Banking, Uncategorized

Bank Lending & Corruption

There was reportedly a recent meeting of public sector bank heads in Delhi with the Finance Minister. The meeting was ostensibly to discuss something related to bad debts, but the emphasis of the discussion, as per press reports, was on the “fear” of bank heads pursuant to the action initiated by CBI against a few officials of one bank. It is extremely surprising that some of the generally well considered, efficient, competent chairpersons of banks were vocal about such irrational fears. It is also interesting that a similar fear was not expressed as vocally when the Chairman of another bank was arrested on corruption charges some months back. There is no evidence to suggest that there is any witch-hunt on against bank boards or officials.

India needs growth and banks play a very vital role in this. Any commercial decision carries with it a reasonable risk of it going wrong. Similarly some decisions might well turn out to be turning points for both the banks and their borrowers. What matters is whether decisions are taken with a clear conscience and with integrity, taking all known risks at that point of time into consideration. The Bank Board Bureau (BBB) under the ex-CAG Mr. Vinod Rai is not there to oversee every bank lending decision and to have bank bosses take a stand that every decision of theirs with respect to lending should be approved, prior to disbursement, by the BBB is nothing short of weird.

There is supposedly a freeze on lending by banks because bank chairpersons and officials are wary of taking decisions. These people have been put in their positions at high salaries to do a job which means they put the funds at their disposal to the best possible use, which includes lending to good borrowers. If they are going to offer lame excuses and avoid their responsibilities, what justification is there for them to occupy those high positions? They would better serve the organisation by quitting and allowing someone else who is willing to do the job they are supp0osed to do to do it.

The hype about increasing bad debts does not help anybody. Certainly there is a problem that needs to be tackled. In this investigative agencies also do have a role. Wrongdoing, if any, whether of corruption or of undue influence, needs to be identified and taken to its logical conclusion, as per the laws in force. This in no way implies, or should be taken to mean, that there will be unreasonable action again bank officials. Only where justified, the agencies and courts will and should do what they are expected to do.

Any Chartered Accountant or Project Consultant worth his or her name can come up with a glossy and attractive project report for almost any project with rosy projections and supposedly attractive returns. It is upto savvy investors and knowledgeable and experienced bankers to separate the wheat from the chaff, and take up the proposals that look good to them. In this there is ofcourse no guarantee that every decision will turn out to be correct, but as long as the bankers can show that they took all reasonable precautions, neither investigative agencies nor courts should commonly find fault.

Bank debts turn bad or doubtful due to various reasons internal or external to the particular enterprise. That there has been political pressure in the past to lend to a particular borrower is hardly a secret particularly given that bank board appointments have largely been influenced by political considerations. Similarly, there has been corruption within the bank too. However, not all decisions have been unduly influenced and many top bank officials have maintained their integrity despite such pressures. This is indeed creditable and needs to be appreciated.

Many infrastructure projects were stalled due to land acquisition and other external issues, and the companies which borrowed for such projects have been unable to repay. The government has made quite a lot of progress in sorting out some of these issues and this process is ongoing. This will in turn start to show up as marked improvements in the bad debts position. However, it is a fairly long process and will take time. Banks will therefore continue to be saddled with such loans remaining doubtful of recovery in the immediate future. This may well constrain those banks from lending too much more. However, to take a stand that banks will not lend till all these issues are sorted out is clearly self-defeating and it is time the government steps in to rectify this position, improve sentiment and ensure that viable projects, which are vital for the country continue to get the funds they need at the right time.

Banking, Uncategorized

India at Davos

So India is no longer the flavour of the season in Davos. Is that a surprise at all? Why hold only the government responsible even if they do take the major blame. Companies have hardly acquitted themselves well and the judiciary has also contributed its share of irrationalism.

Take the SC decision where 122 telecom licences were cancelled one fine day in one fell swoop. This decision was one of the worst exercises of judicial dictatorship in recent memory.  Certainly there seems to have been corruption in the grant of these licences, and both the bribe giver and the bribe taker need to be taken to task. However, foreign investment into these companies came only after the licences were granted. For sure, the companies put in the funds after the licences were awarded. The cancellation of the licences badly affected the credibility of India as a stable investment destination.

The 2G losses were arrived at by CAG based on the very high premiums these companies paid  Are we going back to the heady days of Indian socialism where the Controller of Capital Issues decided what premium a company inviting investment can charge? If high premiums are a criteria or wrongdoing, then every single investment into the e-commerce sector would be suspect.

Cancellation of these licences where nothing was started, and no further investment had been made would perhaps have been justified, but to disrupt entirely companies which had already started operation, which included companies like Loop Mobile which already had ongoing operations, or those companies which has already made heavy capital investment was ridiculous to say the least. What the court should have done is to direct the government to auction these licences and reallot them fairly. Whichever company won the licences could then have taken over the investments made and assets created by the earlier allotted companies which would have gone a long way in assuaging the concerns of the foreign collaborators.

Banks have bad debts, and they have accumulated to very high levels. There are many reasons for this. Some of it, like in the case of Vijay Mallya is corruption. Other loans have become stuck because infrastructure projects has been held up mainly because of land acquisition issues. Some loans have become stuck because of diversion of funds. Real estate project loans are stuck because markets are down. So it is not just one reason and each loan needs to be handled accordingly. Making a huge noise about it is self-defeating. It does not make any sense to make statements which bring down the entire credibility of the banking system and all the borrowing companies.