU banks for lending to a acquisition-hungry company that was now sitting on a huge pile of debt and unable to repay it. “I remember him saying on a business channel that he found it shocking that banks had lent money to the company despite its businesses steadily losing money. I was surprised when just a week later, I received a call from the same gentleman directing me to extend a loan to that company,” R said. “I reminded him about what he had spoken on TV the week before. He was quite blasé about it. “Of course R, one has to say all kind of things; please see what you can do best for this company.” I told him I would not make the loan, but he tried to be persuasive. The following day, the chief financial officer of that company rang me up with the details of the loan. At the end of the brief conversation, he asked me arrogantly: “So by when can we expect the loan.” I told him he could expect it when I was no longer working for the bank.
And while the bank’s profits kept rising, R had ended up antagonising too many powerful people. And it was a matter of time before they got back at him. “I had sanctioned a hefty loan to a large business group. A week later the owner of that group called me up saying that he had got a call from an influential politician’s office to pay up a certain amount, which would then be adjusted against his dues to the bank… under the NPA head, of course. I called up the politician and made it clear that my bank would support no such deal. A few days later I got a call from a senior ministry official asking me if I would interested in taking charge of another PSU bank. I knew this time I had over reached myself, and my days in the current job were numbered. So I agreed to the offer. But there was no word from the finance ministry after that. A few weeks later, I called that person and asked if there was some progress on the earlier conversation.
I was told that post could be mine if I was willing to shell out money. “Do you know what the going rate for a PSU bank chairman’s post is? Take a wild guess,” he said. “Rs 10 crore,” I replied. “It can go up to as much as Rs 40 crore, depending on the importance of the bank. I told him that I don’t have even Rs 4 crore on me, leave alone Rs 40 crore. I never heard from him again,” R said. I found the Rs 40 crore figure a bit hard to digest. Not to say that every single bank chairman is corrupt, but then every chairman sanctions a few thousand crores of loans during his brief tenure at the helm of the bank. Seen in the context of the loan book size, the Rs 40 crore does not appear too large. If this insight from an ex-banker is anywhere near the truth, god help public sector bankers. The system is corrupted to the core by the crony-capitalist-corrupt-politician nexus.
Santosh Nair Editor, Moneycontrol.com