The Rot Called Corporate Debt Re-structuring

Discussion in 'Politics & Society' started by sasi, Oct 31, 2014.

  1. sasi

    sasi Senior Member Senior Member

    Nov 18, 2012
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    The government has sanctioned fresh capital for public sector banks. Will this capital too leak out into bad loans and be dumped into the opaque and another corrupt process called CDR?
    The government of India has just announced a fresh round of capital infusion to keep unaccountable and corrupt Public Sector Banks (PSBs) alive. The money will come from taxpayers' pockets, as has happened in the past.
    Exactly as in the past, no accountability has been imposed on the banks in return for the capital infusion. The Ministry of Finance and Reserve Bank of India (RBI) never pause to think that well-run private sector banks working within the same economic system do not need capital the way PSBs do. Why do the PSBs need all this money at regular intervals? Where is all this capital going?
    PSBs need regular infusion of capital because they lose tens of thousands of crores in bad loans, for which PSBs are not even held accountable. Indeed, a lot of the bad loans land up in another corrupt and opaque mechanism called Corporate Debt Restructuring (CDR), run under the auspices of the so-called banking regulator, RBI. There is no tracking of what happens to restructured loans. This absolves the banks from any accountability.
    If the Finance Ministry is interested in tracing where the capital is leaking out to and or in estimating the extent of rot in PSBs, it should investigate CDRs on priority. It will discover that CDR allows for artificially favourable asset classifications in the accounts admitted under CDR, which are otherwise bad loans.
    This misreporting through falsely favourable artificial asset classification, without making the CDR cell accountable, has encouraged banks to push their massive bad loans into CDR. This has severely compromised the basic reason for which the CDR cell was established.
    How widespread is the menace? A typical public sector bank has around 35% of its advances to large and mid-size corporates. Surprisingly, a large portion of this part of the credit book is being referred to CDR, which involves loans where for a two-year period there has been no income, then fresh loans are granted at a concessional pricing at 11%-12% p.a.
    This portfolio gives returns, which are far lower than the risk-adjusted cost of capital of most banks. How much are banks giving up on their income under this dubious RBI-managed restructuring process? Unfortunately, bank-wise restructured portfolio data is not available in the public domain.
    But those who have been involved with CDR say that “about 60% of loans to large and mid-sized corporates have been/are being restructured either bilaterally or under the CDR scheme. Thus, around 21% (60% of 35% of total loan book) of an otherwise high returns loan book is giving returns which reduces the value of business, i.e. gives a return which is lower than the cost of capital.”
    Remember, agricultural loans contribute 18% of the loan book and are also lent at concessional rates, hence earn returns that are lower than the cost of capital. Therefore, adding the restructured loans (21%) and agricultural loans (18%), nearly 38% of the total loan book provides lower returns than the cost of capital.
    While agricultural loans are a part of priority sector obligation, their proportion of the restructured loan book is ever increasing and at times even difficult to predict, as banks rush to use CDR as a means for hiding and kicking bad loans down the road.
    Unfortunately, unless someone from the Modi government steps in and starts asking tough questions, this burgeoning restructured portfolio is likely to come in the way of sensible banking and monetary policy.
    Interestingly, senior RBI officials have often mentioned that banks are indulging in evergreening of loans, (according to former Deputy Governor Dr KC Chakrabarty) as well as “putting lipstick to pigs” (according to Governor Dr. Raghuram Rajan) i.e. they are restructuring loans which really are not viable. But nobody seems to be bothered that this evergreening and beautification is happening right inside the RBI's CDR cell!

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