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The Raghuram Rajan Note

Akhilesh Bhargava

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Raghuram Rajan, the former RBI governor, who was too independent minded to suit the requirements of the BJP, has been a polarising figure of sorts, for the BJP itself. One section of the BJP, which includes the likes of Gurumurthy, the swadeshi ideologue of the RSS dislike him, and so does Mr. Rajiv Kumar, the vice chairman of the Niti Ayog. But others like Murli Manohar Joshi and Arvind Subramanian, the outgoing CEA of India, have admiration for his professional abilities. Due to his stellar credentials, though Rajan has gone back to his teaching job at Chicago, he yet continues to hover around the Indian policy makers. His recent comeback to the newspaper headlines in India, started with the CEA Arvind Subramanian praising him before the Parliamentary Committee headed by the senior BJP leader Mr. Murli Manohar Joshi, for having identified the NPA crisis and triggering its disclosure by banks. That led to Mr. Murli Manohar Joshi, requesting Mr. Rajan to appear before the committee to explain the roots of the NPA crisis, its build up and its solution. Rajan was requested to at least forward his expert written opinion, in case he was unable to appear before the Parliamentary Committee.

Raghuram Rajan did send a note as per Mr. Joshi’s request, outlining his expert views on the genesis, journey and the solution to the NPA crisis, that is so huge that it defies a solution at the moment. His note mentions the reasons for the NPAs, the restructuring schemes set up by the RBI to resolve the NPAs, the need to recognise bad loans, whether the RBI created the NPAs, whether the NPA recognition slowdown the credit growth and economic growth, the reasons why NPAs continue to mount and how do we prevent their recurrence. In his note Rajan cautions the government of the budding NPA crisis in the Mudra loans and the Kisan Credit Cards and the futility of loan waivers.

The key issue is that the huge NPA crisis has already occurred and India has lost over Rs.10 lac crores. While this matter needs to be resolved by recovery of loans and the most strictest possible punishment to the fraudsters and the wilful defaulters, the major issue going forward is how do we prevent the recurrence of such huge NPAs. Rajan prescribes the solution for this too and says at the outset that we must improve the governance of public sector banks and must distance them from the government. He rightly says that public sector bank boards are still not adequately professionalised and the government, rather than an independent body decides bank board appointments, with inevitable politicisation. He further says that banks need to improve the process of project evaluation and monitoring to lower the risk of NPAs. All this needs to be duly supported by further strengthening the recovery process. Rajan’s parting advice is that the government must focus on the sources of the next NPA crisis and not the previous one, for which he says that in particular, the government must refrain from setting ambitious credit targets or waiving loans. The sum and substance of Rajan’s expert advice is that political interference in banks must stop immediately, or else the next credit crisis will certainly recur.  No Indian politician has heeded to such obvious sage advice, since the days of bank nationalisation.

Banking

Why Forensic Investigation of Banks is a Must?

Akhilesh Bhargava

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As the government and the overall banking system struggles to resolve the gigantic NPA crisis that has crippled the Indian economy, it is clearly evident that these huge NPAs are brimming with frauds and criminal negligence/misconduct, that resulted in the loan accounts going bad, and the banks being duped. Investigation forensic audits are thus being conducted, as a part of the routine NPA recovery/resolution process, particularly where the default in repayment of bank loans has been found to be willful. Any forensic audit carries the implication of a crime and its purpose is to unearth the fraud, the criminals and the beneficiaries, because it is they who are the actual fraudsters, which generally happens to be the company promoters/directors, their auditors, consultants and key employees, as has been seen in many cases, including the likes of ILFS, Reid & Taylor etc.

 

Apart from unearthing incriminating facts, it also finds out regulatory violations and corporate malpractices, in addition to identifying the money trails that led to the syphoning of funds. The normal focus of a forensic audit is thus on related party transactions, bogus transactions, money laundering, tax evasion and the vanishing securities/assets of the borrower, whose overall beneficiaries are the men in charge of the borrowing entity. The normal and inevitable finding of such forensic audits is that the bank has been defrauded by syphoning/diversion of funds.

 

Take the case of Era Infra, wherein a number of  persons were booked by the CBI, including its promoters, auditors/consultants, as also the then chairman of UCO Bank, under charges of diversion/siphoning of bank loans, without using them for the sanctioned purpose, with the help of false end-use certificates provided by chartered accountants, as also fabricated audited financial statements.

 

It is clear from cases like Era Infra and many others, that such giant frauds do not happen merely because the borrower was criminal in his conduct. They occur also because the lending bankers necessarily collude, right from the sanction of funds, to their disbursement and continuous enhancement of loans on the basis of fraudulent financial statements. To state the very obvious, the control of funds under loans given, is always with the banker, who can at the very inception stop/prevent/object to any suspicious payment/transactions that represent the diversion of funds. But they deliberately collude with the fraudulent borrower and let the diversion go on. That is how, while banks have an exposure of over Rs.30000 crores on Alok Industries, a forensic audit reveals that its receivables to the tune of Rs.14000 crores are just not traceable and so is the case of Reid &Taylor, where against bank loans of over Rs.4000 crores, the assets available are a mere Rs.200 crores ie. 5% of the loan account.

 

A vigilant banker who does not collude with the fraudster can immediately spot and stop and illegal transactions, whereby funds are being diverted, the most popular of which are bogus purchases and related party transactions. So if banks, NCLT etc. conduct a compulsory forensic audit on the borrower, they must do so on the bankers too, because both were equally involved in this criminal game, which could not have been played without minimum two players ie. the bankers and the borrower.

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Banking

Lenders Not Happy : Blame IL&FS

News Desk

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ILFS

The Infrastructure Leasing and Financial Services (IL&FS) debacle was no small event. It was deemed to be one of the entities that had the tag of “too big to fail”. However, the unthinkable happened when it defaulted on its repayment obligations sending the entire nation’s financial markets into a tailspin. It was the main reason for the severe liquidity crunch faced by the economy for months which saw the share price of almost all NBFC’s fall drastically. A host of banks, mutual funds, pension funds, and other institutional and retail investors had exposure to this leasing and financial services behemoth; an exposure which equaled a whopping Rs 91,000 crore. Of this, around Rs 50,000 crore worth of exposure are from banks, with public sector banks forming the majority.

It comes as no surprise that any entity that has exposure to IL&FS has the risk of seeing their balance sheet deteriorate because of provisioning norms. Some lenders approached the RBI for special leave to allow them a standstill arrangement for six months so that they won’t have to apply provisioning norms and weaken their balance sheets when they close accounts for the third quarter for FY19. While their cause may be a noble one, the country is going through a banking sector overhaul and the RBI is taking a tough stance and making the industry swallow a bitter pill to cleanse it of its wrongdoing over decades. Therefore, the RBI has declined this request and instructed all lenders to apply the adequate provisioning norms; whatever may be the effect on their balance sheets, to their dismay. The non-payment of dues beyond 90 days would force the banks to treat their exposure as non-performing assets and apply the provisioning norms as per RBI guidelines.

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Banking

A Merger of Convenience or Otherwise? 

News Desk

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A merger in the financial sector always creates a buzz in the market with different opinions and various suggestions always emerging. The latest coming together involves Gruh Finance, which is the HDFC group’s affordable housing finance arm and Bandhan Bank, the Kolkata headquartered financial services company that was granted a banking licence by RBI in 2014. As per the arrangement, shareholders of Gruh Finance will get 568 shares of Bandhan Bank for every 1,000 shares of Gruh Finance.

Let’s not forget that Bandhan Bank was under pressure by RBI to reduce its promoter shareholding below 40% within a specified time frame. It previously missed the deadline for the stake sale thereby prompting RBI to impose penal action on it. It was restricted by the RBI from expanding its network of branches and the RBI also froze the salary of its MD and CEO Chandra Shekhar Ghosh to current levels. Some experts, therefore, believe that this merger is one of convenience for Bandhan Bank as it helps the Bank dilute its promoter stake from the current 82.3% to 61% (which is still not as per RBI guidelines, but it is a step in the right direction).

The merger did not bode well with the market as shares of both Gruh Finance and Bandhan Bank fell sharply on Tuesday, a day after the board approved the amalgamation. Many global brokerages expressed doubts about the synergies that the deal would offer. It is widely believed that the price paid for Gruh Finance is expensive. HDFC Bank, which owned a majority shareholding in Gruh Finance, is set to have benefitted the most from the deal as it received a premium valuation and will now end up holding 14.96% stake in the merged entity.

Insisting that this merger was a strategic decision and not just an attempt at reducing promoter shareholding, Bandhan Bank MD and CEO Chandra Shekhar Ghosh made a statement in defence of his decision.

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