Moving on GST
This refers to your editorial “Jaitley’s GST” (FE, September 14). The suggestion to unify the rates of excise duties and service tax is an oft-repeated one. It emanates from an elementary economic logic. History has it that the central finance ministers have been trying hard, ever since 1991—if not earlier—to remove the deformities of the indirect tax structure; and is it not true that almost each budgetary exercise has boasted of reformative proposals? Curiously, however, the net result, as it exists after tolling for years, is that the structure is still perceived as seriously flawed and condemned as grossly inadequate. The suggestion to equalise the threshold limit for small manufacturers and service providers also has merit. The immediate offshoot, though, implies huge gain to the service providers and disadvantage to the small manufacturers. But, as rightly mentioned in the editorial, it has to be faced sooner or later. The excise tariff also needs to be cleansed by removal of the large number of exemptions. But can the area-based exemptions be removed at this stage is a moot question. The ministry also needs to closely look at the nitty-gritties of the Cenvat credit scheme. Even though it is comprehensive in scope, the irritant of several ‘ifs’
and ‘buts’ have led to phenomenal number of disputes. That said, whether the finance ministry would actually engage in such reforms as a pre-GST exercise is doubtful. They have been waiting for GST and might choose to wait a little more!
Rethink consortium lending
This refers to the report “RBI mulls smaller lenders’ consortia” (FE, September 16). The number of banks will increase because of either of the two following reasons. One, if the applicant is good, many banks (big and small) would be eager to participate in the consortium. Two, if the applicant is not good, the borrower-applicant goes for consortium shopping and persuades other banks to join the consortium. There is a rule that a member of the consortium should take up a minimum 5% share that would limit the number of members to 20. Since big banks take up a share of not less than 40%, the residual is shared among the other members. But consortium lending has become a big tamasha in banking circles. Other members of the consortium, big or small, simply copy the appraisal memorandum prepared by the leader. The leader is chosen on the basis of the share and not on the basis of skill-set and expertise. Even the leader of the consortium prepares the appraisal note based on the contents of the project report submitted by the applicant. There is no independent study of the proposal. All this is due to the lack of lending skills. Promoters have a tendency to jack up the project cost to facilitate their margin-funding. This in effect implies that promoters will not have any stake in the project. No wonder, when big-ticket loans, that are usually lent on a consortium basis, turn bad, promoters have nothing to lose. As for multiple lending, it is worse than consortium lending. Different banks can fund the project independently and the banks over-finance the project. Even the follow-up in consortium lending has many gaping holes. The lead bank along with a few other participating banks follows-up the loan. There is no individual follow-up and the leader’s findings are copied by other members. No wonder, all these factors have contributed to a big pile up of such loans in the category of bad assets.
KV Rao, Bengaluru