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Missing liquidity

Akhilesh Bhargava

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crores

Money is extremely scarce at present in the Indian economy. Experts say that India is passing through its worst liquidity crisis, of the past five years. It is not that Indians are not earning/saving enough, or that there is a shortage of currency in circulation in the system, (it is in fact at a record high), but for those businesses that desperately need it, the money is missing. As the economic growth surges in India, so does the demand for funds to finance larger turnovers and if the needed funds are not made available to businesses on time, the nation’s economic growth does not get consistently sustained on a quarter to quarter, as we have often witnessed in the Indian economy, in recent times.

The liquidity crisis that we face, has primarily to do with the unprecedented crisis that India’s banking system faces and which defies resolution. It is not just a crisis of resources, where banks have lost their substratum capital to gigantic NPAs and have little to lend or that many of them are under RBI’s PCA which entails lending restrictions, but it is also a huge crisis of confidence that the system is rife with, after having indulged in corrupt and reckless lending for years (resulting in a NPA mountain of over Rs.10 lac crores). The bankers are a confused/chaotic lot today, having lost the confidence in their own ability/expertise to do clean/credible credit appraisal/due diligence and to lend only to those who are creditworthy. With many CBI/SFIO investigations looming in the background, bankers are also unwilling to indulge in fresh lending. Their dilemma is, why to lend and face criminal agencies, in case the loan turns bad.

What has further slowed the credit offtake and lending is that the bank lending norms in terms of security/collateral security and promoter margins have become so tough and onerous, that few borrowers are able to comply with them, such as to be eligible to avail of loans from the banking system.

The Reserve Bank of India, together with the SBI, has been pumping money into the system, in order to improve the liquidity position. Last month the RBI/infused Rs.32000 crores into the banking system for onward lending. It proposes to put in a further Rs.24000 crores into the system, in a similar manner. It is also encouraging banks to pick and choose and buy out the portfolio of assets of NBFCs and provide funds to them for further lending. The top 15 NBFCs in India are reported to have an asset portfolio of about Rs.5 lac crores, which can be securitised/monetised by banks, thus providing further funds to the borrowers. SBI has announced that it will purchase such assets worth Rs.45000 crores from NBFCs in the FY 2018/19. Such measures will bolster the funds available with banks and NBFCs, for further onward lending.

These are emergency measures, which will only provide temporary relief and are not enough. Until the banking system is not recapitalised and revived, not just financially, but operationally too, the liquidity crisis that we face will only persist. Bank credit growth has been falling and so is the liquidity/funds available in the system. If not tackled quickly and appropriately, the nation’s economic growth will suffer again, after having been rejuvenated with great difficulty.

 

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RATING AGENCIES HAVE BEEN INCOMPETENT AND NEGLIGENT

Akhilesh Bhargava

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SEBI

The giant ILFS scam was not an overnite creation. It started in 2012 and continued for years, becoming bigger and bigger with each passing year. It is the stark negligence of the credit rating agencies (CRAs), that has been responsible for the ILFS scam, ballooning to such a big one, whose very size in terms of loans taken, still remains a mystrey. Had the CRAs exercised just ordinary vigilance and had not shut their eyes to the most obvious signals of distress and default by ILFS, the scam would have been nipped in the bud, much earlier in the day and its size would have been a fraction of what it is today. There were obvious signals of losses and financial fatigue in the ILFS group, starting from 2012 itself. These very apparent signals that the CRAs ignored were that the liabilities of the ILFS group increased year after year, with no matching increase in the assets, its disputes over claims with the likes of NHAI kept increasing and remained unresolved, its holding company had started incurring losses and cashflows were receding, the support of its investor shareholders like LIC, SBI etc. on which basis ILFS was given AAA ratings, was clearly missing, that in the June 2018 board meeting of ILFS, the directors warned these shareholders that if they did not immediately infuse an additional equity of Rs.4500 crores in ILFS, its collapse was imminent and yet right upto Aug.2018, these rating agencies gave a AAA rating to ILFS.

If the CRAs were sleeping and gave no downgrade ratings/warnings to the lenders to ILFS, they were also very incompetent in their job. They failed to spot that ILFS had borrowed far in excess of its repayment capability, its liquidity was shrinking rapidly, it was incurring more and more losses by padding up project costs (called gold plating), its own investment in projects was actually NIL and that it had indulged in money laundering and siphoning of funds. The CRAs were also very willingly hoodwinked by the smart/oblique Ravi Parthasarathy and his team of highly paid executives and were also overpowered by the gang of top notch very well connected, retired bureaucrats at his disposal. The rating agencies thus were clearly negligent and incompetent, who compromised their integrity, whether intentionally or otherwise and are now being questioned for their failure, by the likes of SFIO.

The CRAs in India are regulated/governed by SEBI, and unsurprisingly SEBI has got into action only after the loot took place. SEBI too is guilty of being reactive and not proactive, that enabled the negligence of the CRAs. SEBI has now tightened the rating agency regulations, primarily entailing more and more disclosures, particularly in respect of liquidity position, asset-liability mismatches, rationale for any expectations of support from the promoters, adequacy of cashflows for servicing maturing debt obligations, and the extent of consolidation in the case of subsidiaries to understand the overall financial position of a company.

These additional SEBI requirements are anyway a must and it is surprising that mandatory regulations are needed to enforce them. These should have anyway been a part of routine rating procedures and methodology. Rating is not a tick in the box job. It needs an intense vigilance/alertness to look out for early warning signals, which was missing in the case of ILFS. Higher disclosure norms are no substitute for basic human common sense/due diligence that CRAs failed to exercise in the case of ILFS and that needs a detailed investigation.

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