A controversial report

Print edition : January 08, 2000

The report of the Confederation of Indian Industry's Task Force on Non-Performing Assets in the Indian financial system raises a storm of protests and helps to initiate a debate on the issue of industrial houses defaulting on the repayment of ba nk loans.


THE Confederation of Indian Industry (CII), a leading representative of big business, finds itself enmeshed in a controversy following its drastic recommendation that several public sector banks and financial institutions be either closed down or privati sed. The CII's Task Force on Non-Performing Assets (NPAs) in the Indian financial system, chaired by K.V. Kamath, Managing Director and Chief Executive Officer of the ICICI, a leading private financial institution, submitted its report to Union Finance M inister Yashwant Sinha on December 13. The Task Force's recommendations brought the CII, arguably Indian industry's most powerful advocate of economic reforms, into direct conflict with bank employees, represented by their unions.

By bringing into the open the Indian corporate sector's interests in the privatisation of the banking sector, the report threatens to spark off further unrest in the banking industry. Indeed, the threat of a potentially sharp escalation of conflict force d the CII to beat a retreat on December 20. It backtracked on the most important of the Task Force's recommendation, the one advising the closure of three "weak" banks, Indian Bank, United Commercial (UCO) Bank and the United Bank of India (UBI).

Finance Minister Yashwant Sinha receives the CII Task Force's report from ICICI Managing Director and Chief Executive Officer K.V. Kamath, who chaired the Task Force.-RAMESH SHARMA

Bank employees' unions, already agitated over the relatively moderate proposals of the officially constituted committee headed by M.S. Verma (Frontline, November 19, 1999), effectively challenged the Task Force's recommendations. They turned the t ables against industry by arguing that the problem of NPAs, in simple terms, "bad loans", of the public sector banks was fundamentally a creation of big business - through their failure to repay money they had borrowed from the banks over the years. At t he end of 1998-99, the NPAs of the public sector banks totalled over Rs.50,000 crores, indicating the massive drain of public funds from public institutions.

The unions, already under pressure to defend the jobs and wage levels in the banking industry, bitterly attacked the "impropriety" of the Union Finance Ministry in accepting an "unofficial" report of a leading private business lobby in full media glare. The unions alleged that the Government, by officially receiving the report, had provided legitimacy to the view of the powerful industrial houses represented by the CII. They also said that the Government, by failing to announce that no action would be t aken on an unofficial report, had created widespread panic among ordinary depositors. There were reports of deposits being withdrawn from the three banks for which the Task Force recommended closure. Assistant secretary of the All India Bank Employees As sociation (AIBEA) C.H. Venkatachalam told Frontline that the CII had "created confusion and panic among people who had their money in public financial institutions."

The unions alleged that borrowings by corporate defaulters acc-ounted for a substantial portion of these outstandings and asked what right the CII had to recommend the closure of public institutions when the problem was basically a creation of industrial houses, some of them members of the CII. Stung by the sharp reaction, not only from the unions but also from a cross-section of interests, the CII went on the back foot.

Going much farther than the Verma panel's recommendations, the Task Force suggested that the first wave of privatisation should include the Bank of Baroda, Corporation Bank, Oriental Bank of Commerce and the State Bank of India. The next lot of candidate s for privatisation included the Industrial Development Bank of India (IDBI), Industrial Finance and Corporation of India Ltd. (IFCI), the Small Industries Development Bank of India (SIDBI) and the Export-Import Bank of India.

THE CII came under attack from several quarters. The most unexpected was the criticism by the two other leading business organisations, the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Associated Chambers of Commerce and Industr y (ASSOCHAM). FICCI said that the closure of the banks would have an adverse impact on depositors, clients, borrowers and employees. It also pointed out that the extreme option of closure would erode people's confidence in the banking system.

ASSOCHAM went even further. It said that banks' inability to recover dues from borrowers had adversely affected their performance. ASSOCHAM president K.P. Singh said that the closure of banks was a serious issue, which needed to be tackled by "experts". Significantly, there was only one representative of the public sector banks in the Task Force; most of its members were from large private companies. ASSOCHAM also said that concerted attempts should be taken to revive the weak banks. It said that merger s or closures should be resorted to only as the last resort.

In the Lok Sabha, T.M. Selvaganapthy of the All India Anna Dravida Munnetra Kazhagam (AIADMK) made a spirited attack on the CII. He accused some large business houses of not paying their dues to the banks. He alleged that the corporate sector owed Rs. 45 ,000 crores to the public sector banks. Rajesh Pilot of the Congress(I) asked the Government not to turn a blind eye to the financial crimes that were perpetrated in the name of liberalisation.

Chairpersons and senior managers of public sector banks were aggressive in their response to the CII, in marked contrast to the muted response to the Verma panel's official report submitted to the Reserve Bank of India (RBI). The most striking response c ame from the Chairman of Indian Bank, T.S. Raghavan, who had cut himself off from the media after the Verma Committee's report was released. He said that the CII had made "sweeping suggestions" without making any attempt to explore why high levels of NPA s arose in the first place. UBI Chairman Biswajeet Chowdhuri said that he planned to "take up" the Task Force's report with the Union Government and the RBI. He called the report "misleading and unwarranted".

There have also been demands that the Government publish the list of defaulters. Prominent among those who made this demand is former Communist Party of India (Marxist) MP, Dr. Ashok Mitra, who had raised the issue in Rajya Sabha when Manmohan Singh was Union Finance Minister. Bankers have often said that regulations protecting the confidentiality of bank clients provided large-scale defaulters an opportunity to escape public scrutiny. The unions have also repeatedly asked the Reserve Bank of India and the Union Finance Ministry to publish the list of defaulters on a regular basis. The demand for greater transparency about defaulting accounts is based on the premise that there will be greater "moral pressure" on borrowers of public funds.

Taking the lead, the AIBEA released a list of members of the Task Force who, it alleged, were linked to corporate defaulters of bank loans. Although some of the companies in the list denied that they were defaulters, the damage had been done. AIBEA gener al secretary Tarakeswar Chakraborti demanded that the Government publish the list of defaulters.

Biswajeet Chowdhuri also said that there were lacunae in banking legislation which constrained banks' efforts to recover their dues from corporate borrowers. He told Frontline that laws need to be amended, allowing banks to attach the property of defaulters."We (UBI) have taken legal action, adopted methods of persuasion, and even sat down with them for out-of-court settlements." Critics of the CII say that although the Task Force mentioned the "moral hazards" in public sector banks, it has faile d to address the question of large-scale defaults by big industrial houses.

Although the RBI has been publishing data on the amount owed by defaulters, these data only pertain to those accounts on which the banks have filed suits to recover the dues from borrowers. K. Krishnan, secretary of the Tamil Nadu unit of the Bank Employ ees Federation of India (BEFI), told Frontline that the RBI data did not reflect the full extent of the NPA problem in banks. First, unions allege that there is political interference which prevents banks from filing cases against borrowers or de lays the filing of such petitions. Branches of banks have to obtain clearance from their head offices before proceeding against defaulters in the courts. Secondly, borrowers may have several accounts on which borrowings are made; while cases may have be en filed against outstandings against borrowers on some accounts, no action may have been taken to recover outstandings on several other accounts. The RBI data thus seriously understate the magnitude of outstandings of borrowers.

Krishnan said that the RBI had, particularly in recent times, encouraged banks to initiate "compromise settlements" with borrowers. He points out that the outstandings of these clients would not be included in the RBI data. In addition, he said that the outstandings from accounts under investigation by the Central Bureau of Investigation (CBI) did not figure in the RBI data. This was particularly relevant in the case of Indian Bank's outstandings where several large NPA accounts were under investigation , he said. Incidentally, a charge-sheet against the former Chairman of the bank, M. Gopalakrishnan, and four others, was recently filed in the Special Court of the CBI in Chennai. The amount involved in the case is said to be Rs.8.99 crores.

Kamath need not have looked very far. For instance, J.K. Synthetics (Kanpur) owed ICICI Bank Rs. 76.87 crores as on March 31, 1999, according to the RBI's list of suit-filed accounts. The same company owed Rs.29.18 crores to the IDBI; Dr. Gaur Singhania, Govind H. Singhania and Yadupati Singhania were directors of the Singhania company. Interestingly, Esslon Synthetics, another Kanpur-based company, in which Sitaram Singhania is a director, owed Rs.4.12 crores to ICICI Bank; the same company owed Rs.2.4 2 crores to IFCI. Parasrampuria Synthetics Ltd., a CII member according to the CII Web-site, owed Rs.60.46 crores to Canara Bank. Om Prakash Parasrampuria, a director of the company, is also on the board of directors of Parasrampuria Polymids Ltd, which also owes Canara Bank Rs.10.17 crores.

Five different companies - Pure Drinks (Calcutta), Punjab Beverages (Patiala), Pure Drinks (Mumbai), Southern Bottlers (Patiala) and Pure Drinks Ltd. (Delhi) - in which Ajit Singh, Harjit Kaur and Satwant Singh were common directors, owe a total of Rs.30 .76 crores to two public sector banks. While four of the companies owe Rs.26.54 crores to Punjab and Sind Bank, one of them owes Rs.4.22 crores to Canara Bank.

Sources in the banking industry told Frontline that although defaulters may number in thousands, there is a high-level concentration in the amount owed by the top borrowers. They also point to the fact that such large borrowers are typically indus trial houses. For instance, in the case of Indian Bank, the top 15 defaulters account for about one-third of all NPAs of the bank. A source in the Central Bank of India told Frontline that 234 defaulting accounts, each amounting to at least Rs.1 c rore, owed the bank Rs.2,190 crores; the total NPA level of the Central Bank of India was at Rs.2,436 crores on March 31, 1999. Further consolidation of the figures, according to this source, indicates an even higher degree of concentration. The top 20 d efaulters owed a total of Rs.430 crores to the bank; the top defaulters thus account for one-fifth of the bank's NPAs.

THE reforms in the banking sector, initiated after the Government's acceptance of two committees headed by S. Narasimham, have focussed on a sharp contraction of the space open to public sector banks. While the banks have been asked to follow the stringe nt norms for classification of their assets, particularly NPAs, there has been no effort to bring into force legislation that will allow the banks to recover dues from defaulters. A senior manager of Indian Bank told Frontline that the "banks' han ds were tied as a result of the reforms".

The Task Force's recommendation that legal reforms be introduced to enable quicker liquidation of defaulting companies in order to enable the recovery of dues by banks has also been criticised. Critics allege that the introduction of such legislation is aimed at protecting private interests in banking after the privatisation of publicly owned banks. These critics say that big business wants to take over the public sector banks after bleeding them to death. The implementation of stringent norms for NPAs and capital adequacy in banks is seen by critics of the financial sector reforms as an attempt to cleanse the balance sheets of public sector banks before their eventual takeover by private interests. They allege that the Government's failure to protect the banks by appropriate legal measures against corporate defaulters has to be seen in this context.

Apart from the question of jobs, the financial sector reforms have also subverted the public sector banks' role as an agent of economic development, particularly since their nationalisation in 1969. There is also evidence that the reforms in the financia l sector have unleashed regional imbalances in the availability of credit and other problems.

The extent of opposition to the CII's report in large measure rests on the widespread belief that public money in public financial institutions has been systematically siphoned off. For long this was described in vague terms, particularly as owing to "po litical pressure" or "influence". The unions, by raising a storm over corporate defaulters, has managed to direct public outrage at a more concrete source of the problem. The unions' action in opening up for greater public scrutiny issues other than job s promises to enlarge the scope for a wider articulation of resistance to the impending "next wave" of reforms, particularly in the banking and insurance sectors.

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