Forensic audit of CDR cases is a good idea
Going by the large number of loan recasts over the last few years—R2.8 lakh crore since FY11—it is clear that there is more to the problem than merely a downturn in the economy. There is little doubt this would have hit companies, especially the smaller ones, since customers, including government agencies, tend to hold back payments in a slowdown. Many of the mid-sized and larger firms, similarly, would have been hit not just by slowing sales locally, but also the sharp deterioration in the exports market—more so in the case of projects specifically set up to cater to the booming market in countries like China. Also, in the case of several power plants, the maths clearly went wrong due to either non-availability of coal or, equally important, the refusal of electricity regulators to raise tariffs to take into account rising electricity purchase costs. With the benefit of hindsight, however, the targets also come across as very ambitious, a factor that banks should have taken closer note of while appraising the loan proposals. While it is, no doubt, hard to predict turns in commodity cycles, and forecasting the extent of the turn is even harder, banks needed to have ensured they had enough of a cushion in the collateral that they asked for. As the economy gets back on its feet and banks look ahead to a pick up in the credit cycle, after a couple of dull years, they must approach the business far more cautiously; it is probably better not to lend than to create an exposure to a promoter without the right credentials and a robust business model.
Indeed, bankers know best how painfully difficult it is to recover money from those who have no intention of paying back; they are
also aware of how intractable the country’s legal system is and how skilfully errant promoters are able to dodge it. At least two large banks have special units that spearhead the recovery of bad debts. In a recent instance, after trying to recover around R4,200 crore from a company and conducting a forensic audit, banks have decided to file a complaint with the CBI alleging cheating and misappropriation of funds. While it would be wholly inappropriate to paint all borrowers with the same brush, it makes sense for banks to conduct forensic audits for companies where it believes everything may not be kosher. While the Corporate Debt Restructuring (CDR) cell may want to have such audits done for all cases that are brought before it, banks for their part should perhaps initiate them for companies where they have even the smallest reason to believe everything may not be above board. Ushering in a culture of scrutiny and investigation cannot hurt and can act as a deterrent. To make the process more effective though, the courts need to act quickly.