Financial Times reported on its front page on Friday that Indian billionaire Ravi Ruia has bought a £113-million mansion in London’s Regent’s Park. It wrote the purchase was an “off-market deal that underlines the continuing secrecy around the sales of the most expensive homes”. A few years ago, the Ruia family had claimed it didn’t have the money to pay back its Rs 45,000 crore of loans to banks. It is only when it realised that the courts meant business and that the corporate insolvency resolution process could take away Essar Steel and hand it over to new promoters, the family suddenly discovered that it has the resources to cough up the dues. It was not the first time a Ruia business was in trouble and bankers were at the receiving end. But the bankers never seemed to learn from their mistakes.
It’s not just the Ruias. The list of wilful defaulters in the country is as long as the toll on the taxpayer is high. By a very conservative estimate, some Rs 30 trillion has been lost by lenders to the country’s so-called entrepreneurial spirit. That’s the sum of the country’s fiscal deficits for about five years. Of course, not all of this has been the result of fraud, but one could safely assume a big chunk of it is.
And that is why, Mr Kotak, contrary to what you written in your recent shareholder letter, over-regulation in India isn’t necessarily a bad thing. Indeed, had former Reserve Bank of India (RBI) Governor Raghuram Rajan not decided to take the bull by the horns and initiate the AQR (Asset Quality Review) and had former finance minister Arun Jaitley not pushed through the Insolvency and Bankruptcy Code (IBC), the situation would have been very different from what it is now. The RBI—until Mr Rajan arrived on the scene—have been too lenient and lax. The rules that allowed lenders to allocate a big chunk—as much as 25% to one conglomerate or group of companies—were most ill-thought out. And the RBI had justified them, saying it was important to encourage businesses. The supervision and inspection department of the RBI failed to prevent any of the bank collapses, Yes Bank being the biggest of them. Those at the helm of the RBI at that time needed to be asked how they failed so abysmally to spot the malpractices, fraud and the constant ever-greening of loans.
Mr Kotak, you believe that the financial sector players risk becoming more robotic, curbing the entrepreneurial flair since the fear of making a mistake overrides the joy of creation and development. You are probably right to some extent—bankers today are undoubtedly risk-averse, particularly when it comes to corporate loans where the biggest losses have been suffered. That’s partly because they fear punishment at the hands of the 3Cs.
It isn’t a fact that loans are not being given out; it is simply that home loans are a much safer bet because the collateral is good. Bankers have found to their dismay that the so-called first or pari passu charge on fixed assets is worth little because by the time the mess is sorted out, the assets have lost most of their value. And personal guarantees are simply not enforceable. In fact, loans to the MSME sector have been growing at a reasonably good pace.
While banks must certainly watch for risks, something at which they have failed miserably, the fact is that too many promoters are looking to exploit loopholes. The “entrepreneurial flair” unfortunately often turns to entrepreneurial fraud, as we are seeing in the start-up space. Despite having access to loads of free capital and generous investors, promoters are succumbing to greed. Despite little interference from their investors, many are simply not able to run their businesses profitably.
Mr Kotak, you may have headed Sebi’s corporate governance committee but only a few have embraced corporate governance. How many of our independent directors are really independent? A study by IIAS early in 2022 showed compensation levels at companies were rising even as disclosures were deteriorating. Nomination and remuneration committees, the study noted, were unable to build tangible contours for compensation. In another study, IIAS found that while most related party transactions remain largely operational, these did put the spotlight on how often promoter-controlled entities do business with listed companies. A more stringent corporate governance test saw fewer companies scoring well in 2022 than in 2021; the median score was unchanged.
To be sure, where there is lending, there will be non-performing assets as lending is all about risk. But the magnitude of malfeasance has been simply too high for a poor country like India. Many of the promoters have gotten away scot free with barely a handful having been brought to book.
You have rightly said, Mr Kotak, that accidents have to be minimised and managed and cannot be eliminated without having a significant impact on growth aspirations. But, unfortunately, aspiration and attitude are running way ahead of aptitude. The fact is that HDFC Bank has become what it is today by lending a lot less to companies than others; it saw the risks of corporate loans for what they were. Certainly, there is a need to build regulatory trust, which requires action on both sides of the aisle. But before that can become a reality, we need a strong judicial framework—not one that lets errant promoters continue to prosper while the nation becomes poorer. And we need better protection for our bankers so that they are not harassed years after they have retired. We also need strong credit rating agencies.
Most of all the mindset of our entrepreneurs needs to change. Mr Kotak, you have built a tremendous business and are a role model, but unfortunately there are barely a dozen entrepreneurs like you in India today.
shobhana.subramanian
@guest