Ways of crony capitalism

Amid  much talk about bringing back ‘black money’ stashed abroad, the Indian economy -- it may be cynically said -- has been creating its own 'opportunities' to make such questionable money within the country. Across the spectrum, many Indians are earning beyond their entitlement, for the services they render. Take the recent news of a peon in a cooperative bank quietly amassing huge wealth in a corner of Madhya Pradesh. Or the news about the Syndicate bank CMD caught taking bribe for sanctioning loans to a mid-sized company. With the active ‘blessings’ of bankers certain companies have created a bubble going by the name of 'assets' worth more than Rs500 billion. Unfortunately in public discourse such instances find little or no interest. Hidden deep in the annual reports of the Reserve Bank of India these cases become manifest in the percentage of NPA (non-performing assets) to total bank lending. 

A cursory glance at the RBI current annual report illuminates the various shades of darkness in the books in the custody of banks. During two quarters – from July till March in 2013-14, the public sector banks have ‘sold’ Rs153 billion of loans to the ARCs (asset recovery companies). Banks take this step when they fail to realise any part of the loans they had disbursed.  According to RBI, 4.7% of gross PSU bank loans  are NPA ( ie bad loans). Interestingly at the end of March 2013, PSU banks had revealed that 97% of their total Rs44,000 billion credit portfolio was standard. The difference clearly establishes the tendency to camouflage the bad loans in the balance sheet.

Looking at the two recent bank employees caught for illegally amassing wealth, it is safe to assume that from a lowly paid peon to the well-heeled Chairman & Managing Director of a large PSU bank, both are equally busy swindling the nation for their personal gratification. There is no study, at least available in the public domain, on how bankers indulge in corrupt practices. 

The cyclical fluctuations of the economy could be one factor behind certain loans turning sticky and thereafter NPA. But primarily it is corruption at various banking and corporate levels that is the single most important contributor to NPAs.  The problem starts with the choice of the borrower. More often than not, banks opt for high profile entities whose references in media are reasonably positive. In most cases, the elementary check called KYC (know your customer) is more fiction than fact. This helps these entities to secure bank loans even of Rs500 billion, with ease. Banks seem to care little in applying their common sense to ascertain if market intelligence is rigged or not. 

Banks go through the formality of Credit Analysis once it is decided to lend money to a person. Mostly, this is form-driven and hurried. Rarely do the bankers look beyond the submitted balance sheets and projections. In reality, only cash flows and their assumptions determine true repayment capacity. Credit histories are not looked at. Intent and purpose of loans is not scrutinised. All financial projections tend to look good due to assumptions that are made.  More important, when a decision has already been taken to loan the money -- where is then the need for the bank to observe  due diligence?

In any credit sanctioned, the lender is expected to assess the stakes involved in the project. It should be common logic that the higher the promoter's own financial investment in the project, greater is the chance of the business running on the right track. The chances of a business turning a non-performer tend to increase with the promoter diverting his loan through estimates of inflated expenses and using the siphoned off money as his contribution to the project.  More often than not, bank officials at every level are attracted by the prospect of easy money, thereby actively helping the promoter create his investable resources. Take any case of corruption exposed, including that of the recent one of Syndicate bank CMD, and you will find how the bribe was paid as part of a quid pro quo. 

Before extending loans, banks seek security -- known as collateral -- in banking parlance.  Rarely are these collaterals checked properly before sanctioning loans. This helps unscrupulous promoters to mortgage same assets several times or even forge papers in connivance with banks and middlemen. An interesting case that came to light in West Bengal a few years back was that of a computer manufacturer showing ‘sales’ on paper. With support from corrupt officials, the company was merrily showing inflated sales and borrowing against increased turnover. The revelations were made following the decision of a sales tax officer to scrutinise sales tax collected from the company. Of course the issue was later hushed up.
 
Such instances are common in nearly every bank branch across the country. While all of the above are well-known to everyone concerned, collusion among different functionaries ensures their invisibility from public scrutiny.

Documentation, loan administration, including external supervision for such favoured borrowers is lax and often enough stage-managed. The operation turns even more complicated and opaque in the complex area of global finance and the use of derivatives. In fact, NPA is just one symptom of the problem called crony capitalism, the malady spreading across the entire financial and capital markets, finally ending up in political funding. The ongoing investigation into the Saradha chit fund scam in West Bengal is just one among such high profile cases. Clearly the political parties, with no other means of raising funds, opted for the chit fund route. 

The enormity and extent of the problem are well known. The question is: Can RBI governor Raghuram Rajan redress the deep-seated malaise? Can the Prime Minister prove effective? We are still awaiting the elusive 'achhe din'.   

The writer works as a consultant analyst on economic issues impacting business in India