Banishing fraudulent roots

The similarity between the fifth labour of our mythological hero and the Indian Prime Minister is the accumulated filth they are tasked to clean. While in mythology it was simple enough for Hercules to divert a running river through the stable and complete the task in just a day; for the leader who is derided for his humble tea selling background, no such quick fix solution exists. Also, unlike the Augean stable, which was empty as the cattle were out grazing, hidden inside the bank books are live accounts limping inside a mud-stuck Indian economy.

The problem that Modi has (which Hercules did not) is how the extent of the problem in the bank books has been effectively camouflaged. Forget loan accounts turning to become non-performing in the course of running a business, many an account have been ab initio bad, where wily promoters joined hands with equally crafty bank-men, with the intention of defrauding the common man's money. Spread across the vast country, the benevolent management of banks allowed the forgery to continue unchecked. What is more, the bank officers who could expand branch business through such network received rewards, some eventually begun running the banks. All they needed to sanction and disburse loans had been full proof paperwork. In any case, a banker is not expected to know if a business risk is worth taking or not. He went by the credibility of the borrower. No wonder the brother-in-law of a local strongman or a top official proved more creditworthy than others in the queue. During audit times, all a banker had to show was repayment by the borrower. In case it was difficult to generate money for servicing interest payment, all that the borrower needed was to produce authentic documentation of more order, therefore more loans with which repayment could be regularised. India popularised the banking term "evergreening'' in due course.

The larger the borrower, the easier was the evergreening operation. With each evergreening came booty for those sanctioning fresh loans and of course, those receiving it. In other words, each evergreening created additional leakages in bank books and left more dirt for cleansing. Naturally nobody, either a well-meaning bank head or a 'determined to do good' leader, ever thought of cleaning the Indian bank stable. Indian Prime Minister Narendra Modi is venturing into where no man has gone before.

What could be the consequences? If one cares to see the cacophony of criticisms one may easily conclude that Narendra Modi has been treading along a path which angels were afraid to tread. First look at the likely effect on economic growth. Through fair means or foul, the enterprises had been running unhindered and so were the banks. The modus operandi was simple. Borrow, siphon off funds, go for the restructuring of loans and then repeat the cycle. But in the process, banks had to carry the burden in the form of written off loans, which as long as the same came from the Exchequer, nobody cared. For the government also, recapitalising PSU banks was easy since the money pumped in could be shown both on the asset and liability sides, therefore not adding to the fiscal deficit. By refusing to allow the cycle and making a break, the new policy is hurting the cosy relationship between the borrower and the lender, so firmly rooted in India. Worried owners and their support brigade are desperately seeking for an exit route.

Innovation is not a monopoly of the honest. Any law can have options for manipulation. If promoter one defaults and the company goes into liquidation through NCLT, all one needs is a promoter number two to front for the defaulting one. Lenders are expected to auction the defaulting company to the bidder who agrees to pay the highest. Assume a company defaulted and created an accumulated default of Rs 50,000 crore. In the auction, promoter two comes out with an offer to pay, say, Rs 25,000 crore. The lenders will lose half, to retrieve the half of the total outstanding. A company which cannot sustain a debt of say Rs 50,000 crore can, in all probability, manage to service a loan of Rs 25,000. The concern turns viable with no default. Promoter two takes some premium from the original promoter on the money funded through some intricate accounting structure and restores the company back to his brother promoter. Nothing stops anybody from completing such an arrangement. The written-off amount by the lenders comes from ordinary taxpayers.

There could be another option. Lenders may decide that the amount offered is too low and decide to take over the company. Banks will then hand over the assets to sectoral experts to run the same with a careful restructuring of debt. Chances are that such experienced professional managers would turn the company profitable. No job will be lost, no asset will be sacrificed and the loss to banks will be minimum. In fact, later, when banks decide to dilute their holding, they may make a profit from the amount sacrificed now. The Augean stable of bad debt may perhaps be addressed provided all work is done honestly and transparently.

If it ends up in success, Prime Minister Modi will etch his name as a Hercules of modern day finance. The trillion rupee question is: will he be that lucky?

(The views expressed are strictly personal.)