Public Sector Banks: How Will the Looting Ever Stop?
V Jayaraman 26 June 2018
Last week a consortium of Reliance Industries Ltd (RIL) and JM Financial Asset Reconstruction Co (ARC) succeeded in their bid for Alok Industries Ltd. This may appear as a great success of a bad loan resolution attempt but it is in fact a sad day in the history of Indian banking. The outstanding exposure of the banking system to Alok is a whopping Rs29,500 crore. Here is RIL-JMF ARC placing a lone bid for less than Rs5,000 crore. Initially it was rejected as it was noticed by the Committee of Creditors (CoC) as too low a bid and hence it chose to liquidate the company and recover their dues. The CoC had then called the consortium and had asked them to improve their bids. Smartly, the bid was improved by a token Rs100 crore and the final bid was placed at Rs5,050 crore, just a tad above Rs5,000 crore.
 
Pat came an amendment to IBC regulatory framework that if CoC gets at least 66% in favour of a proposal instead of the present 75% levels, then the bid can be considered as acceptable and the proposal can be accepted. RIL consortium worked overtime to convince all the lenders. They had finally succeeded in persuading 72% of the lenders and could thereby breach the amended threshold limit of 66%. Wow! The consortium of banks are indeed very happy to announce that they are willing to take a nominal 83% haircut and offer on a platter a company in which about Rs29,500 crore were sunk by the banks (perhaps taking turns to pump in the money) against which they are getting a paltry about Rs5,000 crore.
 
Still they feel they have done a great thing by recovering at least 17% of the overall dues.
 
On the same day, another news headline is that the Indian Bank’s Association (IBA) is taking up the mantle and fighting for the top management of the banks. In their opinion, the investigative agencies of the government have been harassing them on ‘frivolous charges’ and hence the association is contemplating buying insurance to ensure indemnity against such ‘frivolous charges’ and protect the bankers against indiscriminate.  What a strange observation! 
 
Banks have queued up in front of Alok Industries (almost all the public sector banks (PSBs) except Axis Bank) and have lent them left, right and centre. Their project assessment skills have been disastrous. Given that these banks have collectively chosen to take 84% haircut, it reflects their collective inefficiency.
 
Where is the accountability of bankers and bank officers for not monitoring the account, reckless lending, and evergreening the exposure. If they can cover themselves under the garb of ‘adequately provided for’, what else is their job?
 
The liquidation value for Alok Industries is about Rs4,200 crore. If they know that the bids from private parties will come at around the liquidation value, why in the first place did they publicly announce the liquidation value? It looks like the framework is made with the sole intention of helping these promoters to put the bid as close to the liquidation value as possible, without proper application of the mind!. Banks here work overtime to let public money get wasted. Sometime back, the banks were shouting themselves hoarse that the lone bid was too low and was close to the liquidation value. Why would one take such a massive haircut and accommodate these proposals, was their query. Now there is a complete U-turn.
 
In the past, banks have taken possession of the properties of Small and Medium Enterprises (SMEs) and have liquidated them. Why not in this case? The transaction has left a good Rs24,000 crore hole through the banks, which is nothing but public money. How is this going to be accounted for? Who will be held liable? If a bank again indulges in reckless fresh lending and not monitoring the deployment proceeds, who shall be responsible? The malaise lies somewhere else:
 
a. The bank senior management positions are filled by the Public Enterprises Selection Board (PESB), which simply reshuffles PSB general managers. No tangible new knowledge gets added. It all depends upon how much liaison has been done in North Block to get coveted assignments.
 
b. Nobody has worked on honing up the assessment skills and post disbursement follow-ups and appropriate timely corrective actions. When new unforeseen problems occur, they do not think out-of-the-box. After all, they had all along been churning manpower from one PSB to another and vice versa. Hence, no creativity is happening.
 
c. Strangely, the government as the biggest shareholder is shying away from their dominant position. Most bankers escape and some get caught (it all depends upon the blessings of North Block and your leanings with the extant forces). The government nominees have no deeper idea and are simply acting as rubber stamps without actively contributing.
 
d.  Given that the bad loan levels are so high till date, the government also does not bother to get lateral talent from the private sector. 
 
The middle level managers have to be adequately trained on project assessment skills and monitoring skills. Today, every bank is looking for a lead banker to take an initiative, who may follow him/her like a herd, so that at the first sight of trouble, any participating banker may report it to their lead banker for suitable corrective action. Nominee directors should be placed for dealing with cases where exposure limits are beyond a threshold and these directors should be held accountable for taking care of the repayment of debt obligations or should find corrective measures and implement them.
 
The government directors should be experienced retired bankers and should not be career bureaucrats, who have no clue about banking challenges and eventually have little to contribute. Unless these maladies are removed, we may continue to see more bad loans. Simple merger of banks will not do wonders unless fundamental changes are brought in. Otherwise the loot of public money will continue. 
 
(The writer is the Director of New Horizon Institute of Management Studies, Navi Mumbai)
Comments
SUBHASH CHATTERJEE
4 years ago
So true Mr Jayaraman.But equally true is involvement of the Bankers too.If all the Bankers decide that no such lending shall be allowed then i am sure a large number of bad loans shall get reduced.
Ashok Senniappan
4 years ago
Bankers are ready for Hair cut of 83% OMG.Let the bank officials make good the remaining from their own asset.
Ashok Senniappan
4 years ago
Instead of Valuation of the asset why not "Replacement Theory Cost " be adopted as poularised by Late Sri Harshad Mehatha ?So that bankers can recover substantial amount.
Mahesh S Bhatt
4 years ago
We left D H Ambani now why crib for larger bites.Mistake if not cleared immediately repeats till it destroys you Corruption is legal/Laws are sham Bureaucracy is tradeable/Justice is a Political whore Mahesh Bhatt Kirticorp
Rangaraj
4 years ago
https://mises.org/wire/entrepreneurial-nature-intrinsic-value

Is the author against privatzation? Highest bidder wins. There is no intrinsic value to anything. Best is free global competition for stressed "assets".
Rangaraj
Replied to Rangaraj comment 4 years ago
Valuation is SUBJECTIVE as it originated in brain(Mieses)
Rangaraj
4 years ago
Cronyism is behind Socialism. After all PSU banks were born of Nationalization - armed robbery by state. PSU banks are acting along their DNA. Bakasuras.
Deepak Narain
4 years ago
The whole set up is rotten. No honesty, no integrity, little skills and little accountability. We need a strong, stern and highly capable and ruthless dictator (like Mao) for 10 years. Western kind of democracy does not suit us nor we suit it. The country is going to dogs!
Western kind of democracy does not suit us nor we suit it. The country is going to dogs! Worse lies in the womb of future. After next Lok Sabha elections in 2019, BJP will not get clear majority. There will be a coalition government of corruption and compromises. God save our country!
See what we had expected 4 years back and what we got!
SUBHASH CHATTERJEE
Replied to Deepak Narain comment 4 years ago
Deepak ji,our country too would survive all this corruption and compromise and come out a better and stronger.We have reached the Nadir so Zenith cannot remain behind for long.It is we ,who have allowed this to happen and it would be we only how could put things in order but the problem is we all are shielding ourselves behind our own personal needs thinking that it something hits us,it remains somebody else's problem. But once we see beyond our own self and that would have sooner or later,things would definitely change for the better.
Rangaraj
Replied to Deepak Narain comment 4 years ago
Be careful on what you wish for. Formation of PSU banks was by armed robbery by state. Now you are asking for Mass murder Mao style. Excellent taste in death wish
DR SATI PRASAD SINHA
4 years ago
Still people believe money supposedly wasted on anti poverty measures should have been handed over to these looter industrialists and then every one will become rich.
Vijay Pal Singh Panjatta
4 years ago
Bye the people, far the people, off the people .
Rangaraj
Replied to Vijay Pal Singh Panjatta comment 4 years ago
Indian state and political parties have emancipated themselves from democracy as it is the vote banks which vote (vote banks are formed by reservation policy as STABLE vote banks are formed at voters expense).
India is an Ochlocracy,mob rule. Any doubt? Where else would you find bandhs where free movement of Individuals is taken away by mobs.
suneel kumar gupta
4 years ago
I blame fully to our judiciary. No lower level person can challenge his superiors for wrong decisions or intent. They harass him and our courts take exceptionally high time in deciding. So who will dare to bell the cat and face consequences.
Rangaraj
Replied to suneel kumar gupta comment 4 years ago
It's Parliament, which is formed by Ochlocracy.See reply to Panjatta
Pradip Joshi
4 years ago
I'm sure in China,the blame would be apportioned without delay,on specific persons... And perpetrators summerily executed, yes to death, in public knowledge.
In India intelligentsia will cry foul even if managers of defaulting banks are photographed with 84% haircut, and published in news papers.
We're civilised where looters like chanda kochar seat home and savor booty.
Rangaraj
Replied to Pradip Joshi comment 4 years ago
You want absolute power to state. How about some power to people by free gun laws.

Ochlocracy (mob rule) is formed by crushing the Individual, the opposite of mob. Free gun laws empowers the Individual the opposite of the mob. USA has prospered BECAUSE of free gun laww
Gopalakrishnan T V
4 years ago
It is very easy to stop the looting of public sector banks. Firstly make the RBI accountable and independent. It should be made answerable to public and parliament for all its duties and responsibilities. Secondly make the depositors and borrowers understand that what ever banks give as loans belong to depositors and all stake holders of the economy and banks cannot fritter away the funds to select borrowers who want only to loot and not to contribute to the economy. Thirdly keep away the bureaucrats from banks and RBI allow them to function professionally and deliver to the economy in a tangible manner.Fourthly equip the human resourcesof both banks and RBI with adequate knowledge, skills and human touch to handle the most sensitive commodity ie money with which they do business. The banks and RBI have to appreciate the importance of Customers and deliver the service to them in letter and spirit by avoiding high sounding jargons. Fifthly, make the public aware of the concepts of financial literacy and the role of banks and RBI in the economy in enhancing the economic prospirity of the country and welfare of the people.
Carlos De Souza
Replied to Gopalakrishnan T V comment 4 years ago
You are assuming that the people in power are honest and have the interest of the country at heart. Wrong assumption, Saar.
B. Yerram Raju
4 years ago
SIDBI refused a haircut of 25percent for a small manufacturing enterprise proprietrix suffering from cancer for an year because she is having the own dwelling house offered as collateral has a value twice the outstanding amount of which 60 percent is interest and penalty.
vj
4 years ago
This is organised loot and legalized plunder of public money!!!
Sanjeev Singhal
4 years ago
This is not surprising. RIL is a shrewd player and has taken advantage of the circumstances. If the liquidation value of an asset is Rs x - estimated Rs 4200 Cr in this case, how can one expect an investor to pay a significantly higher value for the asset they are bidding for. I am to sure RIL can be faulted for this. Yes the Banks could have been shrewder too by prevailing upon RIL and JM Financial to put a higher amount of bid, if they had done their homework in assessing the future earning potential of the asset and asking RIL to put on the table the NPV of the excess than the normally expected returns..

That owners of Alok Industries have looted is a no brainer. That the Bank officials have lent Rs 28000 Cr to a company that had a net worth of around Rs 3000 Cr and a peek sales of Rs 22000 Cr between 2010 and 2017, is very surprising. If Rs 16000 Crs of tangible assets that were built not to long back can fetch only Rs 4200 Cr, there is something seriously wrong with how the assessment was done.

These officials who are trying to claim immunity must not be let off. They were enjoying pecuniary and other benefits from the the company for releasing them money far in excess of what the company deserved. And now when accountably is being demanded, they are seeking immunity - bloody grasshoppers and looters.
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