Unhindered loot of public finances

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Unhindered loot of public finances

Monday, 08 October 2018 | Shivaji Sarkar

Unhindered loot of public finances

India today is living through moments of severe extortion. The poor man’s deposits have become an easy target. Culprits range from banks to various financial institutions to auditors and rating agencies. Citizens need to be alert

Crisis in the Infrastructure Leasing & Financial Services (IL&FS) has sent India into a panic mode. While it may or may not be a Lehman moment for the Indian economy but the debt crisis has certainly raised questions about how our society has been mismanaging its finances. As projected in the media, the Government has already accepted it as a serious moment but not a scam.

It is also a fact that people’s deposits in banks and other financial institutions, like Life Insurance Corporation (LIC), even in mutual funds, are at risk. It is also a wonder that for 31 years, nobody noticed that loans being granted to IL&FS were on a mere guarantee on a piece of paper without any security.

Even now, but for the sudden severe stock market crash and Small Industries Development Bank of India’s (SIDBI) approach to the insolvency court to recover dues and IL&FS filing of a petition before the National Company Law Tribunal for protection from creditors, the entire episode could have remained under garbs.

No wonder, the company was downgraded to a rating of D — deep in ‘junk territory’ from its default grade of AAA that indicated higher levels of credit worthiness. The surprise is: How did the firm manage to have super AAA rating for so long?

Are the monitoring systems, including that of the Reserve Bank of India, so weak? Or is there a deliberate apathy and the system is being milched by unscrupulous elements who are aware of the loopholes? This means that our experts, like their Western counterparts, who allowed the world to plunge into the Lehman crisis, are equally naïve or are very negligent. Possibly, it also means that more difficult situations may knock the doors as the State Bank of India (SBI) and LIC are being told to fill the hole.

The IL&FS is a strange creature. It is dubbed as private entity, but is fully dependent on finances from public bodies, like LIC, Central Bank of India and mutual funds, including that of SBI and pension funds like HDFC, India Discovery Fund, Japan’s Orix and Abu Dhabi Investment Authority. Today, all of these entities are in crisis. This means that people’s hard earned money is being liquidated by defaulters like Nirav Modi and Vijay Mallya and the nation remains a mute spectator.

Fund flows from various foreign companies, too, may remain affected. The country’s finance management since the 1991 globalisation is in a mess. The situation has aggravated all the more than being resolved. This calls for a study as to why during 1947-1991, public financial institutions or banks rarely had such dark moments, despite low Gross Domestic Product growth. The silver line was its high savings and internationally acclaimed secure system.

Let the nation not forget that the country is indeed passing through a dark moment as another private bank, ICICI, manipulated by its Chief Executive Officer, Chanda Kochar and her family, is facing probe on account of irregularities in granting loans. Much of that is also not public knowledge. More than a Lehman, possibly, IL&FS is a Satyam moment, where accounts were covered up, if not fudged.

The sum is that banks are having over Rs 12 lakh crore non-performing assets (NPAs) and a high portfolio of unsecured loans, both private and Government entities. In fact, nomenclature may differ but all are dealing with the poor man’s money, euphemistically called the middle class — a group that is just at the poverty line. A mistake anywhere can lead them to an abyss.

It also means that across the political spectrum either nobody understands the intricacy of securing public deposits or they are a part of the mess.

Else, how would a Rs 91,000 crore debt pile up with IL&FS in 2017-18? There is another five billion dollar of such pile up with its 169 subsidiaries. It may be the case that this is not a scam, but how come the most of it has been lost in road construction and not in a year but almost over two decades?

Lending to infrastructure companies, in short the National Highway Authority (NHAI) contractors, were to be recovered through tolls. Where has the toll collection at super high rates gone? The NHAI in various statements has averred that not more than one-third of the collections were being paid to it. This raises a serious question: Who gobbled up the toll money which has caused an all-round inflation?

Questions also arise as to why at all people are being fleeced at toll gates despite high petrol cess of eight rupee per litre that is being paid by even non-highway users? The nation was given to understand that cess would replace the tolls. This means mess is possibly at every step — from cess to toll collection to high credit being given to infrastructure companies to their non-repayment.

India is living moments of severe extortions of people’s deposits. Earlier, it was supposed to be restricted to banks. Now, it is even the Non-Banking Financial Companies (NBFC), like IL&FS, which have stepped in to fill the banking sector void. They succeeded in growing fast and grabbed a lot of market share.

But now, with IL&FS defaulting, investors will be reluctant to lend to NBFCs. This will increase cost of borrowing and impact their profitability. Corporates, too, will find it difficult to raise money from NBFCs.

That the entire financial system is in a crisis is evident from the way SBI and other banks halved the levels of ATM withdrawals from Rs 40,000 to Rs 20,000, post the IL&FS crisis. The banking system is having a severe cash crunch. The only hope is that they do not go “cashless” as the West had seen during the Lehman moment.

The Government itself has hinted at it. It alleged that the debt-laden IL&FS suffered due to “mismanagement and misgovernance”.  Neither a change of guard, as effected by the Government, nor any finance body will solve the problem. Repeated mismanagements, if not scandals, point to a grim situation.

The country has not learnt. Former US President Barack Obama’s chief of staff Rahm Emanuel had said, “Never waste a crisis”. The IL&FS has exposed several fault lines. The 2008 Lehman crisis also started with over-leveraging by shadow banks like NBFC. This exposes the fault lines at the RBI, where the IL&FS is registered. The nation has to think twice now before trusting the regulator.

Rating agencies registered with the Securities and Exchange Board of India (SEBI) too have failed. Fees to rating agencies are paid by the rated. Giving a generous rating has incentives for the rating companies. The reality is: Rating is advertising and people need to treat these as scraps. Was SEBI not aware of it? The company auditors also either were too incompetent to read the books or they did it deliberately. But they are guilty of breaching public trust.

The nation needs to be aware that such unethical fault lines erode the entire finance system. Is that the difference that the nation had before 1991 and after?

(The writer is a senior journalist)

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