Ghost in the Cash Machine

Arun Kumar  Aug 11 2014 : The Economic Times (Bangalore)   The Syndicate Bank incident demands a transparent loan -clearance mechanism in place Is the bribery charge against the Syndicate Bank chairman  and managing director Sudhir Kumar Jain a trailer of what's  in store for perceived standard operating procedure at state -owned banks that are vulnerable to pressure from political  bosses? Or is it a one-off incident? Investment revival in the Indian economy in the short run rides  on the answer to that question. If Jain's arrest leads to a  freeze in lending or loan-restructuring decisions across banks,  projects will remain stalled.Which first-generation promoter in  India has deep-enough  pockets to bring in the equity needed for any large project?  It is common practice to mobilise the promoter's equity contribution also from the loan raised from the bank for the project by inflating the project cost. If the promoters are honest, the gold-plating is 30%. A project actually worth ` . 100 crore would be implemented for ` . 130 crore and banks give a`. 90-crore loan from which the promoters take out ` . 40 crore to bring the amount back as their equity contribution. And this is probably the bestcase scenario. In some cases, this gold plating goes up 50%. And bankers are kept in the loop, obviously for a consideration. Or, at the behest of political masters, across party lines. Such projects are unviable from day one. But the promoters  and bankers work together to defer the impending problem  by delaying the completion of the project to reap two gains.  A company is allowed to capitalise the interest during the construction  period, which means interest payment is part of the project cost.  After commissioning, the project needs to generate enough resources to meet interest obligations, which is often difficult. The longer the period of implementation, the easier it is to take  out the money from the project and convert it as equity. It also  helps in justifying the rise in project cost that further helps the nexus. Once you reach closer to commissioning and the interest meter is  about to start ticking, such promoters start another project. This helps the bank to give a new loan that is diverted to repay the old loan. The cycle continues and the promoters become  bigger and bigger till they become a systemic, multi-billion-dollar  problem. And the bankers involved, having already made crores,  gracefully retire, passing on the headache to the next boss. Why Top-Down Clearance?The majority of Indian banks have a top-down approach to loan  clearance, justified on the grounds of speed and improving market  share. In case a branch manager does not approve the loan, promoters go directly to zonal or regional managers. In case they are reluctant, they go to the general manager, executive director or the chairman-managing director. And every superior justifies the decision on the ground of business  growth but without any transparency or accountability . No wonder  Percy Mistry , who chaired a government panel on financial sector  reforms, chose to call Indian public sector bankers “zombie bankers“. Ban Intermediaries While the Narendra Modi government has banned the entry of corporate lobbyists and liaison agents, financial intermediaries and  chartered accountants facilitating loans flourish in the banking system. “They use their contacts in the corridors of power to raise loans at cheap rates and take a commission of just 2%,“  according to a mid-sized member of the corporate world. What is the role of intermediaries in getting loans from a bank?  Why do bank officials interact with them? Is athird-party structure  used to legalise bribes in the name of commissions? Why not make  the system more transparent for the purpose of internal records? These days, such meetings between bankers and would-be borrowers  could be recorded at an insignificant cost. And everybody should be warned that the proceedings will be on record. Committee Structure Let loan decisions come through a strengthened decision-making pro cess with a committee structure at branch, zonal and headquarter  levels. And everyone should be empowered to give his or her rationale  for supporting or opposing any financing proposal in a time-bound manner. Senior officials are entitled to overrule the decisions of their subordinates.  But they should record detailed justifications. Banks must monitor the implementation of a project regularly and the  end-use of funds. Why not make the branch manager or zonal officer ensure that the money disbursed goes into stated purposes and is not left at the mercy of the promoters? And someone should be held accountable for this before any fresh disbursal of loan is made. Most importantly , there should be a complete ban on executing projects through an in-house company , unless a discount  to third-party executions at an arm's length can be  demonstrated. Finally , let promoters pony up the committed  equity contribution upfront or provide a detailed mechanism  for the purpose, such as how they will raise the equity for  each project and what their backup plan would be in case of any eventuality .