Bad loans and 'zombie' projects
Former RBI governor Raghuram Rajan's note to the parliamentary committee on estimates is already providing fodder for another bruising slugfest between the Congress and the BJP.
- Published 12.09.18
New Delhi: Former RBI governor Raghuram Rajan's note to the parliamentary committee on estimates is already providing fodder for another bruising slugfest between the Congress and the BJP.
"A larger number of bad loans were originated in the period 2006-2008 when economic growth was strong, and previous infrastructure projects such as power plants had been completed on time and within budget. It is at such times that banks make mistakes," Rajan said in his note.
The BJP was quick to pounce on this observation to attack the UPA regime. The party's spokespersons said this buttressed their claim that the bad loan crisis had actually originated during the UPA government.
Union minister Smriti Irani took to Twitter to accuse former Congress chief Sonia Gandhi of having led a government that "attacked the very core of the Indian banking system" during her party's rule.
But the party overlooked Rajan's statement that bankers - faced with an alarming drop in bank credit once the economy slowed down - "extrapolated past growth and performance to the future. So they are willing to accept higher leverage in projects, and less promoter equity."
Rajan seemed to blame the indiscriminate lending by banks on bad decisions and poor due diligence.
"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 checkbooks, asking him to name the amount he wanted. This is the historic phenomenon of irrational exuberance, common across countries at such a phase in the cycle," Rajan wrote.
"Until the Bankruptcy Code was enacted, bankers had little ability to threaten promoters... even incompetent or unscrupulous ones, with loss of their project. Writing down the debt was then simply a gift to promoters, and no banker wanted to take the risk of doing so and inviting the attention of the investigative agencies. Stalled projects continued as 'zombie' projects, neither dead nor alive....
"It was in everyone's interest to extend the loan by making additional loans to enable the promoter to pay interest and pretend it was performing.... The promoter had no need to bring in equity, the banker did not have to restructure and recognize losses or declare the loan NPA and spoil his profitability, the government had no need to infuse capital.... this was deceptive accounting. It postponed the day of reckoning into the future, but there would be such a day."
The note written by Rajan was handed over to Murli Manohar Joshi, chairman of the estimates committee, who has been sidelined in 2014, soon after the BJP's massive victory at the general election. Joshi was made a member of the party's Marg Darshak Mandal along with veteran leader L.K. Advani and the late former Prime Minister Atal Bihari Vajpayee, thereby limiting their influence over the party and the government.
Rajan, a well-known economist, also cautioned the government against the recent practice where some big loan defaulters were trying to game the system after the introduction of the Insolvency and Bankruptcy Code which is designed to extricate big-ticket companies from a morass of bad loans.
"The Bankruptcy Code is being tested by large promoters, with continuous and sometimes frivolous appeals," he said in the note.
Rajan said that every effort must be made to ensure the integrity of the bankruptcy process and ensure speedy resolution. He cautioned that the discredited promoters should be barred from inserting a resolution plan through "an associate at the auction, and acquiring the firm at a bargain-basement price".
Last November, the government had amended the Insolvency and Bankruptcy Code to bar promoters and their related parties from bidding for stressed assets.
The issue of whether former promoters of failed firms should be barred from bidding for these companies rose after the Ruias decided to bid for Essar Steel, a firm they had run into the ground.
The Essar Steel case is still some way from resolution and has turned into a three-way bidding war between Numetal, a Russia-backed consortium, ArcelorMittal and the Vedanta group.