OUR BANKS: THE BIGGEST PONZI SCHEME IN TOWN
Published: Jan 11, 2021
By V Ranganathan
THE buck stops with us as savers and taxpayers when we read that the amounts looted from our banks on various guise is almost equal to the revenue receipts projected in the 2020 union budget. A business magnate whose morning gruel is presently paid for by his better half as he has declared himself bankrupt is the likely candidate to enter the World records for managing to cause between his three businesses of telecom, finance and infra a hole of roughly Rs.3 lac crore to the lenders.
To put it in perspective, according to www.integritas.org, the top three looters of all times Mohammed Suharto (Indonesia 1969-98), Ferdinand Marcos (Philippines 1965-86) & Mobutu Sese Seko (Zaire) could manage at the higher end of the estimate only USD 50 billion cumulatively and over many years! While the government may claim that it has plans to recapitalise the banks (mostly by passing accounting entries), that figure is still only 15% or so of the total loss. The rest needs to be supplied from the future savings of all of us. Thus it is a PONZI scheme. The government at a minimum shall disclose year wise and bank wise disbursement of loans to all defaulters in excess of say Rs.1000cr. I am yet to come across the suspension of even a sole officer in RBI or SEBI for oversight failure! How can the regulators be running a perfect ship when what they regulate has come so short on governance?
WANTED URGENTLY! A NEW REGULATOR FOR OUR SAVINGS
Three of the critical limbs of savings in India is deposits in bank and finance companies; investment in mutual funds, and life insurance investments.
Bank and financial companies are regulated by the RBI, mutual funds by the SEBI and life insurance by the IRDA. The role the regulators play in creating confidence in the supervisory and monitoring capability is key for the public to embrace these modes of savings. Unfortunately the recent record has been very patchy and far from inspiring confidence. The major part of the problem rests with the way RBI has been repeatedly caught napping with regard to bank and NBFC failures. The immediate aftermath of liberalisation in 1990s saw a mushrooming of NBFCs which was aided by liberal tax breaks for asset financing in the form of investment allowance and high levels of depreciation.
While some of the tax reliefs even preceded the 1990s, the fever spread like a virus in the post liberalisation period. Many companies which easily accessed public deposits with high interest payment and other liberal incentives started to indiscriminately lend to very vulnerable sectors like film industry and resorted to questionable accounting practices to show artificially high book profits and earning per share. Aided by a very lax market vigilance, funds were raised from the market at high premiums. It was only a matter of time and the house of cards came tumbling down and many a famous name like the Tata and ITC to name just two, and some of the big regional names had to fold up in different ways. Hardly a handful of NBFCs which were in operation thirty years back have survived till date thereby registering a mortality rate even unsurpassed by Covid 19!
This carnage came largely at the cost of gullible public investors and the complicit public sector banks which lent with little regard to the inherent merit of the business practices followed by the companies. The RBI was at all times chasing the tail and trying to close the stables after the horses had bolted out. The other key actor in all these was the auditors who had little insights into the sustainability and solvency of the business but mostly went by the apparent appeal of the book figures.
The effervescence passed off and lessons were learnt but only for a brief period.
Faulty lending practices and poor accounting and oversight continued to dog the financial service industry and periodic defaults and loss to public became an accepted norm. The regulatory reprisal of adding more layers to the regulation only seemed to cost the compliant ones in added management time but did little to stop the unscrupulous.
After some hiatus and apparent quiet, ILFS tumbled down with a thud surprising everyone as it had the credentials of a highly professional company with pedigreed institutional shareholders and an outstanding board of independent directors of high sounding names of retired bureaucrats and public personalities.
Above all, the top credit rating agencies had consistently given its securities the best rating. Did ILFS fail for any completely new and unknown business problem? Apparently no! The malaise is the tried and trusted formula of well-cooked books, large dollops of bank and institutional funding and untrammelled diversion of money for pet projects most likely patronised by political heavy weights. The only nuance introduced in the game is the web of more than three hundred companies helping to drop a veneer of gravitas to the structure and aiding the auditors to come up with the most innovative ideas to hide the problems.
Did this all require the super computing power of a big blue to detect? A simple spreadsheet could have done the trick except that nobody spread it! Following suit, have been the unravelling of the Wadhawan family company of DHFL with a 1 lac crore book size and the Reliance Capital conglomerate of various companies with a total liability book of almost RS 90000cr. DHFL has significant public deposits and secured debentures issued to public. Its liability side dwarfs many a private bank in size. The consistent window dressing of the accounts by both the entities is something that could have been most easily detected if a careful pair of eyes had seen the books. The cases are characterised by lending to related parties of highly questionable credentials and dummy entities created specifically to siphon out funds. The auditors and the RBI supervisors stand dismally discredited for having failed to notice these transactions that have been going on for a while.
Keeping the news wires charged has been the case of YES bank, PMC bank and lately Lakshmi Vilas Bank. The rest of the scandals involving bad loans of public sector banks like PNB and most recently the consortium lead by Canara bank (Transstroy), SBI (IVRCL) and Indian Bank (Cethar Vessels) are not detailed out as they have been covered in the media descriptively. Whenever the history of the RBI is written for this period, the string of pearls will have all these names and the ones like ICICI Bank where there have been governance issues which the independent directors failed to call out, and the bail out of IDBI bank by LIC. At this juncture, the intent to expose banking sector to large corporate houses as recommended by a internal think tank of RBI is like a yacht unfurling its sail to set out on a pleasure trip when the cyclone warning signal 6 has been hoisted!!
SEBI' supervisory lapses have often come up for criticism but the one that accounts for the Rs.30000 cr worth of investments of more than 3 lac investors in various schemes of Franklin Templeton Mutual fund to yet unquantified erosion and possible loss and delay in recovery characterises its very nadir. This is a case where the regulator not only failed to exercise reasonable vigil and verify the monthly data sheet that had tell-tale signs of the coming problem, but failed to get alerted when the trustees actually approached it for relaxation in borrowing limits for settling accelerating redemptions. While the Hon'ble Karnataka High court has pulled up SEBI for its laxity, it will be a yet another case where the generalised comments evaporate with limited public memory and the bureaucrats who failed to do their jobs go completely unpunished. All these cases of the appointed government agencies failing to secure common investors' investments into what is normally considered safe avenues has actually caused deep dismay and forced even conservative investors to expose themselves to equity markets where at least theoretically there exists a higher payback for the given amount of risk. The more worrying aspect is the continuing attraction of Ponzi schemes as an offset for poor and uncertain return in regulated spheres of investment, like the one reported recently involving more than Rs. 4000cr in AP.
There is an acutely felt need to have a common super regulator to oversee all businesses that access the common man' savings. The most critical aspect in investments in fixed income products is the expectation of the safety of principal. In this regard, the RBI has been most inconsistent in the way fixed income securities have been treated in YES bank and in LVB as well as the raw deal to PMC bank depositors which was recently criticised by the Hon'ble Delhi High court. Worse is the apathy shown to the investors of DHFL and Reliance Capital who have been left to the trial of a very infantile process of insolvency resolution.
Apparently mutual fund investments operate under the caveat emptor principle and the three lac investors of FT have to bear the burden of SEBI' failure. If bank deposits up to Rs.five lac is insured so shall be any other non-equity investment. The issuer shall bear the cost of insurance which gets indirectly priced in the return. The regulator shall be the appointer of the credit rating agency to rate the instrument and pay the agency. The bank, NBFC, MF and insurance company shall pay an annual fee computed as a percentage of the public borrowings effected or on any other equitable basis to fund these costs. Ideally, the appointment of statutory auditor and an agency to periodically do a special forensic audit shall be by the regulator. The structure of the board and composition and appointment of independent directors shall be carried out as a part of the regulatory oversight. The regulator with only this responsibility to licence and manage these specific institutions will acquire deep specialisation to inspect the books and exercise vigil with the help of artificial intelligence and cutting edge technology. The entire band of executives manning this should be outside the administrative service and ideally have accountancy and business intelligence qualifications. This would be a major overhaul necessary before new players enter any of these businesses. The case for a common regulator would become obvious as banks, NBFC, life insurance and AMC business are in many cases part of a common management or a business group. All the entities may have common source of funding and lend to same or connected borrowers. Unless the cluster, as such, is monitored for risk and exposure, the picture shall be incomplete and fragmented.
As the economy limps back post the pandemic, re-engineering the savings and investments architecture will act as a major fillip to build savers' confidence.
[The author is Former Director, Tax, E&Y Chennai and the views expressed are strictly personal.]
