Merger Mania III

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MERGER MANIA III

BY

S.SRINIVASAN

PRESIDENTNATIONAL UNION OF BANK EMPLOYEES

(NUBE)

"FINANCIAL REFORMS" AND NPAS &SCAMS ARE LIKE AN

OBJECT AND ITS SHADOWS!

You have an infection ... You leave it alone. You don't treat it. You diagnoseit badly. Guess what? Even the strongest parts of the body will get infected.That's what's happening in BANKING IN INDIA today. The infectivemedicines , and obsolete, junk palliatives of the west is being prescribed byFinance ministry, such as the recent missive setting of holding companiesand consequent consolidation of PSU banks under the guise of global statusto cure the NPAs spreading throughout is akin to killing the patient.

No drastic measures such as confiscation of the properties of willfuldefaulters, imprisonment, and blacklisting for all future advances and

loans is attempted by the government. Although there may be some

cases where for genuine reasons advances have become NPAs, in most

cases as we explain in this chapter corporate borrowers turn defaulters

wilfully.

The problem of NPAs in banks is not merely an internal problem of banks,their efficiency and what have you. That the NPA levels have risen despiteSecuritisation and Reconstruction of Financial Assets and Enforcement of

Security Interest act is because of "faulty" economic policies. Thesuspension of the planning process, the curtailment of public expenditures,and drastic reductions in investment demand are hurting the growth of themanufacturing sector and breeding NPAs. The government has shown noawareness of this structural malady afflicting the economy. The measures as

being "in line with the government's medium-term goal of privatising the

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public sector banks." It would be a disaster for the Indian economy. This isdictated by the international multilateral agencies.

According to a study commissioned by industry body ASSOCHAM,Thenet non-performing assets (NPAs) of the banking sector in India are

increasing at an alarming rate and may cross Rs 2 lakh crores for the

fiscal year ending March 2013 from Rs 1.57 lakh crores as on June 30,2012.Also, banks restructured advances would also be as high as about

six per cent by March, 2013.

To put it very succinctly the NPA due from Indian Industrialists is

equal to economic output of 48 poor countries.

The study titled Growing Heat of NPAs on Banking Sector released by

RBI Deputy Governor Dr K C Chakrabarty at a function said the continuingpressures on Indian economy would result in pushing the NPA ratio from2.94 in June, 2012 to about 3.75 by the end of the current fiscal.

A plethora of issues like rising trends in stress assets, increasedprovisioning, issues of asset quality and challenges of requisitioningadditional capital to keep growing business together with burgeoning twindeficits of fiscal and current accounts have been adduced by the protagonistsof restructuring for contribution to this dismal situation of increased NPAlevels and falling bottom line, according to the study.

The report further states besides, the credit offtake has also sharply tankeddue to various issues like environment-related approvals, land acquisitionand other such issues. Existing exposure of banks to poor performingsectors like power, aviation, highways, micro-finance institutions

(MFIs), ports, telecommunication and others have lead to high levels of

stress assets.

Another reason is attributed by the captains of the industry for theburgeoning NPA is the growing inability to raise adequate equity in a time-bound manner due to high volatility and depressed condition on capitalmarkets which is straining companies balance sheets and financialflexibility of players in vulnerable sectors like infrastructure,construction, iron and steel, textiles, engineering and others, which has

resulted in increased likelihood of restructuring.

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They expect the government as in the past to further liberalize

restructuring norms to give adequate financial support as well as

reasonable time-frame to restructure the debts including concessions in

interest rates and other reliefs. Further, the banks must support allreasonable restructuring proposals to enable the industries to restore

their activities, the Assocham report added.

So it is incumbent for us to analyze why the mechanics of this mendaciousNPA menace in the banks, despite huge budgetary support in the formsubsidies to corporates and why it has mounted in geometric proportionsover the reform period despite restructuring, one time settlements, waivers,and actions as per SAFRESI often reported in the media by the governmenttime and again, to expose the root cause of increase in NPAs. While thesimultaneous dole packages of thousands of crores of rupees are declared bythe government to save the sagging big industrialists, the vast unorganized

sector is being deliberately bypassed in a state of deepening slowdown.There are about 58 million enterprises in the non-firm unorganized sector,each with investments up to Rs.25 lakh and fewer than 10 workers,contributing to about a third of the gross domestic product. This is the figuresupplied by the National Commission for Enterprises in the unorganizedSector (NCEUS). While the fate of these units is intermeshed with that oflarge and medium industries, their credit needs in the current severe crisisare deliberately ignored with all attention focused on the big bourgeoisiecaught in the maelstrom of present global crisis. According to the NCEUS,enterprises with an investment of up to Rs.5 Lakh accounted for just Rs.59,

279 crores or 2.2% of bank credit as of March 2007. Those enterprises in theRs.5-25 lakh category accounted for another 2.1%. What is worse, only 2.4million of the unorganized units received credit from Banks, criticallythrowing the vast unorganized small and medium sector to a dire strait. On

paper however, the RBI guidelines allow banks to sanction loans up to Rs.5lakh without collateral. Such reluctance is the outcome of banking policyunder the LPG regime. Indian state and governments have so-long mimickedthe capitalist centers of the world substantially fallowing speculation-basedgrowth allowing FIIs, various toxic instruments to serve the economy for a

small section of rising middle class by allowing enormous leverage to theMNCs, World Bank and other foreign institutions to control the economy.

Subsidies to big industry

All along, we have been focusing on reducing the subsidy outflow to theweaker sections, without looking at reducing the subsidies enjoyed by the

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very rich. Often we believe that giving subsidies to the very rich by way ofnear free resources will result in cheaper manufactured products or offeredservices. This is completely untrue. In fact, those who get these resources arethe ones who are selling their manufactured products much higher thaninternational prices by getting themselves several policies put in place to

protect their pricing power

While the neo-liberal programme condemns subsidies such as those on foodand fertiliser, and the supposed subsidy on petroleum, it promotes an arrayof subsidies to the private corporate sector. These subsidies take variousforms .interest rate cut is one of the forms.

There are large transfers disguised in form of sums owed to the State by thecorporate sector which the State makes no serious attempt to collect. Large

borrowers with 11,000 individual accounts accounted for as much as Rs. 400

billion of total bad debt of banks by 2001-02. Among public sector bankstoo high-value defaults involving 1,741 accounts over Rs. 50 millionamounted to Rs. 228.66 billion. (Even these may be understatements, since

banks tend to evergreen corporate loans, providing fresh loans in order toprevent default.)may cross Rs 2 lakh crore for the fiscal year ending March2013 from Rs 1.57 lakh crore as on June 30, 2012,despite, banksrestructured advances would also be as high as about six per cent by March,2013.

Whereas banks frequently attach the entire property of defaulting peasant

borrowers and even have them arrested, no such stringent measures havebeen taken with the big borrowers, and, unsurprisingly, efforts to recoverbad debts have met with little success. Banks bad debts have been reducedover the last few years not largely by collection, but by lengthening theschedule of repayments, making provision for bad debts out of banks profitsearned elsewhere, and infusion of capital by the Government into the publicsector banks. Large uncollected tax arrears, amounting to about Rs. 390

billion on corporation tax and Rs. 200 billion on customs duty, excise, andservice tax, amount to another implicit transfer to the corporate sector.

A second major subsidy is tax concessions. One should keep in mind that atax concession is no different from a subsidy: it is the equivalent of theGovernment returning to the tax payer a portion or the whole of tax payable

by him/her. The total of tax revenue forgone on corporation tax, excise dutyand customs duty was estimated at Rs 2.36 trillion in 2007-08, which wasover half the total revenues actually connected under these heads in that

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year. (Apart from this revenue forgone on personal income tax was Rs421.61 billion, which was 35.5 per cent of the revenues from individual tax

payers. To repeat, the Surveys opposition to State intervention in theeconomy is selective: It opposes such State intervention as protects the

people at large from the ravages of the private sector; but it envisions avastly expanded role for the State in micro-monitoring the people, wielding

bureaucratic despotism over them, and using arbitrary methods to excludelarge numbers from the meagre benefits some of them hitherto enjoyed. It isan enabling State for certain classes, a disabling State for the vastmajority.

The Surveys allergy to State subsidies too is selective. We usually think of asubsidy as a monetary grant given by the Government, but tax concessions

by the Government to particular classes of taxpayers are no different;indeed, these concessions are termed tax expenditures. The revenue

forgone on account of corporate tax concessions in 2009-10 was nearly Rs80,000 crores, amounting to almost 13 per cent of all corporate tax revenues,and 16 per cent of corporate profits after tax (profits after tax were nearly Rs500,000 crores, or 9 per cent of GDP). Further, it has been widely reportedthat a large part of the additional concessions on excise duties and customsduties in 2009-10 were not passed on by the corporate sector to the public inthe form of lower prices, but simply added to corporate profits. Personalincome tax concessions were nearly Rs 41,000 crores in 2009-10. The grandtotal of revenue forgone on corporate income tax, personal income tax,excise duty, and customs duty in 2009-10 is over Rs 500,000 crores, whichis almost 80 per cent of the actual total tax collection in 2009-10, or 9 percent of GDP

The Receipts Budget notes: the amount of revenue forgone continues toincrease year after year. As a percentage of aggregate tax collection, revenueforgone remains high and shows an increasing trend as far as corporateincome-tax is considered for the financial year 2008-09 (assessment year2009-10). In case of indirect taxes the trend shows a significant increase forthe financial year 2009-10 due to reduction in customs and excise duties.

(emphasis added)

These are hardly the only subsidies to the corporate sector. Various types ofsubsidies and give-aways to the corporate sector include free land; zero-interest loans; privatisation of public sector firms/assets and naturalresources at throw-away prices; allowing firms to gold-plate (i.e., overstatethe value of) investments on which they are to earn a guaranteed rate of

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return (e.g. Reliance investment in its gas fields); sale of licenses/spectrumfor mobile services at below-market prices; failure to collect corporate taxarrears; failure to collect bad debts from defaulting firms (some of whichdebts are then re-structured); failure to collect various types of dues (e.g.

private airlines fuel dues); construction/maintenance of supportiveinfrastructure (such as urban roads, which benefit the auto industry); and soon. For example, the Tata Nano is reported to have received a 9,750 croresloan from the Gujarat government at 0.1 per cent interest, exemption from15 per cent value-added tax, waiver of stamp duty, and subsidised land. Thesubsidies come to an estimated Rs 30,000 crores over 20 years on a Rs 2,000crores investment by the Tatas. Put another way, the Rs 1,00,000 car comeswith a State subsidy of Rs 60,000, or 60 per cent.

A recent addition to the list of subsidies to the private corporate sector is thescheme for Public-Private Partnership (PPP). in the infrastructure sector.

The Governments claim is that the PPPs allow the Government toleverage public capital to attract private capital, and thus undertake alarger number of infrastructure projects. The Planning Commission wants

private firms to account for 30 per cent of the $500 billion infrastructuralinvestment under the current Plan (2007-12), and half the $1 trillioninfrastructure to be set up under the 12th Five-Year Plan (2012-17).However, the private sector will only enter the field if it receives anattractive rate of return, and as theEconomic Survey2008-09 admits,

Infrastructure projects often have high social, but an unacceptable

commercial rate of return. These are generally characterized by substantialinvestments, long gestation periods, fixed returns, etc., which make itessential for Government to support infrastructure financing, throughappropriate financial instruments and incentives. With a view to supportinfrastructure projects, the Scheme for Financial Support to PPPs inInfrastructure (Viability Gap Funding Scheme) was announced in 2004....The scheme aims to ensure widespread access to infrastructure through thePPP framework by subsidizing the capital cost of their access. It providesfinancial support in the form of grants, one-time or deferred, to make

infrastructure projects commercially viable. The scheme provides totalViability Gap Funding up to 20 per cent of the total project cost. TheGovernment or statutory entity that owns the project may provide additionalgrants out of its budget up to further 20 per cent of the total project cost.

This, then, is a pure subsidy of up to 40 per centof the project cost providedto the private investor, in order to make the project commercially viable!

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The scale of the scheme is enormous: the cost of projects completed, underimplementation or in the pipeline comes to nearly Rs 7 lakh crores. (SeeTable below) Not all of these projects will receive Viability Gap Funding(VGF) or, in simpler words, subsidy of 40 per cent; some will becompensated in other ways. (For example, the now-tainted firm Maytas, ofRamalinga Raju fame, was to be given vast real estate for commercial use as

part of the Hyderabad Metro deal.) But very large VGF flows are alreadytaking place, and commitments are being made for even larger sums.

Public-Private Partnership Projects in Central and State Sectors (as in

Dec. 2009) (Rs. cr.)

Completed

Projects

Projects Under

Implementation

Projects in

PipelineTotal

66,627 2,41,111 3,76,561 6,84,299

These projects are in highways, roads, ports, airports, Railways, power,urban infrastructure, and other sectors. Source: Planning Commission,Compendium of PPP Projects in Infrastructure, March 2010.

The latest Survey, while extolling the Public-Private Partnerships andaccording them a critical role in building infrastructure, ignores the glaringcontradiction between its lectures against those subsidies which benefit thevast majority of people, and its active promotion of subsidies to the private

corporate sector.

VGF payments are made upfront to the private entrepreneur at the start ofthe project work. Apart from this, annuities, or annual payments to bridge ashortfall in revenues, may also be paid to the private party, depending on thecontract. A recent report by Gajendra Haldea, a senior adviser to thePlanning Commission, has pointed out that VGF payments and annuitiesthreaten to bankrupt the National Highway Authority of India (NHAI) in thenext three years. The report criticises a Planning Commission committee

which had cleared the NHAIs plans, and points out: The committee hadendorsed a higher limit of 40 per cent of total project cost as VGF, whichwas introduced earlier as a part of the stimulus package. This could enable aconcessionaire to transfer most of its financial risks to the exchequer. The

NHAI will incur an outgo of about Rs 50,000 crores in the near future,including Rs 25,000 crores on VGF payments, Rs 9,500 crores on annuitiesand Rs 7,500 crores on land acquisition.

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Even under the pre-1991 economic regime in India, the ultimatebeneficiaries of public sector infrastructural investment were the privatecorporate sector. The State took on low-return, long-gestation period,activities vital to the economy, and private corporations focussed on high-return activity, enjoying the benefits of cheap infrastructure. Such was thescheme laid down in Viceroy Wavells Statement of Industrial Policy(1945), on the eve of transfer of power; the same scheme is outlined in theBombay Plan for Indias development chalked out by the top Indian

bourgeoisie in 1944; and Indias Plans duly reflected this class logic.However, by virtue of its pretensions to popular legitimacy, the State wasalso unable to deny certain social claims of the people on that infrastructure,and so the people did obtain certain limited benefits from public sectorinvestment. Now, however, the economic regime is more brazen and morerapacious: even though the infrastructure being set up continues to be

primarily to serve the needs of the private corporate sector, the

infrastructural sectoritselfbecomes a channel of social surplus to the privatesector.

The Haldea report, titled Sub-prime Highways, provoked a vituperativeresponse from the Union Minister of Road Transport, Kamal Nath. Theminister, who has announced plans of building an unprecedented 7,000 kmof highways a year with a planned investment of Rs 3,70,000 crore, hastermed the Planning Commission armchair advisers. However, a senior

NHAI official admits that the NHAI might pile up Rs 85,000 crore of debtby 2012-13.Of course, the NHAIs subsidy spree is a bonanza to domestic and foreigncorporations. (NHAIs technical criteria for the larger projects in effectnecessitate the participation of foreign developers/construction companies.The French bank BNP-Paribas has titled its September 2009 research reporton the NHAI India Transport Infrastructure: The Worlds Largest PPPPlayground.) Note that the earlier quotation from the Economic Survey2008-09 does not claim that infrastructure projects are necessarily loss-making. It says that though they have a high social rate of return, their

commercial rate of return is unacceptable that is, unacceptable to theprivate sector. The gap that is being filled by various subsidies is theadditional profit margin demanded by private capital which wields controlover the State. As we can see from this example, when we analyse moreclosely the concept of market price, to which the latest Survey assigns amagical role in the functioning of the economy, we find that monopolycapital and the State play a major role in constructing that price.

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In the case of petroleum products and fertiliser, the corporate sector uses thebanner of market pricing to set prices, building in a hefty profit. Whereasin the case of infrastructure, it abandons talk of market principles and drawson hefty subsidies, under the banner of harnessing private capital in thecause of Indias Growth. In both cases, even as ruling class intellectualstalk of the need for the withdrawal of the State from the economy, theyobscure the fact that it is State intervention on behalf of the corporate sectorthat enables it to step up surplus-extraction.

While iron ore sells at Rs.6,000 plus per ton in the international market,those with captive mines are able to extract it at less than Rs.1,000 per ton.Similarly, coal costs less than 25 per cent of domestic prices to those whohave captive mines and at a much lower percentage when compared tointernational prices. The same is the case with other resources like bauxite,limestone, river sand and granite. Resources are being made available at less

than 15 per cent of international costs by the States and the Centre.

The people of India, to whom these resources belong, are forced to givethem away near free at these cut rates by elected rulers, and they do not getthe benefits of the difference between the market price of the manufactured

product and the giveaway price of the resource. These virtual freebies to therich are far in excess of Central and State deficits put together.

The time has come for those who are elected to represent and protectpeoples interests to start market pricing resources that are now being away

almost free to the very rich. This would solve all our fiscal side issues at onego and get us to double digit growth rate in quick time. This would go a longway in improving the quality of life of our people substantially. It wouldalso help us get to interest rates on a par with the developed world.

There is dominant thinking in our policy framers that relaxing interest

rates, greater policy incentives to the corporate world will spur the

economic growth, while it is true at some measures but it is not the

whole story. The Gov't should remember it may be counter productive

to its goal of inclusive growth. The accumulation of riches in fewbillionaires of India who constantly figure on Forbe's list tells it all. The

pathetic social and development indices of our country, far

behind many of developing countries is an alarming situation. While

finance minister gives audience to corporate leaders before budget, why

not extend the same to grass root level social activists who seek to bring

changes in much needed human development in India?

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Indian state and governments have so-long mimicked the capitalist

centers of the world substantially fallowing speculation-based growth

allowing FIIs, various toxic instruments to serve the economy for a

small section of rising middle class by allowing enormous leverage to the

MNCs, World Bank and other foreign institutions to control the

economy. The e Banks India will once gain has offered home loans at a

concessional rate of for a limited period. It will also extended that to

other consumer loan categories like automobiles. All this is to beef up

the declining automobile and real estate markets. such mortgage loan

in order to bring the customers is for mimicking US mortgage lenders

in the sub-prime market.

Earlier, close on the heels of Barack Obamas current round of hugestimulus of $787 billion , Mr.Pranab Mukherjee, then finance ministerdeclared on 24 February, the third stimulus package by huge tax cuts for

manufacturing companies, consumer durables, steel and cement,automobiles, SEZs, etc. The revenue loss of an estimated Rs.30, 000 crore ina full year is aimed to rescue the faltering business of corporate houses.Industry however claimed for another round of interest rate cuts to buttresssuch fiscal measures. The RBI will inevitably trim bench mark rates soon tosupport the pro-corporate UPA government policy. Already The realdeposit rates are negative and the real lending rates at about 250 bps

are much lower than the long-term average of 400 bps .

While such blatant pro-corporate generosity is all evident in the RBIpolicies. In our country as in most other countries, subsidizing the rich at theexpense of the poor is commonplace. All advanced societies are nothing butsystems perpetuating hierarchies of exploitation, where a select few wield

power over the hapless masses.

In a recent speech, K C Chakrabarty, RBI deputy governor, accused

banks of misusing the system, stating, "In the recent past, many

unviable accounts were restructured by establishing viability only with

some kind of financial engineering.

Disguising NPAs benefits banks in the short run as it helps them avoidmaking provisions out of their income for a possible default. But it onlydelays the inevitable as banks end up recovering lower than what they wouldhave had they taken timely action. "Even with securities, recovery becomesdifficult where the borrower does not have any intent to repay. This is

because borrowers still manage to get a stay order.

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BANK GROUP-WISE CLASSIFICATION OF LOAN ASSETS OF

SCHEDULED COMMERCIAL BANKS

(As at March 31, in Rs. Crores)

Bank Groups / Years As on 31st March

Total

Advances

Gross NPAs

Amount Amount Per cent

Public Sector Banks

2006 1070872 41378 3.9

2009 2103763 44039 2.1

2011 3079804 71047 2.3

Private Sector Banks

2006 303793 7774 2.6

2009 519655 16888 3.22011 732310 17972 2.5Foreign Banks

2006 98862 2090 2.1

2009 169714 7294 4.3

2011 199321 5065 2.5

Source: Off-site returns (domestic) of banks, Department of BankingSupervision, RBI

In a published report, the RBI attributes the rise in the NPAs of bothPublic and Private Sector Banks to diversion of funds away from the original

purpose for which they were granted, as well as willful default (ormisappropriation of funds) by borrowers. That apart, adverse economic andmarket factors, ranging from recessionary conditions, regulatory changesand resource shortages to inefficient management and strained labourrelations have impacted the health of businesses, and driven them to defaulton their loan repayments. Sometimes the banks themselves are to blame delay in loan disbursement can throw a project off tract, and have acascading effect on its viability and capacity to repay. Banks have also beenknown to take comfort in collateral, and hence not follow up diligentlyenough on loan dues. Were the market value of the collateral to drop, thereis an immediate impact on the quality of the related loan asset.

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In this constellation, it is OK to squash those that are even less fortunatethan yourself and pay obeisance to the "mai baap" sitting on top. Ourcivilization, having survived unbroken for the last 4000 years hasaccentuated this problem. Moreover, the rich and powerful can and do buyany government and influence decisions. Perhaps a French Revolutionevery few centuries

wouldnt be so bad for us!

Banking Sector Reforms and its Dangerous Consequences

Public sector banks in India have played a crucial role in mobilizinghundreds of thousands of crores of rupees worth of small savings from thecommon people and this enormous capital is expected to be disbursed by thegovernment for priority areas like agriculture, small industries, ruralelectrification, development of backward areas, etc which are inevitablyshown their backs by the comprador big bourgeois class or such profitgrabbing institutions. The imperialist globalization programme pursued bythe Indian governments since early 1990s imposed prescriptions in the nameof reforms in the financial sector to allow foreign investors, speculativefinance, foreign banks qualitatively changing the structure of this sector.Indian rulers have time and again sung the refrain: financial sector reformsare irreversible. With the chanting of liberalization, privatization andglobalization mantra the RBI sponsored two reports the Narasimham

Committee reports of 1991 and 1998 almost a reproduction of thesubstance of a confidential World Bank report of June 1990 titled India :Financial Sector Report : Consolidation of the Financial System. Thesereports held the brief for the World Bank designs to remove all barriers forthe entry of foreign banks and the progressive denationalization of thePublic Sector Banks. The Narasimham Committee reports overturnedthe earlier declared policy of social objectives of public sector banks and

all focus was concentrated on maximizing profits, strengthening the

flurry of activities like the real estate business, speculative investments,

IT sector, etc. that came to be highlighted as engine of growth story. It islittle known that the countrys largest bank, the State Bank of India , 45 percent of the shares went into the hanks of private hands, of which one-thirdwere foreign by the end of 1998-99. This way of privatization continued inthe name of restructuring of weak public sector banks. Simultaneously thequantum of NPAs (Non Performing Assets.) i.e. the loans given away to

corporate houses remaining unrecoverable skyrocketed.

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Thanks to the modicum of democracy still operating in the country and fearof public opinion, strong resistance from bank unions, the government hasfound it difficult to accept the suggestion of outright privatization of the

banking system. Therefore some of the above surreptious devices of backdoor denationalization have been adopted. The entire system is being turnedtopsy -turvy without any comprehensive study or social dialogue, except forthe report of a committee which was tailor-made to secure financial sectorand structural adjustment loans from multilateral agencies. The government(irrespective of who is in power) has charted out Blue print for

privatization of PSU banks in teune with the above reports as under:

IMF RECOMMENDATIONS (DT 26/ 06 /1990)

(as appended in the General Secretary Report of AIOBEU , 28th

conference)

In the near term

1. Reduce the budget deficit and start lowering the cash reserve andstatutory liquidity requirements with the objective of bringing thecombined ratio down to 30 percent in 3 years and subsequentlymoving to market determined interest rates on government debt.

2. Recategorise immediately commercial bank lending to larger

borrowers among small-scale industrialists and farmers, thus reducingthe priority sector-lending target to about 20 percent. Reduce furtherthe priority sector-lending target to 10 percent in 3 years.

3. Rationalise, introduce flexibility in / or liberalise immediately thefollowing interest rates: development finance institutions long-termlending rate: export loans and mortgage; capital market debt issues;and accept the Agricultural Credit Review Committees [ACRC]recommendations for concessional lending rates.

4. Give commercial banks operational autonomy immediately andrecapitalise them as needed after a portfolio clean up. Introduce higher

prudential norms, supervision standards and financial requirements.Improve legal procedures for foreclosures and sale or transfer ofassets. Allow competition by easing private sector entry andexpansion.

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5. Allow greater financial and operational autonomy to developmentalfinancial institutions. Introduce prudential guidelines and supervisionsystem. Allow Private Sector entry in investment banking andincreased private sector participation in Industrial Credit and

Investment Corporation of India [ICICI] and

6. Introduce better regulations for capital market transactions whiledecreasing direct control. Eliminate tax preference for UTI and allow

private sector mutual funds.

The recommendations for priority sector lending recategorisation, interestand reform of financial institutions can proceed immediately, independent of

budget deficit reductions.

In the medium term

1. Eliminate priority sector lending target.

2. Introduce floating interest based on a market-determined primerate.

3. Further recapitalise commercial banks after internal restructuring

and reorganization to the Bank of International Settlement [BIS]standards, perhaps through private sector participation and

4. Allow private participation in the Industrial Development Bank ofIndia [IDBI] and the Industrial Finance Corporation of India [IFCI]and also allow further private sector ownership of ICICI toreinforce autonomy and facilitate business innovation.

In the long term

1. Allow completely market determined interest rates and

2. Privatise commercial banks, development banks and moneycapital markets.

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The happenings in the banking Industry over the past decade will amplyevidence that the above prescriptions by the World Bank are faithfullyimplemented by the Governments in power in India since 1990s as under:

The capital of the banks to be increased by private

participation New prudential norms like CAR ratio

Privatization of Banks

Higher level of computerization

Reduction in priority sector lending to 10%

Cut in subsidy for social lending

Liberalization of interest in advances

Interest rates to be determined by market

Curbing of trade union rights

Reduction in staff strength by 20% Ban on recruitment and outsourcing job, contractualisation

of labour

Reduce staff. Stop further recruitments in award staffcadre.

Stop the channel of even compassionate appointmenttowards this reduction

Reduce immediately the share capital of the governmentin public sector banks from 51% to 33% and then to 26%.

Increase Private shareholding to 67%. Incorporate Public sector banks under the CompanysAct and delink from bank nationalization act.

Introduce voting rights as per companys act.

Ensure market driven consolidation of banking systemand reduce number of public sector banks to 4 or maximumafter such mergers.

Bring necessary legislative amendments to the statues tofacilitate and enable such mergers.

Ensure that RBIs shareholding in SBI is not transferred

to the Government.

Give up majority ownership of public sector Banks bothin nationalized banks as well as for State Bank of India.

Encourage more private banks.

Encourage Bank mergers under the guise ofconsolidation , setting up of holding companies

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Give more stakes to Industrial houses in the existingbanks and/or allow them to promote new banks

Convert Non-banking Finance Companies (NFBCs) tobanks.

Permit foreign Banks /foreign investment to enhancetheir presence in Indian banking System.

Increase the ceilings on FII through investment in debtfunds to $1.75 billion.

Stop concessional loans to priority sector.

Permit the Banks to trade in commodities and derivatives(a form of speculative investments which give huge profits).

Dilute, dismantle all regulatory measures such as prioritylending, as well as restrictions on banking activities in India.

Allow Banks greater scope to fund trading in sharemarkets

Scrap the tax on long- term capital in share tradingaltogether Reduce tax on short- term capital gains to 10%. (This

is a stunning tax give away. Wages above Rs. One lakh

are taxed at the rate of 20 and 30%, but speculative

income is taxed at a much lower rate!)

Create universal Banks that are in the nature of Banksupermarkets, offering the customer a range of products likedebt products, investment services, debt and commoditymarkets and insurance of different kinds. Overhaul thoroughly Priority lending and investments

policy of nationalized banks and make them lucrative profit-making machines, ripe for foreign take-over.

Direct Closure of bank branches in the name ofCompetitiveness, Consolidation or Corporatisation or

efficiency and profits disregarding the waste of social assetsalready created.

Systematically and periodically write off NPA innationalized banks. With the grounds already laid for themaximization of profits then allow speedy take-over ofIndian Banks by the foreign TNCs.

Amendments to rules to freely transfer the employees

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Easier rules to dismiss employees

Deunionisation and union free environment,

NOTE: Once the nationalized banks are handed over to the private sector,credit flows to the rural sector and agriculture shall be steadily choked.

Similarly, small, mini and cottage industries, self-employed persons, likevendors, cobbles, rickshaw-pullers shall be thrown out of the credit deliverysystem.

The recent bank failures in South-East Asia, including Japan, could hardlyaffect India or its banking system. The reasons for this contrasting situationare not difficult to understand. While India had a strong public sector

banking system, more or less well regulated, these Asian Tigers were havingprivate banks, with hardly any regulation and run on the prescriptions ofWorld Bank and IMF. While many banks closed down, currencies collapsed,

thousands lost their jobs, economy got the rudest shock, resulting,ultimately, in political instability. Taking advantage of this chaos andanarchy, foreign capital took over many banks and the financial system.Bank privatisation is hence against peoples interest.

Industrial sluggish growth: Re visit banking reformsOne of the reasons for the sluggish industrial growth in India is doing awaywith specialized development banking institutions during the period ofeconomic reform. Is this regard we compare the Indian and Brazil modelwhich were similar for development finance institution (DFCs). We shallexplain this comparing the models in vogue at Brazil an India. Twodeveloping countries that relied heavily on development banks in their post-War industrialization effort were Brazil and India.

Two developing countries that relied heavily on development banks in theirpost-War industrialisation effort were Brazil and India. In Brazil theprincipal development bank is the Brazilian Development Bank (BNDES)

established in 1952. Over time the government has used various measuressuch as special taxes and cesses, levies on insurance and investmentcompanies and direction of pension fund capital to mobilise resources forthe industrial financing activities of the BNDES. The size of BNDESsupport for investment increased significantly, with a transition in 1965when BNDES support rose from below 3 per cent of capital formation to 6.6

per cent. There was also a shift in the focus of BNDES activities. While

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initially sectors like transport and power overwhelmingly dominated itslending, subsequently there was considerable diversification in support, tosectors such as nonferrous metals, chemicals, petrochemicals, paper,machinery, and other industries. Further, while in its early years BNDESinvestments were focused on the public sector, there was a significant shiftin favour of the private sector in later years. In the period 1952-66, 80-90%of financing was directed to the public sector. That figure fell to 44 per centduring 1967-71, and then to between 20 and 30 percent.

India adopted a more elaborate structure. Apart from setting up an IndustrialFinance Department (IFD) in 1957 within the Reserve Bank of India (RBI)and administering a credit guarantee scheme for small-scale industries fromJuly 1960, a series of industrial credit institutions were promoted, which infact had begun earlier with the setting up of the Industrial FinanceCorporation (IFC) in July 1948 for rendering term-financing for traditional

industries. In addition, State Financial Corporations (SFCs) were createdunder an Act that came into effect from August 1952 to encourage state-level medium-size industries with industrial credit. In January 1955, theIndustrial Credit and Investment Corporation of India (ICICI), the firstdevelopment finance institution in the private sector, came to be established,with encouragement and support of the World Bank in the form of a long-term foreign exchange loan and backed by a similar loan from thegovernment of India financed out of PL 480 counterpart funds. In June 1958,the Refinance Corporation for Industry was set up. The next major step ininstitution building was the setting up of the Industrial Development Bank of

India (IDBI) as an apex term-lending institution, which commencedoperations in 1964.

The importance of these institutions is clear from the fact that theirinvestments (disbursals) in Net Fixed Capital Formation in India rose fromless than 10 per cent before the 1970s to around 35 per cent in 1988-89.Over 70 per cent of sanctions went to the private sector, and took the form ofloans as well of underwriting and direct subscription of shares anddebentures.

The similarities between Brazil and India with respect to developmentbanking are clear. However, a real difference between the two emergedoccurred in the period since the early 1990s when the government in thesetwo countries opted for internal and external economic liberalisation. InBrazil, reform notwithstanding, the BNDES has grown in strength. Its assetstotalled Reals 277.3 billion or close to $120 billion at the end of 2008. This

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has served Brazil well. The bank's role increased significantly, when privateactivity slackened in the aftermath of the financial crisis. Thiscountercyclical role helped Brazil face the crisis much better than manyother developing countries.

According to reports, the BNDES has stepped in to keep business credit

going, when private sector loans dried up in 2008. It lent a record 168.4billion Reals ($100.8 billion) in 2010, which was 23 percent higher than theprevious record in 2009. As a result, the country's credit to gross domesticproduct ratio continued to grow after the onset of the financial crisis.

On the other hand, liberalisation has damaged the structure of developmentbanking in India. On March 30 2002, the Industrial Credit and InvestmentCorporation of India (ICICI) was, through a reverse merger, integrated withICICI Bank. That was the beginning of a process that lead to the demise of

development finance in the country. The reverse merger was the result of adecision (announced on October 25, 2001) by ICICI to transform itself into auniversal bank that would engage itself not only in traditional banking butinvestment banking and other financial activities.

After that reverse merger was put through, similar moves were undertaken totransform the other two principal development finance institutions in thecountry, the Industrial Finance Corporation of India (IFCI), established in1948, and the Industrial Development Bank of India (IDBI), created in 1964.In early February 2004, the government decided to merge the IFCI with a

big public sector bank, like the Punjab National Bank. Following thatdecision, the IFCI board approved the proposal, rendering itself defunct.

Finally, IDBI was merged with IDBI bank, which had earlier been set up asa subsidiary. With this creation of a universal bank as a new entity, that hasmultiple interests and a strong emphasis on commercial profits, it is unclearhow the development banking commitment can be met. These decisions are

bound to aggravate the shortage of long term capital for the manufacturingsector, especially for medium sized units seeking to grow.

These two experiences point to the two very different directions thatdevelopment banking has taken. Some countries like India are doing awaywith specialized development banking institutions on the grounds that equityand bond markets would do the job. This is bound to lead to a shortfall infinance for long-term investments, especially for medium and small

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enterprises. Fortunately, there are some others such as Brazil that have thusfar not opted for this trajectory.

This makes evidently clear that the polices pursed under the guise ofbanking reforms have failed in our country an in the process of rectifying thesame after self introspection, government is myopically aping still the

policies of the west landing the economy and baking in greater trouble, likea drunken person navigating Pot hole getting trapped on a huge pit .Government should be ready at all times to stand up for the truth, becausetruth is in the interests of the people; Government must be ready at all timesto correct their mistakes, because mistakes are against the interests of the

people. The adage Wise men profit more from fools than fools from wisemen; for the wise men shun the mistakes of fools, but fools do not imitatethe successes of the wise is equally applicable to many of the ill-advised

banking reforms policies pursued by the Government.

LENT AN LOST:

Nationalization of private losses and privatization of their profits

Routine assessments of financial stability extol the robustness of Indiasbanks and their ability to bear stress. But this is largely because large,questionable loans to private investors in capital-intensive sectors have beenrestructured to keep them

Ever since liberalisation opened up and deregulated the markets andinstitutions that constitute Indias financial system, the positive effect thathas had on Indias banks has been a periodic refrain. Two sets of indicatorsare used to support that argument. The first is the sharp fall in the share ofnon-performing loans to total, with the ratio of gross non-performing assets(NPAs) to gross advance falling from close to 16 per cent in the mid-1990sto as low as 2.5 per cent a decade later, where it has remained since. As aratio of total assets too those NPAs have fallen from 7 per cent to less than1.5 per cent The second set of indicators point to the successful adoption byIndia of Basel norms in both their first and second versions, with the capitalto risk-weighted assets ratio being well above 12 per cent in the case ofalmost all scheduled commercial banks. With the major banks stripped oftheir NPAs and extremely well capitalised, Indias banking system seems amodel to hold up to the rest of the world. Those who had predicted that

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liberalisation would increase the fragility of the banking system had beenshown to be wrong, it is therefore argued.

This performance was particularly creditable because the system wasdisplaying enhanced robustness in the midst of a sharp increase in creditadvanced by the banking sector. Thus the ratio of credit outstanding to GDP,which stood at around 2 per cent just prior to liberalisation and remainedaround that level till the end of the 1990s, rose sharply in a period of rapidgrowth to reach 5.2 per cent in 2007-08 and 5.6 per cent in 2011-12

Away From Production:

There was, of course, some cause for concern as a result of a couple of post-liberalisation developments to which even the central bank as the principalregulator had on occasion drawn attention. Significant among these was ashift in lending by the banking system away from the productive sectors tothe retail sector, with personal loans accounting for a rising share of thetotal.

Between the end of the 1990s (March 1998) and March 2011, the share ofindustry in total advances (which, as mentioned, was rapidly rising) fellfrom 49 per cent in 1998 to 38 per cent in 2004 and remained around thatlevel till 2011. On the other hand, the share of personal loans rose from 10.5

per cent in March 1998 to 20.3 per cent, though it stood at a lower 16.4 per

cent in 2011, as a part of the slowdown that had begun to affect theeconomy. Much of the retail lending was to the housing sector, withautomobile and education loans being quite significant too.

As in the case of the sub-prime market elsewhere in the world, thisexpansion of retail lending had brought into the universe of borrowers a setof households that did not have secure employment, could not offer muchcollateral and often had borrowed more than they should. This could, wheneconomic circumstances change, lead to default rates that would be difficultto provide for and cover and pointed to an increase in potential fragility. It

was such expansion in retail lending that prompted former central bankerS.S. Tarapore to call for caution with regard to Indias own version of thesub-prime problem.

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Government pressure

It is now becoming clear that such signs of potential fragility have beenaccompanied by another form of increased fragility resulting from changedlending behaviour and liberalised regulatory practices. The source of thisfragility was the Union Governments decision to use the banking system as

an instrument to further an aspect of its larger liberalisation agenda: theentry of the private sector into core infrastructural areas involving lumpycapital intensive investments in power, telecommunications, roads and ports,and sectors such as civil aviation.

Under normal circumstances, banks are not expected to lend much to theseareas as it involves a significant maturity and liquidity mismatch: banksdraw depositors from savers in small volumes with the implicit promise oflow income and capital risk, and high liquidity. Infrastructural investments

require large volumes of credit and do involve significant income and capitalrisk, besides substantial liquidity risk. So what is required for supportinginfrastructural investment are increased equity flows from corporate or highnet-worth investors and the expansion of sources of long-term credit such asa bond market.

Neither of these, especially the latter, occurred in adequate measure. Rather,the development financial institutions with special access to lower-costfinancial resources, which were created as providers of long-term finance,had been shut down as part of liberalisation. Hence, besides recourse to

external commercial borrowing, many infrastructural projects had to turn tothe banking system. As is to be expected, private banks have been unwillingto commit much to this risky business. So, it is the public banking system(besides a couple of private banks) that has moved into this area, possiblyunder Government pressure.

Consequences

The figures are dramatic. The share of infrastructural lending in the totaladvances of scheduled commercial banks to the industrial sector rosesharply, from less than 2 per cent at the end of March 1998 to 16.4 per centat the end of March 2004, and as much as 31.5 per cent at the end of March2012

That is, while the share (though not volume) of lending to industry in thetotal advances of the banking system has fallen, the importance of lending to

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infrastructure within industry has increased hugely. Four sectors have beenthe most important here: power, roads and ports, and telecommunications,and more recently a residual other category, reflecting in all probability thelending to civil aviation.

Unfortunately, as the exposure of the banks to these sectors has increased,the folly of dragging the private sector into infrastructure with concessionsand cheap credit is becoming clear. The shake-out has begun in civil aviationwith possibly only one airline able to show profit after many years ofliberalisation.

Of the ones that were surviving until recently, the worst case is KingfisherAirlines, which added to the effects of an erroneous policy through its ownfollies: bad strategy, bad acquisitions, profligacy and obviousmismanagement.

The result is that the banks that lent to Kingfisher have found themselves ina mess. If they withdraw, they invite default of the large volume of debt theyhave already provided. So they restructure debt, offer better terms, extendrepayment periods, and provide more credit to keep the unit afloat. But theyare doing so with the knowledge that unless the Government uses taxpayersmoney in some form to bail out the unit, this is merely sending good moneyafter bad.

Thus, in 2010, the banks had got together and under the corporate debt

restructuring scheme of the Reserve Bank of India restructured debt to

the tune of Rs 7,720 crores owed by Kingfisher. Now, with the debt of

the airline having increased by another Rs. 1,000 crores or so, the

airline has been forced to suspend operations with no hope of repaying

the banks unless the impossible happens.

At the banks expense

Such restructuring of debt as is being implemented in Indias infrastructuralsector clearly favours the debtor at the expense of the creditor. The RBIs

prudential guidelines define a restructured account as one where the bank,for economic or legal reasons relating to the borrowers financial difficulty,grants to the borrower concessions that the bank would not otherwiseconsider.

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Restructuring can involve some combination of changes in the terms ofadvances, such as alteration of the repayment period, reduction of therepayable amount, reduction in the rate of interest and conversion of debt toequity. It can also be accompanied by the provision of additional credit,despite the shortfall in meeting past commitments. The intent is to help thecompany recover. But often that intent is not realised. The only benefit isthat in return for the losses the creditor institution suffers, it is in a positionto treat the asset (after providing for any write-down) as a standard assetsubject to conditions. But this may, in fact, provide the cover to abuse therestructuring route to bail out private investors at the expense of the banks.

As the table shows, the net result of this strategy has been that the troubledassets restructured by Indias banks had by March 2011 exceeded theidentified NPAs of the banking system.

The reason is that Kingfisher is no exception it is the tip of a debt-defaulticeberg that has been hidden by restructuring. The largest chunk of bankdebt to infrastructure (estimated at Rs 2,69,196 crores as of March

2011) was in the power sector.

The problem in the power sector is that large capital investments, wrongtechnology choices, poor management, high power costs that the Statedistribution agencies are not able to bear given the tariffs they charge, anddifficult and costly fuel supplies have all ensured that most of the high-

profile private power projects are not viable.

The Government has sought to prop them up with concessions such as coalallocations without success. If this leads to failure, the bankruptcy of the

private sector power companies can spill over onto the banks carrying theirloans, much of which has already been restructured. According to anestimate by Credit Suisse reported in the media, 36 private thermal

power projects carrying a debt of Rs 2,09,000 crores are now facing

potential stress.

A chunk of bank exposure to power consists of credit to finance the lossesincurred by the power distribution companies, most of which are State-owned, though privatisation has brought in non-State players. Thatexposure is estimated at Rs 1,50,000-1,70,000 crores as on March 2012,

which is around half of total power credit.

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In theory, the State-inspired restructuring has conditions attached to it thatare expected to ensure that the units involved would turn around and becomecommercially viable. But the feasibility and viability of these liberalisation-inspired schemes are in serious doubt.

As noted earlier, the burden of financing the losses has fallendisproportionately on the public sector banks, which have seen the volumeof restructured assets grow at a compounded rate of 47.9 per cent during2009-12, when credit grew at 19.6 per cent. The comparable figures for

private banks were 8.1 per cent and 19.9 per cent and for foreign banks -25.5per cent and 11 per cent respectively. Clearly, liberalisation has notreduced but rather increased the misuse by the State of the public

banking system to shore up private capital.

The Great Indian Bank Robbery

About 8 years ago, Indian Express ran a series of articles on the systematicloot of the banking system with possible connivance of Bank Officialsestimated at Rs.1.1 lakh crores. Today the media is going crazy over NPAsof Kingfisher And Deccan Chronicle. These things have happened in the

past also and conveniently forgotten. This happens as either people looseinterest or get appropriated into the system by the very people who aretargeted by such reports. Whatever it may be, the point is kicking up suchstorms is just a hobby and a way to get into limelight with ulterior motives.Even Indian Express did not follow it up. Now the media is breast beatingabout black money stashed away in foreign banks. It is only such ill gottenwealth which is carted away. Whatever it may be, the point is kicking upsuch storms is just a hobby and a way to get into limelight with ulteriormotives. In this chapter we are trying to once again rake these issues up withthe first article that appeared in December, 2002, January 2003.

When the parliament passed the a new law to act SARFESI against IndiaIncs mountain of unpaid loans the Indian express after thorough

investigations ran series of five articles titled Rs 11,00,00,00,00,000:The Great Indian Bank Robbery IThe Great Indian Bank Robbery Edition IIHow Defaulter No 1 worked overtime to stay at topHow textiles group took its banks to the cleanerChor Machaaye Shor

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This is the money that India Inc owes and won't pay back. Here's what itcould pay for: all our defence bills for 2 yrs. Or an expressway in everystate. Or A school in every village

The report said Forgotten Harshad Mehta? Just as well. The scale of thescandal now threatening India's economy is vastly greater than the 1994stock market carnage. The numbers may seem unreal, but Rs 110,000 croresis actually a conservative government estimate of the unpaid loansofficially called non-performing assets (NPAs)staining the books ofIndia's banks and financial institutions.

For vast swathes of corporate India, it's been an era of financial plunder.Then why Finance Minister Jaswant Singh called NPAs ''loot, and notdebt .To a strident demand by the Opposition to table the list of defaulters the

government furnished asudner

Company Total Default (Rs Cr) Mardia Group 1,450 Lloyds Group

1,012 Modern Group 846 Parasrampuria Grp 705 Core Healthcare Grp

751 Mafatlal Group 598 Nova Group 527.5 Patheja Group 547 Usha

Ispat 391.7 Indian Charge Chrome Ltd 493.3 Altos India 437 Jk Group

698 Rajinder Group 620 Mesco Group 527.5 Prakash Industries Ltd

360 R S Mardia H S Ranka (Modern) Vinay Rai (Usha) Mukesh Gupta

(Lloyds) ...And Other Problem Cases? Essar Group 7,184 Malvika Steel

(For 2000-01) 2,095 Jindal Vijaynagar Steel 4,900 Spic Group 3,284

Sanghi Group 1,582 Cesc Ltd 3,300 Ig Petrochemicals Ltd 720 Ispat

Industries Ltd 6,369 Ispat Metallics Ltd 1,688

Sources: Ministry of Finance, Reserve Bank of India, and financial

institutions.

NOTES: 1. The information is valid upto March 31, 2002, unless

otherwise indicated. 2. The list is in no particular order. Some figures

are estimates. 3. Companies in the first list are declared defaulters with

debts converted to non-performing assets (NPAs) in the records of

banks and financial institutions. Those in the second chart have not

been declared defaultersthough some debts could harbour NPAs. 4.

A debt is supposed to be classified as an NPA if agreed payments are not

made within 180 days. The new law will reduce that to international

norms: 90 days.

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The article further unraveled, what the Government didn't mention is that ithas no reliable, consolidated list. The Finance Ministry's list of defaulters, asof March 31, 2002, is still topped by Harshad Mehta at Rs 812 crores. TheRBI does not reveal a defaulter's identity unless a bank files a law suit. Somany of the big fish, don't show up on these hot lists. Some escape law

suits. Other defaults are deliberately fogged by accounting practices: so

defaults hide, for instance, as ''projects under implementation.''

To compile a list, The Sunday Express launched a nationwide investigationthat took reporters from corporate offices in Mumbai and New Delhi tofactories in Alwar, Rajasthan and Vatva, Gujarat. Given the fog of secrecyand arcane accounting practices that surround defaulters, it involved several

background briefings from banks and financial institutions, Governmentofficials and company managements.

Thereafter the Indian express brought out series of stories detailing howunchecked borrowing by industrialists ballooned into bad loans, how theycontinue with their lavish lives as their companies crumble and joblessworkers fight for survival.

The articled underscored the truth that The lenders should first target

the largest defaulters, who have the ability to pay but have shown no

willingness to do so, said then UTI Chairman M. Damodaran. The

Finance Minister has assured Parliament that the new law will be

enforced without fear or favour. The message may not have reached

some of his colleagues in Parliament. Thats why Congress spokesman

Kapil Sibal, appears for Indias worst officially listed defaulter,

Ahmedabads Mardia Chemicals, which in five years hasnt paid a paisa

of its debt: Rs 1,404 crore and mounting. Sibal, who says hes in favour of

the new law, is fighting a suit that wants the Act struck down as

unconstitutional. Thats why the Shiv Senas Balasaheb Vikhe Patil

earlier this year asked IDBI and SBI to call meetings in Mumbai to

restructure debts of the Lloyds Group. When contacted, Patil said: I

recommend people for many things, but I always say according to rules

and regulations.

FM & EX-FMS: ALL AGREED (This is) loot, not debt...

the provisions of the Act will be enforced without fear or favour. Well

start with the bigger NPAs, and then move to the others Jaswant Singh,

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Finance minister If defaults continue, it will be the end of the financial

system. Till now, everything was in favour of the borrowers. The

lenders were being taken for a ride while the defaulting industrialists

flourished Dr Manmohan Singh Former finance minister and RBI

Governor This Act gives unreasonable discretion to the banks. What is

also important at this stage is not to see who have been sent notices, but

who have not been. Questions must be asked why these people have not

been sent notices. P. Chidambaram Former finance minister .If

enforcement falters and NPAs continue their rise, it could help send

India towards the kind of financial crises that ravaged the tiger

economies two years ago. But South Korea, Malaysia and Singapore

were better off then than India is today.

The proportion of NPAs to total bank advances was at that time about 7 percent in those countries in September 2000. Indias figure, as of 2001 was 11

per cent, though Ministry of Finance (MoF) officials are quick to point outthat NPAs of public sector banks, at least, dropped from 24.7 per cent in1994 to 11.4 per cent in 2001.

The old laws were woefully inadequate. The governments other majorinitiative in recovering NPAssetting up Debt Recovery Tribunals (DRTs)in major citieshasnt really worked. There are 56,988 cases filed in theDRTs, involving Rs 1,08,665 crores. The amount recovered till March 2002is a paltry Rs 4,736 crores.

Thereafter ten of the 16 large groups sent notices by the ICICI under the newlaw are now pleading for negotiated settlements. Some of the obdurateindustrialists who scurried in with token payments: the Ispat Group, twocompanies of the Jindal group, the Lloyds Group, Ganesh Benzoplast andKesar Enterprises. A senior banerk said But one reason why the cheque

books are reappearing is because the defaulters hope to reschedule orrestructure loans After all, the same banks and FIs consistently obligedthem with sweetheart deals for years by lowering interest rates, writing

off some loans, converting debt to shares at dubiously low levels, or

handing out new loans to repay old ones. So the payments started thatcoming in were smallas low as Rs 50 lakh in some cases. Still, the chief ofone institution sees it thus: Many industrialists have forgotten how to takeout their cheque books and sign cheques to us: that they are even making asmall payment is a beginning.

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What has changed?

Now once gainafter 10 years after publishing of articles by Indian express ,the eloquent statements, appellations of the ministers to hoot out this

NPA menace through stringent legislations , banking sector has been innews for wrong reasons. Big borrowers from public sector banks arebig loan defaulters

That public sector banks are saddled with more than Rs 100,000 crores inbad loans, enough money to fund half of India's defence budget this year, isan open secret. What has come as a surprise, though, is the fact that big

borrowers-those who owe more than Rs 10 crores but have not paid up ontime-make up more than three quarters of the amount in default, dataobtained through an RTI application revealed.

The high end loan-owners, most of whom are builders, manufacturers ormanaging educational or medical institutions, account for 78 per cent of bad

banking across the nation, going by statistics provided by 26 nationalisedbanks to an RTI query by a Thane-based chartered account.

The affluent borrowers which total up to a miniscule 969 accounts, havecollectively defaulted on their scheduled loan repayments exceeding Rs78,000 crores to the lending banks as on December 2011. A vast majority ofthe defaulters -- 49.23 lakhs as on December 2011-- across the nation wereresponsible for a gross Non Performing Asset (NPA) of just over Rs 22,000crores or a mere 22 per cent of the bad debts.

It means that people who borrow less pay more in interests and capital to thebanks. But those who borrow more have no liability whatsoever to repaytheir loans. Any person who defaults on a small or medium loans taken forhis house, car or any entrepreneurial venture has to face such humiliationfrom bank-appointed recovery agents and bank officials that it leaves animprint on his psyche. However, people who virtually rob banks of crores ofrupees go scot free despite all the half-hearted attempts by the banks to

recover the amount.

The RTI activist Thane ( a district in Maharahstra ) -based chartered accountsaid that the bank managements have further declared that the NPAdeclaration by the banks does not mean that the borrowers are intending tocheat but circumstances outside their control have crippled them financially.

Inflation, economic slowdown, increase in interest rates are some of the

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contributing factors for such a large NPA base. However, the recent switchover by public sector banks to computersied system of identifying NPAfrom the previous relationship banking has added to the problem.Previously, the bank manager and staff knew the borrower and wouldconsider his request to release some part payment so as to avoid his accountto be tagged as NPA. In the present system anyone who defaults onrepayment of interest for more than 180 days is blacklisted as NPA.

The Indian government's recent proposal to restructure debt of state-ownedpower distribution companies will provide them only a temporary reprievefrom weakening finances. The proposal is in itself unlikely to adequatelyspeed up the growth in India's power capacity to meet snowballing demand.That's according to a report titled "India's Power-Sector Debt RestructuringProposal: A Salve, Not A Cure Proposal: A Salve, Not A Cure," thatStandard & Poors Ratings Services published recently.

According to the government proposal, a portion of loans to the powerdistribution companies will be restructured. About half of these loans will betransferred to the respective state governments. This could be throughguarantees on bonds that the distribution companies will issue.The report analyzes the impact of the proposal on distribution companies,the sovereign, and on financial institutions that have lent to powercompanies. It also examines the effect of the recent power blackout onIndias industries and growth prospects.

The power outage has affected 20 of India's 28 states, but had little impacton industry. One key reason is that several Indian companies have brokenaway from state-supplied electricity, and now depend on their own captive

power plants. Such a practice reduces the competitiveness of Indianbusinesses and deters investments by overseas companies.

An increase in investments to the sector is possible only with transparenttariff regulations and reliable fuel supply. A reliable fuel supply, in turn,

hinges on availability of timely clearances and a transparent framework forproducing fuel, and the presence of adequate infrastructure for transportingfuel. Hence the government policies are the root cause of induced NPAsin this sector.

Rotten Apples

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According to an S&P report, about 11 per cent of banks' loans to the sectorwere restructured by FY12. it is pertinent to mention here that Indian

banks do not include restructured loans as non-performing loans.State-owned banks have a larger exposure to power utilities than their

private sector counterparts.

According to sources, the finance ministry has asked public sector lenders toform consortiums to restructure the accounts of SEBs. The rationale behindthe move is that by carrying out restructuring together, banks could pressureSEBs to agree to their terms and conditions.However, in practice, the terms put forth by banks turn out to be politicallyunpalatable as they involve raising tariffs and asking state governments tofoot the subsidies provided to consumers.

The Cabinet Committee on Economic Affairs further approved restructuringof Rs 1.9 lakh crores debt of state electricity boards. According to analysts,the move will benefit the lenders and power companies in the long term ifdiscipline is maintained.

As per the scheme, 50 per cent of the short-term outstanding liabilitieswould be taken over by state governments and balance 50 per cent loanswould be restructured by providing moratorium on principle and best

possible terms for repayments, an official statement said.

In a major shift from its earlier stand, the consortium of 13 banks that has aRs. 7,700-crore exposure to the bleeding Kingfisher Airlines has indicatedthat it could agree to provide about Rs. 600 crores of additional workingcapital required by the carrier to tide over its financial crisis. Thegovernment is expected to move fast on allowing foreign direct investmentinto the cash- starved aviation sector, a move that would ease the pressureoff Indian carriers. Once the FDI proposal is cleared, the situation of thecountrys airline majors would be healthier a government official toldHindustan Times on the condition of anonymity. Banks are therefore not

averse to providing the additional capital sought by Kingfisher.

A chairman of a public sector bank, which has a significant exposure toKingfisher stated in a paper report that an amount of over Rs. 7000 crorescannot be allowed to turn non-performing. Besides, banks would be

required to provide the additional capital as part of the airlines debt

restructuring exercise carried out last fiscal.

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Banks' exposure to the aviation sector is unsafe, as the companies in thesector are highly leveraged, face a high interest burden and also the potentialrise in fuel costs, which eats up these firms' profitability. A total ofapproximately 63500 cr of debt is seen in the airline companies likeKingfisher, Air India, Spice and Jet Airways. Kingfisher Airlines has a hugedebt of Rs 7000 cr, of which approximately Rs 6200 cr has been issued bythe Indian banks.

For the last 7 years, Kingfisher Airlines has been reporting lossescontinuously. For FY11, it reported a loss of Rs 1027 cr on the back of hugeinterest expenses, which stood at Rs 2340 cr. Banks are worried as theirexposure to the company will result in the restructuring of debt andadditional provisioning, which will affect the banks' profitability. SBI hasthe highest exposure of Rs 1410 cr in Kingfisher Airlines.

The following table shows the exposure various banks have to KingfisherAirlines:

Bank Rs (Cr)

State Bank of India 1410

IDBI 719

Punjab National Bank 702

Bank of India 552

Bank of Baroda 532ICICI Bank 430

United Bank 395

Central Bank 360

Corporation Bank 305

UCO Bank 287

State Bank of Mysore 139

Indian Overseas Bank 122

Federal Bank 100Oriental Bank ofCommerce

56

Punjab and Sind Bank 51

Axis Bank 46

IndusInd Bank 6

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Bank Rs (Cr)

Total 6212

Kingfisher Airlines had asked for government help to meet the financialchallenges resulting from rising cost of ATF and the debt burden. It has also

proposed that the government should allow FDI investment in the aviationsector.

Earlier, the banks had restructured some of the loans into CompulsorilyConvertible Preference Shares (which were further converted to equity at Rs64) and Cumulative Redeemable Preference Shares. Banks now own 23.39%of the shares, and are affected by Mark-to-Market loss.

Commenting on this bail out package to King Fisher and Deccan Chroniclewillful defaulter the www.allbankingsolutions.com-a social networkingsite, popular site of bank employees (working & retired ) succinctlyexposed it as titanic default. In a hard hitting article against these willfuldefaulters the All Banking Solution site stated Two major account (totalexposure of banks is above Rs 12,000 crores) which have repeatedly hit theheadlines and are now under media scanner are Kingfisher Airlines andDeccan Chronicles Holding Ltd. Each one of us have certainly heard about'Titanic' - thanks to the wonderful movie by the same name - which was seen

by almost all of us with awe inspite of this being a tragedy. It is a humannature that people enjoy larger than life size events, even if they are terrible

tragedies, provided they or none of their near ones suffered in that tragedy.Whether it was Titanic or Hindonsburg or 9/11 Twin Tower Crash - eachone is seen with awe by general public and they are ready to see the sameagain and again on their big screen or TV sets. The people behind and theconcept supported by the management ofabove two accounts were projectedas Large than Life and as Dream Projects for Indians. Vijay Mallya wasalways shown as busy with glitz, glam, bikini clad models, booze, and F1.Similarly, DCHL got its boost after entering into cricket arena under the

brand of "Deccan Chargers". Huge stadiums, flood lights, Cheer-Girlsshown through hitherto unknown camera angles were part of the Brandcalled Deccan Chargers of IPL fame. Both the above referred companiesare now on the verge of collapse and this will result in TITANIC DEFAULTfor bankers. These two companies together have exposure of over Rs12,000,00,00,000 (Rs12,000 crores.). A decade ago this figure must havesent chill in the spine of any top banker.

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However, now it is being taken as a matter of routine and no one seems tobe worried except fools like me. The reason are obvious. After charges ofcorruption running in lakhs of crores, people are becoming immune andslowly giving up some resistant they early at least thought of. All bankersare well aware of the alarming situation on NPA front, but top managementhas been trying hard to bury the same under sand and put up a brave facethat 'all is well". The syndrome of 'all is well' is repeatedly shown by our

politicians and others who are in power.KF and Deccan are only the starting points for mega defaults. I call themTITANIC DEFAULT as the losses on slippage of these accounts will behuge and large scale infirmities will be exposed. BUT certainly NOHEADS WILL ROLL, unlike in small loans of few thousands where BM isinvariably charge sheeted for not preparing the CR of a farmer or HousingLoanee or failing to assess properly the market value of a collateral of one ortwo lakh rupees.

Bankers have read the news about the above defaults, but must have found itdifficult to assimilate the facts - due to paucity of data and time.

www.allbankingsolutions.com/ -social networking site which championsthe common bank employees causes summarized some of the facts, bail out

packages to these willful defaulters which it gathered from various news,but are glaring and every banker must know these facts in its informativethought provoking article.

Any banker who has fair knowledge of credit will be shocked to read theabove. Frankly speaking it is rightly said that we are treading across'unchartered territory' with 'unprecedented spike' in restructured loans, whichall started in big way in 2008. Corporate knew it well that in the name ofgrowth story of India, they can loot the resources of the country. Theyknew it very well that they can take a risk and create wealth for themselves

but would not have to bear the costs of those risks. If they failed or wereable to show that they have failed, everything will be free. Today, nobodyknows how much of this will go bad as the banks were very lenient and in

order to cover up their past misdeeds are trying to find out new ways to putthese under carpet.

The signals for this mess have already been noticed by number of analysts,credit rating agencies and some freelance authors From time to time theyhave tried to highlight these but nobody listens and they are dubbed as anti-national and creators of pessimism. Bankers will remember that when rating

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agencies downgraded India and some banks, our former FM, now Presidentjumped into fray and wanted to expel some of such agencies. Now the waterin the swimming pool has reached the level of lips and can cover nose anytime. What bankers are trying is to reduce the level by throwing some waterout of the pool by the actions of their hands and arms.

Across the world, now Indian are competing with the best brains. Theabove loans were consortium or multi-banking loans and almost every major

bank has some share of exposure in these two accounts. What is glaring isthat top bankers, across public and private sectors, did not find any issues infinancing such huge amounts based on collaterals which were physically nonexistent. This is an example of herd mentality whereby small bankersmerely follow the bigger banks on the plea that due diligence must have

been done by banks which have entered the fray at initial stage. This isnothing but herd mentality. It is pertinent to note here that inspite of huge

losses, no big heads have rolled.

Merry go round goes on

So the merry round of herd mentality sanction without objectiveassessment , one time settlements, waivers, write-offs, of government

politicians borrowers bankers nexus goes unabated even in era ofderegulated banking widely talked about by the proponents of

privatization. The net result is that Amount to rescue for PSU banks onaccount of NPAs pegged at $1.7 billion (Press Trust of India: December

25, 2012)

Gross non-performing assets (NPAs) of public sector banks have increasedfrom 2.28 per cent in March 2010 to 4.01 per cent in September 2012,

For SBI Group, the gross NPA (as a percentage of gross advances) hasjumped from 2.82 per cent in March 2010 to 5.16 per cent in September2012, Namo Narain Meena, Minister of State for Finance, said in a writtenreply.

In the case of nationalised banks, gross NPAs have increased from 2.04 percent in March 2010 to 3.50 per cent in September 2012. The Governmenthas advised public sector banks to take a number of new initiatives toincrease the pace of recovery and manage NPAs, the Minister For state forFinance said.

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The total bailout amount required to rescue public sector banks in case ofmaximum stress caused due to non-performing assets will be around $1.7

billion, a top company official of India Ratings and Research said.

According to Director (Financial Institutions) of India Ratings, at amaximum stress level of NPA, which is considered to be around 13-14 percent of total assets, government requires $1.7 billion to bail out the publicsector banks.

In a published report, the RBI attributes the rise in the NPAs of both Publicand Private Sector Banks to diversion of funds away from the original

purpose for which they were granted, as well as willful default (ormisappropriation of funds) by borrowers. That apart, adverse economic andmarket factors, ranging from recessionary conditions, regulatory changesand resource shortages have impacted the health of businesses, and driven

them to default on their loan repayments. Sometimes the banks themselvesare to blame delay in loan disbursement can throw a project and have acascading capacity to repay. Banks have also been known to take comfort incollateral, and hence not follow up diligently enough on loan dues. Were themarket value of the collateral to drop, there is an immediate impact on thequality of the related loan asset. There are also other, less transparentreasons why NPAs are on rise. For one, the process of (non performing)asset disposal is riddled with legal impediments and delay. Secondly, highlyconnected corporate debtors have been known to use political pressure to get

banks to waive their dues or restructure terms in their favor. Come electiontime, political parties make populist promises such as the credit to theSmall Scale and Rural Sectors which may not yield the expected results which commercial banks are forced to honor.

CDR: Cruel Denial of Recoveries and/ Consensus delay for recoveries?

It is now when entire exercise of recognition of assets is being done byonline CBS technology, bankers are constrained to declare their decade old

bad accounts as Non Performing Assets. However clever bankers continue to

resort to unofficial restructure of loan to conceal bad accounts in variousbranches .There are many branches where more than 25% of their total loansare truly NPA and at many branches even more than 50% to 75% of theirtotal loan portfolio is bad. Even RBI officials do not want to read the truthand they become satisfied only getting a certificate of health from corrupt

bankers.

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This is the reason that slowly and year after year , quarter after quartervolume of NPA in public sector banks and that of restructured loan accountsin these banks have been increasing despite tall claim made by Governmentof India that banks in India are safe. Banks are eager to restructurebecause otherwise they have to take a hit on profits or provide more

capital

Total loans restructured by Indian banks under the so-called corporate

debt restructuring (CDR) route crossed Rs.2 trillion (2,00,000 crores), in

December2012. In the past quarter alone, banks restructured Rs.24,584crores of loans, up from the Rs.19,544 crores they recast in the previous

quarter, to reach Rs.2.12 trillion of restructured loans. The actual figure forrestructured loans may be around Rs.4 trillion as this estimate does not

include bilateral restructuring cases that banks undertake individually

with firms.

Note :1 Trillion = 1,00,000 Crore

In an interview with Economic Times on the eve of his retirement on 31-01-2013 Mr., DK Mittal, Former Banking, sharing his views on the mounting

NPAs in public sector banks said:

We as a majority stakeholder in the public sector banks are concernedabout the rising NPAs and we have been informally discussing with the

banks and formally discussing with the banks in the boards what strategy

need to be adopted.

The rising CDR cases which are coming, many of them are genuine, but

many of them as we believe are not so genuine. To a specific questionWhat is your take on the Finance Ministry's differences with the RBI onthe interest rate trajectory?

Mr. Mittal repleid A difference in opinion does not mean a

confrontation all the time. The government and the RBI could have

different perspective. The focus of the two could be quite different.

The government would be looking at larger perspective from thedevelopment side and the regulator's side, but the regulator primary tends tolook at the regulatory side which is very correct. Now these two differentopinions are synergised when we sit together. As Governor Reddy has saidthat if the RBI and the government are working together, then the RBI is

37
http://economictimes.indiatimes.com/topic/DK-Mittalhttp://economictimes.indiatimes.com/topic/CDR-caseshttp://economictimes.indiatimes.com/topic/RBIhttp://economictimes.indiatimes.com/topic/DK-Mittalhttp://economictimes.indiatimes.com/topic/CDR-caseshttp://economictimes.indiatimes.com/topic/RBI


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superfluous and if RBI is always having confrontation with the government,that is obnoxious. It is appropriately said

He was obviously referring to the excerpt of the recent interview of Mr.Reddy mentioned below.

Speaking to the new reporters of Hindustan times on commemoratingrelease of his new book Economic Policies and Indias Reform Agenda:NEW THINKING onJanuary 29, 2013, former RBI governor Y V Reddy,the chairman of the 14th Finance Commission, questioning the orthodoxeconomic thinking of the government that developing countries do benefit

by attracting foreign savings to supplement domestic savings he said Itsnot Govt. vs. RBI, but a difference of opinion. Hinting at the repeatedinterference of the government on the autonomy of RB

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