A file photo of Punjab National Bank, victim of $2 billion PNB fraud perpetrated by jeweller Nirav Modi. Photo: Mint
Even as frauds and murky dealings continue to tumble out of the closets of the biggest names in Indian banking, there is danger in assuming that the problem is restricted to that industry.
India’s banking crisis isn’t just about the likes of Punjab National Bank, Bank of Maharashtra or ICICI Bank Ltd. India’s corporate sector, including some of its largest companies, is as much a part of the toxic environment that is now unravelling before us.
Every Indian company, large and small, has at some stage put pressure on bankers to bend the rules either for sanctioning loans or changing the repayment terms. Even as we rail against the executives and the boards of the banks for conniving with borrowers, let’s not forget who they were conniving with and for what.
The gross non-performing assets (NPAs) of Indian banks are about 10.5% of total advances but within that, loans by scheduled banks to industry account for over 20% of gross advances. These bank NPAs are nothing but the excesses of companies reflected in irrational leverage levels and high default ratios.
Whether it is Rotomac or Nirav Modi, the script remains unchanged. Banks have always been a fertile ground for political and corporate patronage.
There’s nothing new about this. For decades, money in the banks has been treated as the personal fiefdom of a few.
In the 1980s, there were the notorious loan melas, where politicians doled out funds through nationalized banks without bothering about basic hygiene factors. Often, even the loan application forms would be filled by bank staffers.
Post 1991, with the onset of private banking, it was expected that more care and caution would be exercised. But as the Indian economy moved into high gear following a global surge in growth, Indian companies suddenly acquired a voracious appetite for bank loans to fuel their many ill-conceived investments.
The spigot, once opened, could only lead to the kind of excesses that are being uncovered.
Significantly, once the easy-money regime changed, particularly after Raghuram Rajan turned the central bank’s lens on the lending and provisioning practices of the banks, Indian companies’ appetite for investments also dried up.
It is one thing to plan ambitious projects or large acquisitions with the reassuring backing of soft loans at nominal rates of interest and flexible repayment terms and quite another to do so on more stringent forms of financing.
The returns needed to service a bank loan are different from those needed to service any other form of financing.
Not surprisingly, after 2010, there has been a decline in the share of gross capital formation (GCF) in GDP, from 38.2% to 32.3% between 2011–2012 and 2013–2014, with the corporate sector’s contribution as GCF also falling (source: Financialisation and Corporate Investments: The Indian Case by Sunanda Sen and Zico Dasgupta).
If banks have failed to judge the creditworthiness of the companies they have lent to or failed to detect those initial signs of stress before a loan turns non-performing, it is in part because of the elaborate efforts companies make to window dress their accounts.
When the chairman of Syndicate Bank is arrested for taking a bribe from the promoters of Bhushan Steel, both are equally culpable and deserve opprobrium.
But when Bhushan Steel becomes the norm for corporate behaviour and a symbol of the manipulative power of our largest companies, it is time to worry.
In his 2013 book, Predator Nation: Corporate Criminals, Political Corruption, and the Hijacking of America, author Charles H. Ferguson refers to canopy ecosystems, which he describes as “worlds of flora and fauna that occur at the tops of very tall trees and exist largely apart from the multiple bio-systems layered beneath them. They do this in part by getting the best access to sunlight, but in so doing they block the sun from reaching everything below”.
By cornering an abnormal share of bank loans, large Indian companies have also created a canopy for themselves, one under which more deserving and needy smaller businesses fail to grow for want of credit.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.
