By Roopen Roy Feb 17 2016
The NPA crisis in the Indian banking system is largely a self-inflicted wound and it has been festering for long. The remedy that is being suggested is simple: take Rs 2.4 lakh crores from the tax-payers and hand them over to the very same banks as fresh capital.
What does this staggering number mean to you? TN Ninan has simplified this for you in his recent opinion column, “The government has talked of giving them (banks) another Rs 2.4 lakh crore — which works out to Rs 10,000 from every family, rich and poor.” This is the pain that we are all being asked to bear.
What is our past track record? The governor of Reserve Bank of India Raghuram Rajan has explained to us in simple terms: “As just one measure, the total write-offs of loans made by the commercial banks in the last five years is Rs 161,018 crore, which is 1.27 per cent of GDP. Of course, some of this amount would be recovered, but given the size of stressed assets in the system, there will be more write-offs to come. To put these amounts in perspective — thousands of crores often become meaningless to the lay person — 1.27 per cent of GDP would have allowed 1.5 million of the poorest children to get a full university degree from the top private universities in the country, all expenses paid.”
So how did this happen and what is going on? It is true that in a capitalist system, businesses can fail and that may impact the loan portfolio of a bank. But all of the NPAs are not simple failures of business. While sick companies abound, there are very few promoters, who have lost their home and hearth. That leads us to the question whether there is a whole machinery which takes money from government-owned banks and pumps them into corporate groups, who siphon the funds out systematically.
While all the bad loans and NPAs are not a result of dishonesty, there is no doubt that a significant part owes its creation to sweetheart deals between a section of politicians, ‘managed’ bankers, pliable auditors and dishonest promoters, who play the system extremely well.
What are the methods deployed by dishonest promoters to burgle banks? The first is known as cloning. Promoters are known to fabricate and forge documents, title deeds and share certificates to raise loans from multiple banks for the same assets. It may seem bizarre that such reckless methods are employed but this crude and old-fashioned ploy is still in use. By his own admission, Raju of Satyam printed fixed deposit receipts of thousands of crores to shore up his weak balance sheet.
DSK Software deployed a variant of this method to swindle $100 million from foreign creditors. The New York Post reported, “In the US, outright cash losses to banks and finance companies are already approaching $100 million. In London, where Dalmia controlled an equally fraud-drenched affiliate, that has now collapsed, lenders are looking at $30 million more in losses.” How did he fool the lenders? Simple, by forging documents: “Eventually, this unending blizzard of counterfeit paper wound up duping nearly two dozen banks and finance companies out of close to $100 million in payment for computer equipment.”
The second ploy which needs the help of professionals is a variant of “cloning. It is known as “over-valuation of assets” which are mortgaged or hypothecated. The promoter will come with bunch of assets with valuation certificates from professional and certified valuation experts. The valuation will be several times the market price of the assets. The lender will not bother while the going is good. Just when the loan goes into a trouble mode, the bank will discover that the assets have realisable values, which are a fraction of the market value in the report. The valuation expert would have covered his risks through many caveats in the fineprint and it will be difficult to pin him down for gross professional negligence.
The next ploy is called ‘evergreening’. A fresh facility is given to repay interest and principal to avoid reporting of a loan as a NPA. Often, in collusion with the promoter, the bank management provides fresh loans to an opaque web of group companies. The objective is to mask the bank’s assistance in gaming the NPA reporting system. It is extremely difficult to detect fraud by examining the transactions of a single entity in the group. It is a method which robs Paul to pay Paul. But the cycle becomes difficult to manage beyond a point and then the bubble breaks.
The last ploy I will cite in this column (and this by no means is the last trick in the book) is false projections and fairytale project reports. The future is in any case difficult to predict. But experienced bankers are capable of doing effective sniff tests. But sometimes match-fixing takes place and the projections and project reports are presented to back-up a deal already done.
In many cases, these financial projections and reports come bound in folders of well-known financial consultants and public accountants. The reports and folders may give the impression that the accountants are attesting to and confirming the numbers. That is a false assumption. In almost every case, the public accountant will give a disclaimer that these are future projections based on assumptions and data provided by the client. He will assert in the fineprint that all that he has done is computed their arithmetic accuracy and takes no responsibility for the achievement of future projections.
You do not need new laws to check these frauds. You need an accountable management, a vigilant audit committee, an alert and courageous auditor, a stern regulator and the political will to book the culprits who are perpetrating frauds on the honest tax-payers of this country. The time has come to save capitalism from dishonest capitalists.
(The author is the Founder and CEO of Sumantrana, a strategy advisory firm)