The Raghuram Rajan challenge: Why the RBI cannot go on acting like Gandhi’s three monkeys

The central bank has been using labels to create an illusion when in truth there is more than Rs 8 lakh crore of likely bad debt.

IVRCL is the company responsible for the March 31 collapse of the Vivekananda Road flyover in Kolkata that killed 26 people and injured more than 90 others. But it’s the company's owners, the public sector banks, who will have to take the blame and the resultant losses. Less than six months ago, the banks took a 51% stake in this company to square off its debt. The label given by Reserve Bank of India to this suicidal decision is Strategic Debt Restructuring. The country’s central bank claims it permits such deals but does not monitor them.

If you owe the bank Rs 5,000 or Rs 5 crore and fail to pay up, the bank will pursue you and make every effort to recover its money. But if you owe the bank Rs 5,000 crore, it will look at the unfavourable market conditions or whether you made a bad business decision, and use of one of the fancy labels offered by RBI so that it does not have to be called a bad debt.

Banks are in the business of getting deposits from many customers and then lending it to various borrowers after assessing their projects. If a borrower fails to repay the money, the bank’s primary concern is to ensure its profitability and safeguard the interests of its depositors. Until 1994, this was the prevailing view of the banks and the Reserve Bank of India. A RBI circular dated April 23, 1994 directed all banks to send a report on their defaulters, which it would share with all banks and financial institutions, with the following objectives:

To alert banks and financial institutions (FIs) and to put them on guard against borrowers who have defaulted in their dues to lending institutions.

To make public the names of the borrowers who have defaulted and against whom suits have been filed by banks/FIs.

After this, a paradigm shift took place. In case of large defaults, it was well known that there were complex bureaucratic and political considerations sweetened with corruption. Slowly, the case was made out that when large borrowers fail to repay, the banks must make a business decision about the revival and sustainability of the business. The nation agrees that governments or its institutions are not really suited to take business decisions, but this flawed idea was propagated that when large businesses did badly and defaulted, the banks must take a business decision to revive them.

Swelling numbers

From past experience, the banks and the RBI knew that once a business became a Non Performing Asset, the chances of recovery were rather dim, and hence the defaulting amounts had to be written off in three years so that there would be proper accounting of the bad debts. It is interesting to note that from 1993 to 2009, the NPAs moved between Rs 39,000 crore to Rs 56,000 crore up and down.

In August 2001, a Corporate Debt Restructuring cell was set up. This was a device of labeling NPAs as a CDR, giving more time for repayment and often reducing interest. This would make the financials of public sector banks respectable, since it would not be a NPA. Apart from Rs 3.6 lakh crore as NPA, the total debt labeled as CDR instead of NPA is about Rs 4 lakh crore, out of which only 0.6 lakh crore has been recovered so far. Much of the defaults labeled as CDR are likely to become a NPA. Alarmed at this rise of NPAs, RBI decided to bury its face in the sand like an ostrich in 2014. It stopped asking banks to report their NPAs to it.

In 2015, the RBI realised that despite labeling NPAs as CDR, NPAs had ballooned to over Rs 3.5 lakh crore. A new strategy was devised with a new label: Strategic Debt Restructuring. To avoid calling a default NPA, banks had a choice to call it CDR or SDR. In SDR, banks are expected to take the shares of the defaulting corporates and try and run the business profitably.

The total amounts in SDR are unknown, but there is speculation that it has already crossed the Rs 1 lakh crore-mark. Most of these are with the public sector banks. As a result, Rs 3.6 lakh crore of acknowledged NPAs with Rs 3.4 lakh crore in CDR and more than Rs 1 lakh crore in SDR, will mean more than Rs 8 lakh crore of likely bad debt. More than 90% of this belongs to public sector banks.

Lip service?

The market cap of all the nationalised banks is about Rs 2.7 lakh crore. It appears their bad debts are more than three times their worth. When a NPA is labeled as SDR, equity may be taken up – as in the case of IVRCL – and this will no longer be considered debt.

In a landmark decision on December 16 last year, the Supreme Court ordered RBI to release information about its activities and the banks it is expected to regulate. The apex court had in a well-reasoned order upheld 11 orders of the Central Information Commission (ten of which were given by the writer during his tenure as Central Information Commissioner) asking the following information to be made public:

  1. Investigations and audit reports of banks by RBI
  2. Warnings or Advisory issued to Bank.
  3. Minutes of meetings of governing board and directors
  4. Top defaulters
  5. Grading of banks

Seemingly inspired by this order, Reserve Bank of India governor Raghuram Rajan delivered this New Year’s message to his officers:

It has often been said that India is a weak state. Not only are we accused of not having the administrative capacity of ferreting out wrongdoing, we do not punish the wrong-doer – unless he is small and weak. This belief feeds on itself. No one wants to go after the rich and well-connected wrong-doer, which means they get away with even more.

If we are to have strong sustainable growth, this culture of impunity should stop. Importantly, this does not mean being against riches or business, as some would like to portray, but being against wrongdoing... there is a sense that we do not enforce compliance. Are we allowing regulated entities to get away year after year with poor practices even though these are noted during inspections/scrutinies?

Should we become more intolerant of sloppy practices at regulated entities, so that these do not result in massive scams years later? Should we haul up accountants who do not flag issues they should detect? My sense is that we need a continuing conversation about tightening both detection as well as penalties for non-compliance throughout the hierarchy,

Finally, we are embedded in a changing community. What was OK in the past is no longer all right when the public demands transparency and better governance from public organisations.

Transparency and good governance are ways to protect ourselves from roving enquiries – everyone should recognise that an effective regulator has enemies, and like Caesar’s wife, should be above all suspicion.”

However, barely three months after Rajan’s speech, the RBI appears to have taken U-turn and is now denying information to RTI applicants, including the writer.

RBI's reply on April 7 to Shailesh Gandhi's RTI application.
RBI's reply on April 7 to Shailesh Gandhi's RTI application.

Perhaps the RBI governor has been subjected to certain pressures. Citizens and media must persuade RBI to honour the Supreme Court’s order and understand that opacity will lead to these banks entering disastrous territory, which will affect the entire nation. The Kingfisher default is only about 1% of the total and we need to wake up and heed the Supreme Court’s judgment for the Reserve Bank of India to be transparent. We have no idea how bad the situation is and the RBI, which is charged with this responsibility, is acting like Gandhi’s three monkeys. This is not healthy for the nation. Illusions and delusions are fine for magic shows, but not for the nation.

Shailesh Gandhi is a Right To Information activist and former Central Information Commissioner.

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Behind the garb of wealth and success, white collar criminals are hiding in plain sight

Understanding the forces that motivate leaders to become fraudsters.

Most con artists are very easy to like; the ones that belong to the corporate society, even more so. The Jordan Belforts of the world are confident, sharp and can smooth-talk their way into convincing people to bend at their will. For years, Harshad Mehta, a practiced con-artist, employed all-of-the-above to earn the sobriquet “big bull” on Dalaal Street. In 1992, the stockbroker used the pump and dump technique, explained later, to falsely inflate the Sensex from 1,194 points to 4,467. It was only after the scam that journalist Sucheta Dalal, acting on a tip-off, broke the story exposing how he fraudulently dipped into the banking system to finance a boom that manipulated the stock market.


In her book ‘The confidence game’, Maria Konnikova observes that con artists are expert storytellers - “When a story is plausible, we often assume it’s true.” Harshad Mehta’s story was an endearing rags-to-riches tale in which an insurance agent turned stockbroker flourished based on his skill and knowledge of the market. For years, he gave hope to marketmen that they too could one day live in a 15,000 sq.ft. posh apartment with a swimming pool in upmarket Worli.

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Call it greed, addiction or smarts, the 1992 and 2001 Securities Scams, for the first time, revealed the magnitude of white collar crimes in India. To fill the gaps exposed through these scams, the Securities Laws Act 1995 widened SEBI’s jurisdiction and allowed it to regulate depositories, FIIs, venture capital funds and credit-rating agencies. SEBI further received greater autonomy to penalise capital market violations with a fine of Rs 10 lakhs.

Despite an empowered regulatory body, the next white-collar crime struck India’s capital market with a massive blow. In a confession letter, Ramalinga Raju, ex-chairman of Satyam Computers convicted of criminal conspiracy and financial fraud, disclosed that Satyam’s balance sheets were cooked up to show an excess of revenues amounting to Rs. 7,000 crore. This accounting fraud allowed the chairman to keep the share prices of the company high. The deception, once revealed to unsuspecting board members and shareholders, made the company’s stock prices crash, with the investors losing as much as Rs. 14,000 crores. The crash of India’s fourth largest software services company is often likened to the bankruptcy of Enron - both companies achieved dizzying heights but collapsed to the ground taking their shareholders with them. Ramalinga Raju wrote in his letter “it was like riding a tiger, not knowing how to get off without being eaten”, implying that even after the realisation of consequences of the crime, it was impossible for him to rectify it.

It is theorised that white-collar crimes like these are highly rationalised. The motivation for the crime can be linked to the strain theory developed by Robert K Merton who stated that society puts pressure on individuals to achieve socially accepted goals (the importance of money, social status etc.). Not having the means to achieve those goals leads individuals to commit crimes.

Take the case of the executive who spent nine years in McKinsey as managing director and thereafter on the corporate and non-profit boards of Goldman Sachs, Procter & Gamble, American Airlines, and Harvard Business School. Rajat Gupta was a figure of success. Furthermore, his commitment to philanthropy added an additional layer of credibility to his image. He created the American India Foundation which brought in millions of dollars in philanthropic contributions from NRIs to development programs across the country. Rajat Gupta’s descent started during the investigation on Raj Rajaratnam, a Sri-Lankan hedge fund manager accused of insider trading. Convicted for leaking confidential information about Warren Buffet’s sizeable investment plans for Goldman Sachs to Raj Rajaratnam, Rajat Gupta was found guilty of conspiracy and three counts of securities fraud. Safe to say, Mr. Gupta’s philanthropic work did not sway the jury.


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