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Blame promoters, not FM Nirmala Sitharaman

Shobhana Subramanian
FM, Nirmala Sitharaman, ban on e-cigarettes, e cigarettes, NCLT, RBI, Raghuram Rajan, HDFC Bank, Aditya Puri

Kiran Mazumdar Shaw wonders why FM Nirmala Sitharaman, and not the health minister, announced the ban on e-cigarettes. Shaw tweeted: "How about MoF announcing some fiscal measures to revive the economy?" Ms Shaw needs to temper her demands. There is no doubt the economy is slowing sharply, and that job losses are large. It is also true that the government could have made some meaningful policy changes in several areas-agriculture or labour, for instance.

But, before India Inc starts blaming the government for all its woes, and demanding fiscal stimulus as though it is a birthright, it should introspect a little. Let us not forget that India's banks have lost a staggering Rs 12 lakh crore or more by way of bad loans in the past few years. And, it is corporate India-in cahoots with the banks-that is responsible for this colossal destruction of wealth. For sure, some of the money may have been lost because of genuine reasons-lack of fuel linkages for projects, abrupt changes in the regulations, or a reversal in the business cycle. But, a substantial part of the money lost, it would appear, is a result of mismanagement, and misappropriation. How does one explain defaults of Rs 30,000 crore by Alok Industries, or of Rs 40,000 crore by Essar Steel?

The IBC process has seen banks take haircuts of 60%, 70%, even 80%. The rating agencies appear to have been batting for the companies, and kept us in the dark for years. Suddenly, there is a spate of downgrades, as though the deterioration in the P&L accounts happened overnight. As for the auditors, the less said the better; until the rules were changed, they stayed on endlessly with firms. Now, suddenly they all want to resign.

Today, one can't count more than a dozen business houses in the country that have integrity; going by the daily revelations, most have either been siphoning off money, possibly using political influence. In some instances, even after it has become evident that a company is bankrupt, the banks have not been able to refer it to the NCLT. As former RBI Governor Raghuram Rajan said, the sanctity of the debt contract had been eroded, and borrowers had become "freeloaders".

The nexus between NBFCs, companies, and mutual funds-which has allowed promoters to borrow beyond permissible limits by parking equity stakes, without even informing the investors-should have been ended years ago. How can NBFCs ask RBI for a line of credit? Who asked these promoters to create asset-liability mismatches?

Unfortunately, this is all taxpayer money that has been lost, and at the end of what is probably the biggest daylight robbery in history, barely a handful of errant promoters is in jail, or even under investigation. Had the Rs 12 lakh crore not been lost, the PSU banks would have been better capitalised.

Every banker in this country needs to be like Aditya Puri. The CEO and MD at HDFC Bank typically stays away from large corporate borrowers-the lender has virtually no exposure to the defaulting companies. And, where it does, the bank is ready to take action if the borrower misbehaves. No pampering. In contrast, the state-owned lenders, at times under pressure from the political class, lent rashly, without worrying about any semblance of prudence. RBI, too, did not tighten the prudential regulations and keep a closer watch on bank's balance sheets when it should have, and neither did any Governor before Rajan call for asset quality review.

So, the evergreening of bad loans went on for years, and the businessmen benefited big time. On many occasions, we are told, promoters did not even contribute to the equity of a project; this contribution was made from the project cost. For all practical purposes, the 70:30 rule existed only on paper; the lenders were funding 100% of the project. If, by mistake, the promoter did put in the equity from his own resources, he made sure he took it back from the company. And, today, companies are so levered that we have a serious twin balance sheet problem. If real estate companies are saddled with four lakh units of inventory, the fault is entirely theirs, not the government's.

Unscrupulous developers bought land at outrageous costs, encouraged investors to bet on rising prices, and pre-sold apartments at inflated rates. And, cheated lakhs of home-buyers. Players like Unitech, and Jaypee Group have not completed projects. In any other country, these projects would have been taken away from the builders long ago.

Indian businessmen complain that they work under difficult conditions-poor infrastructure, high interest rates, red tape, etc. All that is true. But, nowhere else do you get free equity capital, and loans that do not need to be repaid. It happens only in India. Ms Shaw, everyone is concerned about the economy. One only wishes you would request your businessmen friends to repay their loans. If they do that, the country will be forever indebted to them.