As seen on The Economic Times
Bad loans are piling up in Indian banks, mainly driven by loans taken by infrastructure and mining sector companies whose projects are stalled or faltering, according to a new report released today by the Rights and Resources Initiative (RRI). By December 2014, total bad loans, called non-performing assets, of listed banks had reached a staggering Rs.4.85 lakh cr. This is nearly 14 percent of total loans given by all banks and equals the total net worth of the sector.
The growing financial risk, the report says, is not because of delays in environmental clearances and land acquisition as commonly thought. Rather, it is because of lax regulation at both the clearance level and the credit giving agency level. According to the Centre for Science & Environment (CSE), between 2007 and 2014 “almost all environmental clearance applications were cleared” while “94 percent of proposals seeking forest clearance were approved”.
“Getting clearances and credit has become too easy and there are no objective parameters to assess economic, social and environmental sustainability of proposed projects,” Shankar Gopalakrishnan, author of the report told TOI.
“This has led to huge over-leveraging. Companies have as much as 90% of debt equity ratio, that is, there loans are nearly as much as they are worth. That’s a very risky situation not just for the company but for people because it’s their money that the banks are lending,” he explained.
Infrastructure, iron and steel, mining, textiles and aviation had 52% of total stressed advances (NPAs and restructured loans) of all scheduled banks, according to Reserve Bank’s Fiscal Stability Report of December 2014. Within infrastructure, electricity, oil and gas constituted around 58%, transport 21% and telecommunications around 10%.
India’s regulatory framework for natural resources – minerals, land, forests and environment – is “unpredictable, arbitrary and irrational” the RRI report says. Projects are sanctioned on a case to case basis without reference to the larger picture, final decisions are in the hands of a small group of bureaucrats, there is no transparency and accountability, regulators have little access to objective information and the impact on people is very cursorily assessed.
In a similar analysis of the financial regulatory system, the RRI report says that the RBI does not regulate due diligence by banks beyond forbidding loans purely for land acquisition. There is no explicit requirement from SEBI to disclose regulatory compliance or the status of clearances, the report says.
Don’t banks check whether the loan seekers have got all clearances? A senior officer of a major public sector bank told TOI on condition of anonymity that although theoretically everything should be final before the loan disbursement starts, in practice, initial disbursement starts even as the regulatory approvals or land acquisition process is continuing. “This happens because the promoters usually convince the lead bank at the highest level that everything is on course,” he said.
The consequences of this lending spree are cronyism, fixing and regulatory arbitrage, the RRI report says. A CAG audit of land acquisition in Odisha found that the State Industrial Development Corporation illegally permitted companies to mortgage 46,533 acres of publicly acquired land. It was found that out of 89 memoranda of understanding signed by the State government only two had started production. A similar audit in Rajasthan had found that only 30% of over 72,000 acres land that was acquired was actually being used. Another audit of SEZs revealed that 11 developers in four states had raised Rs.63 lakh cr by mortgaging their SEZ lands, 35 percent of which was diverted to non-SEZ purposes. In Chhattisgarh, an ET report had revealed that just 15 out of 60 private power projects were ever going to start. Most companies were looking for buyers of land.
The RRI report suggests that due diligence by financial regulators needs to be strengthened, and it must include evidence of consent from affected communities to prevent growing social conflict. Also, all financial institutions must have ombudsmen to respond to complaints of fraudulent projects.
Original article – Bad loans hit banks as infrastructure projects falter