In this 3-part report, we take a stock of the current situation of the Indian financial sector, the current financial policies, and try to map how our ‘common wealth’ is being suctioned off into the pockets of a few big business families of the country. Tathagata Sengupta writes. You can read Part One here.
Part Two: The Banking Fraud
Even after 27 years of structural adjustments and the Narasimhan Committee measures, the debt situation hasn’t gotten any better. The Non-Performing Assets (NPAs) have only grown. Indian banks have been converted into gigantic casinos through which public money channeled into big business families. The so-called NPAs, variously categorized conveniently as ‘stressed assets’, ‘bad loans’, etc. are basically fancy terms for large amounts of public money that the banks have lent out to big corporations, without any fool-proof mechanism of retrieving them.
The NPA crisis
According to the All India Bank Employees’ Association figures, the total amount of bad loans in the country today is estimated to be ₹10 lakh crores. Out of this, the 10 banks that Finance Minister Sitharaman merged, account for more than ₹3 lakh crores. In the 2018-19 fiscal year, the total profits made by these banks is almost ₹1.5 lakh crores, while they were forced to declare losses (‘bad loans’ that are officially admitted to be unrecoverable) of more than ₹2 lakh crores – a net loss of more than ₹66,000 crores. While 86% of NPAs belonged to public sector banks, 82% of the loans themselves were given to corporate defaulters. Between April 2014 and April 2018, the country’s 21 State-owned banks ended up writing off more than ₹3 lakh crore of loans. This was 166% more than the amount written off in the 10 years before 2014. During the recent bankruptcy proceedings of Electrosteel Casting in WB, Electrosteel owed more than ₹13,000 crore to its lenders, and was put up for sale. Vedanta put up a bid of ₹5,320 crore, picking up a 90% stake in Electrosteel. Thus, the banks that had lent to Electrosteel still lost ₹8000 crores.
Incidentally, at the same time when we have ₹10 lakh crores of “bad loans”, the total amount of actual money deposited in Indian banks is a little more than ₹1.25 lakh crores. The money being lent out by these banks, therefore, is no longer just a part of their reserves (i.e. from people’s deposit accounts) to a borrower. We now live in a global economy where money is literally generated out of thin air, electronically by banks, merely by the press of a button, and then lent out to big borrowers. Almost 90% of the ‘bad loans’ isn’t even ‘real money’ in the traditional sense. Let’s discuss this in a little detail.
There are four main ways banks make money: by charging interest on money that they lend, by charging fees for the services they provide, by borrowing from other banks, and by betting in the speculative financial markets. Thus if a bank B wants to lend ‘x’ amount of money to a company C, and when ‘x’ is far more than its actual reserves, it mainly borrows from other banks. This borrowing mechanism is what the ‘press of a button’ really is. The only thing the bank has to convince its own lenders (usually other banks, mutual funds, pension funds, and cash reserves) is that it can recover this loan without having to depend on its actual reserves – mainly through chains of lending and borrowing. This is where hiding of crucial market information and false certifications, in other words ‘fraud’, comes in. This enormous interconnected network of money lending works only till everything works. But sooner or later when the fraudulent practices accumulate and a part of the economy (for instance, the housing loans sector) collapses, it triggers a domino effect and the entire chain begins to crumble.
The Case of the Punjab Maharashtra Co-operative Bank
In the recent case of restrictions imposed on the Punjab Maharashtra Co-operative (PMC) Bank, while official data from the bank claimed that its NPAs had doubled over the past one year to around ₹315 crores, the actual extent of the bank’s ‘bad loans’ was far far worse than that. According to a recent Mumbai Mirror expose, the chief reason for the RBI’s punitive action against the PMC Bank was a loan of ₹2,500 crore to the now-bankrupt real estate firm, Housing Development and Infrastructure Limited (HDIL). HDIL is a major player in Mumbai’s real estate business, particularly its ‘slum rehabilitation’ projects. Real estate companies have been one of the chief culprits behind ‘bad loans’ in recent times, with the real estate market witnessing a slump. According to reports, India’s real estate market currently has more than 4 years worth of unsold apartments and the market has hit rock bottom. There is hardly a way to recover the public money that was channeled through banks like the Bank of India (BoI) and PMC Bank to prop up these tall, empty highrises.
The PMC Bank had hidden the fact that HDIL was a ‘stressed client’, and kept lending it money. Earlier in August, the National Company Law Tribunal (NCLT) had initiated bankruptcy proceedings on HDIL based on an application filed by one of the real estate company’s main lenders till now – the state-owned Bank of India. HDIL had failed to repay the BoI a loan of ₹522 crores. Besides Bank of India, HDIL also faces resolution pleas by Corporation Bank, Syndicate Bank, Indian Bank, and Dena Bank. Out of the above, BoI and Dena Bank are on the RBI’s PCA list owing to their huge NPAs. There are apprehensions that Syndicate Bank may be added to the list, while Corporation Bank, which was there on the list till last year, was only recently taken off. Incidentally, each of these banks will end up with one or the other of Sitharaman’s new post-merger ‘big banks’ – but that gives no new way to recover the thousands of crores of rupees that companies like HDIL owe these banks.
Finally on October 7, the HDIL promoters were arrested by the Mumbai police, and the company;s assets were seized. According to police sources, 21049 dummy accounts were created by the PMC Bank to replace 44 borrowers, to facilitate dubious transactions. Besides HDIL, at least 16 firms linked to the Wadhawans borrowed Rs 2042.45 crore from PMC Bank. “A complex web of firms, including ones based overseas, linked to Housing Development Infrastructure Ltd (HDIL) and their promoters Rakesh Wadhawan and Sarang Wadhawan, with little or no revenue, borrowed money from Punjab & Maharashtra Co-operative (PMC) Bank Ltd and, in turn, invested in each other and related companies,” says an investigative report into the fraud, by The Indian Express. Records have shown that Rakesh Wadhawan and Sarang Wadhawan [now arrested promoters of HDIL] – invested money in Mauritius-based firms that have not “conducted any business operations” since their inception. These foreign subsidiaries of the company were ‘managed’ by a Mauritius based agency called Abax Corporate Services Ltd. Abax Corporate Services was used to manage several offshore companies that have been named in The Panama Papers and The Paradise Papers investigated by the International Consortium of Investigative Journalists (ICIJ).
Some of this money borrowed from PMC Bank through fake companies was ultimately used to invest in HDIL by allegedly routing it through multiple related entities. About 85 per cent of these firms were audited by the same auditor until 2017. “Interestingly, the branch office of the auditor is in the same building as some of these companies,” says the IE report. A large number of these firms also have a common pool of directors and cross-holdings. For instance, a current employee of HDIL is on the board of at least 11 companies linked to the Wadhawans.
Joy Thomas, the suspended managing director of the PMC bank, has also been arrested on charges of participating in this scam. The total amount of fraud is alleged to be ₹6500 crores. It is interesting to note that very little of this kind of stolen public money is being used by the companies to invest in actual productive activities – the traditional model of business one assumes such companies espouse. One question therefore is, where is this money being invested by the companies for profit-making, if not in productive economic activities? One answer is – bulk of such money is being invested in ‘betting’, leading to enormous immediate profits. While these profits are being pocketed by the corporates, any risk of loss from such betting activities is being outsourced to the real economy of common people.
The Economy of Bets, not Goods
Today’s economic decisions, decisions regarding transactions of money including bank loans, depend more on the logic of speculation than on the logic of economic production. Here is a description of how big the speculative economy is. In 2017, Bill Gates, one of the world’s richest men had a fortune (the total market value of his shares) of 65 Billion Euros. The total amount of cash in the world was less than 100 times Bill Gates’ fortune – 5000 Billion (5 Trillion) Euros. The value of goods and services created yearly at that time was 75 trillion Euros. This is the “real economy”. The world’s collective debt on the other hand – the total amount of money that Governments, businesses and private individuals have borrowed from the market – totaled 200 Trillion Euros. This is the total ‘material’ economy. However, the total value of all ‘derivatives’ – essentially, these are bets on this collective global debt – was 705 Trillion Euros, 3.5 times the size of the entire material economy put together. This speculative economy is solely based on bets on the money-lending transactions going on every moment across the global economy. This part of the world economy is metaphysical and abstract – up in the clouds, in the form of electronic money, numbers, digits, bets.
Here is an example. Let’s imagine a couple of people – A and B – are playing cards. C and D are observing the game. At some point, C and D decide to bet on the outcome of A&B’s game. Next, E&F decide to bet on the outcome of the bet between C&D. G&H bet on the outcome of E&F’s bet and so on – setting up a domino of bets. If A&B initially had x amount of money on the table, the total amount of money that eventually gets put up through the bets on these bets, and more bets on those bets – will soon become many times bigger than ‘x’ itself. This tower of interdependent bets is like a house of cards, which might fall altogether when the weight of the tower becomes too heavy for the base (the original material transaction between A&B). And particularly so if the initial betting decisions were themselves wrong. This is what happened during the 2008 Wall Street collapse and eventual global financial crisis.
For the big corporates, investing borrowed money in speculation than in materially productive activities is far more profitable – though only so long as they can all play the game of betting successfully, something that is impossible to do. But till then, the ‘bad loans’ money keeps getting sucked into this waterfall of huge financial profits. A 2017 report by the ratings agency Credit Suisse mentioned that 40% of all corporate loans, mostly in metals, power, and telecom sectors, were given to companies that don’t even earn enough to pay interest. Corporations are essentially gambling using people’s money.
To be fair, this has always been the dominant ‘Indian model’ of business, particularly since post-Mughal times. One of the dominant trading communities of the country – the Marwadi businessmen – famously made it big based on profits from global speculation, through windows opened up under the British rule. The role of Marwadi traders in destroying colonial Bengal’s jute industry by using jute production units as pawns in the betting world, is well known. However, the scale and pace of things now is of a different order. Big banks – the kind that FM Sitharaman is talking about – with huge “bad loans” and bad speculation, are therefore ticking financial time bombs.
The Insolvency and Bankruptcy Proceedings
The current bankruptcy proceedings that are ongoing post the Insolvency and Bankruptcy Code (IBC) passed in 2016 are being touted as the ‘NPA recovery process’. According to Justice SK Kaul of the Supreme Court, 80 insolvency and bankruptcy cases have been resolved and ₹60,000 crores have been recovered through the IBC proceedings in the past 3 years, as of September 2019. This is only 6% of the total estimated NPAs – ₹10 lakh crores.
As has been pointed by reports, most of the companies being pushed into the insolvency process are being bought for cheap amounts, by bigger companies. “Of the Reserve Bank’s first list of 12 defaulters, seven have already changed hands. But only in the case of Bhushan Steel did banks recover more than half of the money the company owed them – the buyer Tata Steel paid 79% of the outstanding loans. In case of five others, the buyers paid less than a third of the outstanding loans. The seventh company went for 48% of the outstanding loans,” says this report by M Rajshekhar. We already mentioned the case of Electrosteel where only a part of the NPA was paid, and the relatively smaller steel company was gobbled up by the bigger shark, Vedanta.
Because of such low price-tags on existing industries with infrastructure in place, corporations have essentially stopped launching new industries/factories. Building a small company from scratch has become economically infeasible because of this. As a result, there is now a general shift towards building single large companies across sectors – the country is being driven towards a real oligarchy, where 10-12 families essentially take control of different pieces of the economy. The list is already shaping up in the Indian public mind today – Adanis, Ambanis, Mittals, Jindals, Tatas, Ruias, and a few others.
The bankruptcy resolution process has not frozen any of the ‘bad loans’. In fact, in August 2018, in a judgment that gave an unmistakable signal of how exactly this is going to work, the Supreme Court stayed the National Company Law Appellate Tribunal (NCLAT)’s order asking the Government to freeze and attach assets, including bank accounts, of four independent directors of the Nirav Modi-led Firestar International to recover dues related to the ₹ 13,000-crore Punjab National Bank (PNB) fraud case.
In other words ‘bad loans’ are still not being treated as theft. In fact, recently, the RBI opened up the NPAs to foreign trading. Foreign money, a lot of which cannot be effectively traced because of the maze of shell companies in tax havens through which such money is made to flow, can now be channeled to essentially buy and trade in what should be treated as ‘stolen goods’ (once we agree that NPAs are basically money stolen from people).
Where are the Regulators?
In any economy, it is the role of the regulators to firstly detect frauds and malpractices like these and secondly, to alert the market at large about the risks involved in such trading. But the Boards of Directors, and high-level management of the banks – the economic detectives who are supposed to look out for bank fraud and malpractice – have for long been puppets of big industries and big money. Like the Hazari Committee pointed out in the ‘60s itself, even so-called ‘public banks’ in India are effectively privately owned. M Narasimhan – one of the architects of the 90s reforms – later joined the Government, and also became the Governor of the RBI. After his short term as RBI governor, he worked as India’s Executive Director at the World Bank, and later at the International Monetary Fund. This trend has, only increased in current times. One of the most recent examples of the “revolving door” between Indian bankers and big global capitalists is the appointment of SBI MD Anshula Kant as the World Bank CFO and MD.
The outcome of these close ties between the banks and the regulators? In June 2018, just before the Infrastructure Leasing & Financial Services (IL&FS) group’s financial problems snowballed, media reports show that IL&FS Transportation Networks Ltd (ITNL), raised ₹186.11 crore in debt financing from KfW IPEX-Bank. This was a 13-year loan for the Rapid Metro South Extension Project in Gurugram. The company took this loan while it was fully aware that it was in no position to pay back the enormous amounts of money it had already taken over the years. However, even after the scandal and subsequent filing of bankruptcy of the company, the same bureaucrats who allowed such loans to flow in are still in place. Some have even been promoted.
CS Rajan, a former IAS officer and non-executive director of IL&FS for the last six months, has been appointed as IL&FS’ Managing Director. “A bunch of former IL&FS group directors and their relatives hold influential positions in the government. Some of them are directly involved in managing the crisis at the LIC-backed infrastructure group…. Ravi Parthasarathy, Arun Saha, K Ramchand, Ramesh Bawa were the core team taking all decisions for 346 entities of IL&FS!” says this report by the Center for Financial Accountability. These people are not ‘on the run’ fugitives like Nirav Modi and Vijay Mallya, but no case has been filed on any of them for fraud. The total outstanding debt of the infamously bankrupt IL&FS is nearly ₹1 lakh crore, and this money includes pension funds and mutual fund investments of middle-class Indians. Even the Army Group Insurance Funds (AGIF) has ₹210 crore of its money in the pockets of IL&FS. The IBC is merely re-branding the defaulters. No action is being taken on any of the physical people, who might have been behind the frauds [with only a few exceptions such as in the PMC Bank fraud case].
In the PMC Bank case, the Mirror Now report claims that the auditors for the bank did not classify the loans given to HDIL as ‘NPAs’ despite the real estate company repeatedly failing to make its repayments. The PMC Bank’s reserves are apparently only ₹ 1000 crores, while it gave a loan of ₹ 2500 crores to HDIL. In order for the RBI to consider an NPA as not a “complete loss”, the bank has to recover as little as 10% of the total bad loan, from its yearly profits. This is in fact the game that most banks are playing to keep afloat in this ocean of bad loans everywhere. However, the PMC Bank was not in a financial position to even do that.
The total amount of money stolen through bank frauds (the NPAs) is around ₹10 lakh crores according to estimates. How big is this amount? Even if 1% of this amount is used to buy off the MPs, each MP would still get around ₹ 17 crores personally. Overall, the IBC is hardly a process that can be trusted to bring justice to the perpetrators. It is more a process of “managing thefts”, and letting the bigger criminals swallow up the smaller ones.
The author is an education researcher.