The Central Bureau of Investigation (CBI) has filed a case in the Andhra Pradesh High Court involving a public sector bank (PSB). The bank had given a loan against a piece of land as collateral. The borrower wanted a short-term loan. He was expecting some foreign investment and once that came in, he would pay back the loan. Bankers hear such cock and bull stories all the time from small and medium entrepreneurs who may be crooks or dreamers. They are supposed to ignore such stories, measure the risks and guard their interests when considering any loan application.
What did the banker do in this case? He gave a loan but did not create a proper charge on the land. As expected, three months later when repayment was due, the borrower defaulted. The bank tried to recover the money by selling the land but discovered that the title was disputed. It was all a set up. The banker and borrower were in league. The CBI has filed a case against the borrower but here is the stunning part. The banker who was negligent about creating and verifying security has not been made an accused!
When I heard the story I was angry but not surprised. What still surprises me is the wilful blindness of all those who are engaged in handling, commenting on and resolving the monumental bad loan crisis. They are unable to see the single-biggest reason for bad loans is right in front of them, hidden in plain sight: Unchecked corruption of bank officers in sanctioning loans. And yet, nothing has ever been done to make bank officers accountable.
Indeed, for the problem of bad loans, officials of the Reserve Bank of India (RBI), the ministry of finance, vigilance teams of banks, the Central Vigilance Commission and bank chairmen have all blamed two external factors: Genuine business failures and poor bankruptcy laws. But all the time, it is bankers themselves who are responsible for public money flowing out like water into the coffers of promoters.
Raghuram Rajan, former RBI governor, while speaking in mid-2106 about PSBs, blamed bad loans on groupthink and herd instinct. “A number of these loans were made in 2007-2008, at the zenith of economic boom. It is at such times that banks make mistakes … Indeed, sometimes banks signed up to lend based on project reports by the promoter’s investment bank, without doing their own due diligence. One promoter told me about how he was pursued then by banks waving chequebooks, asking him to name the amount he wanted...”
With a sweeping anecdote, Dr Rajan extrapolated “a number of these loans” across trillions of rupees of bad assets of PSBs and absolved the government and bankers of the real reason for bad loans: Collusion and corruption. PSB employees are government officials who have little incentive to lend. Behaviourally they are best-placed to turn down dubious proposals. What drove these officers to chase promoters waving chequebooks? The answer is there in plain sight if one wishes to see it: The banker-businessmen nexus. What is worse, Dr Rajan went on to publicly defend them, saying that bankers are scared of the sword of vigilance inquiry hanging over their head and are hence unable to take decisions. He ignored the fact that very few bank officials have paid a price when banks are found to be horribly short of collateral — a cardinal sin in banking — something that happens routinely in PSBs.
The second excuse for huge bad loans, laughably enough, has been poor bankruptcy laws. This is trotted out despite policymakers having initiated half a dozen measures over the last three decades to deal with bad loans. As Arundhati Bhattacharya, former chairman of State Bank of India, said, we needed a shake-up in the regulatory system and tougher rules for defaulters, as well as “a proper bankruptcy law to help get orderly resolution of (bad) assets”. But the bankruptcy law comes into play after a loan has gone bad, not before. If corrupt bankers escape after making bad loans, what will bankruptcy laws do?
Indeed, the new law, the Insolvency and Bankruptcy Code (IBC), has shown us how wide and deep such corrupt banking was. Anyone with some idea of PSB lending knows that if you want a genuine loan, bankers would impose onerous conditions, including arm-twisting you to buy some expensive insurance. And yet banks are short of enforceable collateral to the extent of 70-90 per cent in Alok Industries, Bhushan Steel, Bhushan Power and Steel, Monnet Ispat and so on. And these may be the better ones. Instead of getting scandalised about how banks are so short of collateral, we are happy that the IBC is washing off the past sins with less than 20 per cent recovery. In fact, the IBC has shown PSBs can write off billions of rupees without anyone being made accountable for it. Those who looted the banks are not being pursued or made to pay. This is an extraordinary case of wilful blindness.
The writer is the editor of www.moneylife.in
The writer is the editor of www.moneylife.in
Twitter: @Moneylifers
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