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What a paradox?

Akhilesh Bhargava

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banking

In any society, banks are the primary agency/organisation, engaged in the business of lending money. In a most critical function that they perform, they pool in and aggregate domestic household savings (thus enabling them to earn interest), which they then lend to various borrowers, which could be individuals, small traders or large corporates, thus providing credit/funds to the economy. Both these functions viz. savings and lending are crucial for the growth and prosperity of a nation. The lending function of the bank, needs the expertise, experience and skills of risk analysis, by way of credit appraisal and due diligence. The purpose is to minimise errors of judgement and lend to a creditworthy borrower only. It ensures the provision of funds to the most deserving borrowers, such that bank loans do not go bad. The key expertise of a banker in his lending responsibilities thus lies in his ability to appraise and spot creditworthy borrowers, who do not default/defraud bank loans.

This ability of bankers to do credit appraisal and risk analysis, has clearly diminished in recent years. With state-owned banks, which monopolise the Indian banking industry, being willing victims of political/bureaucratic meddling in their state of affairs, lending decisions of banks as have often been dictated by babus/netas and not by an impartial and objective assessment of the credibility of the borrowers and their credit needs by the borrowers, by the bankers per se. In many big ticket loans, bankers have taken orders from their political masters, rather than do detailed credit appraisals and then decide, whether to lend or not. It has been often found that papers were cooked up by bankers thereafter, to justify loans given to unworthy crooked borrowers in this manner. It was thus not a reasoned credit decision to lend, but was a mere execution of a corrupt politicians order. In this process, the infectious bug of corruption, widely infected the bankers too, collectively resulting in the giant mountain of over Rs. 10 lakh crores of bank NPAs. This huge banking crisis stands as a loud shameful testimony to the degradation and deterioration of the skills of bankers in India.

India thus faces a deficit of professional skills among its banking fraternity. Lending decisions have come to a grinding halt in banks, reflecting in the below 10% bank credit growth in India this year. Banks cannot refrain from the lending responsibility or else the liquidity in the economy runs dry. So we are witnessing a strange paradox in the Indian banking & finance industry. Instead of doing direct lending to borrowers, banks are buying the loan portfolios of NBFCs. SBI itself has earmarked a sum of Rs. 45000 crores towards purchasing NBFC loan portfolios this year. It means that the credit appraisal and decision to lend to borrowers, at the inception has been that of the NBFC whose skills have been relied upon/trusted by the banks. On the other hand, banks are desperately seeking to sell their rotten NPA loans to NBFCs at huge discounts, again betraying their poor lending skills. Interestingly while NBFCs sell their loan portfolio to banks, they have been demanding a premium, but when they purchase the loan portfolio of banks, they demand a discount. That’s the sorry state of banks in India, and the denuded skills of bankers.

 

Business Tit-Bits

Siphoning of Sun Pharma Funds

Akhilesh Bhargava

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The importance of whistleblowers has been increasing recently in corporate India. Taking the example of Chanda Kochhar and how powerful and influential she was and the fact that she was brought down by a whistleblower, we can get a glimpse as to their importance. Another example is Dilip Shanghvi, MD of Sun Pharma. He was thought to have a squeaky clean reputation until the recent letter by a whistleblower revealed transactions involving a conflict of interest, related party transactions, auditors being compromised and other charges against him, his brother in law and his company. Related party transactions to the tune of Rs 5800 crore have been alleged. What Independent Directors, Auditors and Rating Agencies failed to point out, the whistleblower letter did. FIIs and DIIs are pulling out of the company and the price of the stock is plummeting in response to this.

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Business Tit-Bits

The Burden of Infrastructure NPAs

Akhilesh Bhargava

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As the country is the midst of an NPA crisis, we find that resolution are hard to come by. The only resolutions are from the Steel and Metal sector. The sector which forms the crux of the NPA crisis in India is the Infrastructure sector which accounts for roughly 25% of total NPAs. Infact, so serious are the NPAs in this sector that 1/4th of loans given turn bad and total around 2.5 lakh crore Rs. Loans given in the period 2009 to 2012 were found to be the worst. Infrastructure loans include loans given for construction of roads, bridges, highways, ports and power sector loans. Corruption, government not living up to its end of the deal and banks rushing to give loans without going through boanfides of the firm are the main reasons. The infrastructure sector bad loan problem has turned into a chronic one and no resolution worth talking about has taken place.

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Business Tit-Bits

The Diamond Cheats

Akhilesh Bhargava

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We take a look into the glamorous diamond industry in India, said to be the largest in the world. Being a very close-knit one in terms of belonging to a particular community and often only within family members, the scope for manipulation becomes easy. The diamond industry has become tainted with bogus exports, money laundering practices, massive NPAs, round-tripping of money etc. Names such as Jatin Mehta, Mehul Chokshi and Nirav Modi have become synonymous with the industry and hence banks are now restricting their exposure to the sector and implementing tougher conditions for lending money to the beleaguered diamond traders.

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