The banker-promoter nexus

In fact, he is merely parroting the motivated claims of banks and institutions. Anyone trying to borrow from a bank would tell you a different story. Genuine borrowers are invariably given the royal run-around. In their case, banks pull out the rulebook and raise endless concerns over repayment and loan recovery. However, when an influential borrower or a leading industrialist comes along, the same banks clear several hundred crores of loans with a perfunctory or incompetent appraisal, faulty documentation and minimal security. They do not demand personal guarantees, or accept such guarantees even when the industrialists’ income and wealth tax submissions do not even cover a fraction of their borrowing.

Only last week, a leading institution was in a major flap when it discovered that personal guarantees provided by a defaulter industrialist who have fought a vicious legal battle with it are missing from its files. Isn’t this collusion of the worst kind? What is the guarantee that its officials had not routinely sabotaged its expensive litigation with the defaulter over several years? More pertinently, bankers’ rulebooks seem to vanish when they encounter a politician’s demand. While it is easy to blame politicians, let us not forget that there is usually a direct quid-pro-quo for the banker who winks at the rules, or accepts fudged accounts and exaggerated projections.

After the securities scam of 1992, banks and lending institutions constantly lamented about the interference by the investigation agencies. And there were indeed several instances where the CBI’s ham-handed approach and lack of understanding about financial transactions led to the harassment of several good officials. But, these were exceptions. Fear of investigation and harassment has never deterred corrupt officials from colluding with borrowers and their political friends. If the bankers’ claim about losing their ‘self-confidence’ out of fear were true, there would have been a perceptible drop corruption in lending institutions after 1992. But there is no such evidence.

Instead, a series of scams after 1992 indicate that it was business as usual or worse. Several institutions are now seeking a government bailout but nobody is questioning the lending decisions by their past chairmen. IFCI is a prime example. Its notorious deals with certain industry groups were common knowledge, but nobody blew the whistle until the institution was on the verge of being wound up. Today, when IFCI is chasing chronic defaulters with an aggressive new statute, the chairmen who sanctioned the loans remain in blissful and unquestioned retirement.

Similarly, UTI’s decline can be traced to questionable loans and investments over decades. But even the Rs 3,300 crore bailout of 1998, did not deter its brand new (then) chairman P. Subramanyam from colluding with market operators, and ruining the institution even further. The tab: a massive Rs 14,500 crore just to meet the minimum assurances made by UTI’s many schemes.

The hypocrisy about bankers’ fears after 1992 was best exposed during the IPO mania of 1992-1995. At that time, bankers and their investment banking subsidiaries shamelessly teamed up with dubious industrialists, prepared shoddy project reports and helped them raise funds from unsuspecting investors. One example of such benevolence that turned sour was Parasrampuria Synthetics. In June 1996, when the company made a Rs 135 crore public-cum-rights, one investor had filed a public interest litigation in the Allahabad High Court claiming that the prospectus had given misleading and incorrect information. He said that the project cost was underestimated, future profits overstated and working capital needs were grossly under provided. He also accused the company of ramping its share price through a group investment company before its IPO.

At that time, ICICI’s subsidiary I-Sec (which lead managed the public issue) had fought the investor in court along with Parasrampuria Synthetics, with active support from the capital market regulator. There is plenty of evidence of banks aiding the fund raising effort of shady companies by providing investment banking (through subsidiaries) and project appraisal services and underwriting such the public offers. In extreme cases, they even cooked up projects on the explicit understanding that money raised from the public would be used to repay bank loans.

Similarly, banks and financial institutions helped companies raise several hundred crores through the issue of secured debentures. They lent credibility to these issues by acting as debenture trustees and collected fees for lending their name. However, most trustees are guilty of dereliction of their fiduciary duties, failing to draw up trust deeds, to create a valid security against the assets or to take timely action to secure investors’ money. Some trustees like ICICI have brushed off their responsibility by selling their trusteeship portfolio to a relatively tiny United Western Bank.

Even today, when the government has cleared the powerful Asset recovery bill (Securitisation and Reconstruction of Financial Assets Enforcement of Security Interest Bill, 2002) and empowered lenders, it has ignored the genuine fears of borrowers that the bill contains no rules regarding lenders liability. Lenders are not even obliged to ensure fair and uniform treatment to different categories of borrowers. Instead, the bill is based on the pious premise that bankers will only use the draconian powers of seizure of assets only under extreme circumstances and will not collude with powerful predators wanting to acquire companies by taking advantage of an industrial downturn or temporary financial crunch. Although the government has done well to arm lenders with a powerful statute to deal with wilful default, it cannot afford to be naive and should quickly put in place rules to ensure fair and equitable treatment of borrowers, instead of listening to bankers whining about scrutiny by investigative agencies.

(Author’s email: suchetadalalyahoo.com)