SREI case further proof of banks’ laxity, RBI lacking alertness too
The stress in the country’s financial sector is clearly far from over. After the collapse of IL&FS, Yes Bank and Dewan Housing Finance Limited (DHFL) and a couple of others, two NBFCs are now headed to the insolvency courts; on Monday, RBI superseded the boards of SREI Infra Finance and SREI Equipment Finance using the powers it has under Section 45-IE (1) of the RBI Act. Three years after IL&FS caved in, there seem to be intermediaries out there so fragile they could fall anytime
Given the chequered history of NBFCs—hundreds of them have folded up—it is disappointing, even unpardonable, they are not better regulated. In this instance, the banks seem to have lent the two firms a little too much—an exposure of some Rs 28,000 crore—clearly more than warranted. Given how RBI observed its actions had been prompted by concerns of ‘default and governance’, the banks have been caught napping. In a reflection of its capability, a ratings agency rated the debt facilities—including NCDs, etc—D or default grade in March. But banks should not be relying on ratings agencies; they need to be vigilant about their exposures and less casual in their risk assessments. Indeed, the episode reflects the failure both of the regulator and lenders in not spotting the trouble early enough. Given how the asset quality review (AQR) for banks was carried out in the December 2015 quarter—seven years back—the regulator and lenders needed to have been far more alert.
The point is few promoters can be trusted to run their businesses efficiently; the string of frauds and failures, over the last decade, leaves little to be said for the integrity and capability of entrepreneurs. For every success story, there are two flops, and while we tend to berate the public sector, the private sector has not exactly covered itself with glory. Unfortunately, we seem to be apathetic to such failures, moving from one to the next, without worrying about the consequences. To be sure, businesses will go bad, but we seem to be caring less about preventing a collapse. The system is not being strengthened to address potential bankruptcies. GTB went under many decades back and Centurion Bank thereafter but the regulatory mechanism is as weak as ever, the surveillance and oversight hopelessly inadequate. It is not clear what we need to witness before the regulations are made stricter; the taxpayer has already lost some Rs 25-30 lakh crore over the past decade to fraud, wilful defaulters, poor business decisions and reckless lending. RBI and SEBI need to beef up the oversight mechanism and also their legal expertise regardless of the costs; it will any way be less expensive for the country than the loan losses. We need to ensure borrowers respect the loan contract. The Insolvency and Bankruptcy Code has made what was once unthinkable, possible; promoters can be dislodged and their companies sold. However, the resolution of stressed assets has come at a cost, seen in the steep haircuts that banks have taken. We need to make sure the funds loaned to companies are being properly utilised, not wasted or siphoned out. Far too many businesses are closing down. The SREI firms may soon find new owners as DHFL did, but that’s little consolation.