Saturday, April 2, 2016


NEW DELHI: The Reserve Bank of India has told the Supreme Court that corporate loan defaults may not always be the promoters' fault or mala fide and may sometimes be due to external factors beyond their control such as cyclical ups and downs of an economy. 

Making the names of such defaulters public may adversely impact genuine risk-taking and growth, the banking regulator said on Tuesday, in the first  .. 

Read more at:

Did you not find some thing funny in the argument of the Reserve Bank Of India and the respected Chairperson of the State Bank of India, Smt. Bhattacharya that all defaulters were not willful (they might have meant Vija Mallya too was not) and external factors might have influenced their defaults.and hence it would be inappropriate to name and shame the borrowers? Thus, the real willful defaulters too escape the noose. Banks and Reserve Bank of India who have the wherewithal to judge every aspect and study the balance sheets upside down before lending  do not have the little wisdom to segregate the willful from the genuine defaulters. To my little knowledge about Banking, very few amongst the richest borrowers are genuine defaulters whereas the poor, especially, the farmers suffering the vagaries of climatic changes are genuine defaulters. But when a farmer commits suicide unable to repay the debt, these mandarins wash their hands off the poor guys saying they misused the borrowed funds on lavish marriages. It is not so if a Vija Mallya throws money to the tune of billions on purchasing IPL players. That is the funniest aspect of this specious argument of these learned men who occupy high position, how we know well.

Before I go into why defaulters default and how easy it is to identify the genuineness behind the default starting from the poorest to the richest, not excluding the elusive middle classes (poor RBI does not have the knowledge of this), let me tell you few funny stories how the delinquent justify their dereliction. Let me cover all sections.

Once Akbar asked Birbal to bring four fools of the first order to him. He said – “It is not difficult because this world is full of fools. Birbal said – “OK” and asked some time to find them, which Akbar readily gave to him.
Now Birbal started looking for fools. He was going somewhere that he saw a man carrying a large plate on which were kept some clothes, betel leaves and sweets. He looked like a fool to Birbal, so he asked him – “Where are you going to? And to whom you are carrying this?” The man replied – “My wife has remarried. Now they have a child so I am taking this gift for them.” Birbal got convinced that he was a fool, so he considered him a candidate to take to the king.
At another time he saw a man riding a buffalo carrying a bundle of grass on his head. Birbal thought he was also a fool, so he asked him – “Why are you carrying this bundle on your head?” The man replied – “In fact my buffalo is pregnant, so I thought that she should not carry too much load, that is why I have put this bundle on my own head instead of putting it on it.” Birbal considered him also a candidate to take to the king.
So next morning he took those people to Akbar’s court and presented them to him as the biggest fools.  “But these are only two fools; where are the other two? I asked you to bring four fools.” King asked. Birbal folded his hands and bending a little said – “Jehaanpanaah, The third fool are you who asked me to bring the fools; and the fourth fool is me who has brought these fools for you.”
Like Emperor Akbar in the fable Reserve Bank of India comes first in the "Fools" list and the Banks that lent money to the numerous Mallyas second. Of course Mallyas come "third" while we, the laymen who believe that these "FOOLS: are not fools come fourth. That decides the issue.
We have Bollywood films like Don (many of this genre) how a toddler, denied, a loaf of bread becomes a petty thief ultimately to appear as Don (a good Don, if it is Amitabh Baccahan). The story ends with all living happily thereafter, as he is not a willful Don but circumstances forced him to become one, e la Vijay Mallya. This is filmy. I do not know whether RBI took a leaf out of the Bollywood Drama. 

If the argument of Reserve Bank of India and the laggard banks has to be accepted per se, then the whole mythology has to be rewritten and historians will have a tough task in justifying the history as presented by them. 

Let us take the case of Ravana in Ramayan. He might present a case in the Supreme Court that he was unjustifiably charged with kidnap but he had not kidnapped Mata Sita willfully. He might argue that had not Lakshmana not cut the ears and nose of Surpanakha, which by his standards of justice was a harsh punishment for loving the handsome Rama (Love is blind, he would say) and had not Lord Rama killed Maricha, he would never have been forced to kidnap Mata Sita. (after all, did I touch her, he may argue). So he might plead that the capital punishment awarded to him might be declared illegal. After all, did  all the left liberals led by Kanhaiya Kumar not plead this on behalf of the good terrorist Afzal Guru? He might have killed people but there were extraneous circumstances behind the action, just as Ravana had for kidnap and Vijaya Mallyas to default loans. 

Or, what is the case of Duryodhana? He might plead that he did not willfully deny the Pandavas their due share of kingdom. It was his father's kingdom. Are you not passing on the mantle of ruling India to one family only whether they deserve it or not, he might question.  Then, had he not been insulted in the Maya Sabha, that according to him was purposeful, he would not have played the illegal dice game to throw out his cousins. So he had a case in point that he was not a willful criminal and hence deserved not to be named and shamed.

Every criminal has a justification. Or else why will there be two lawyers, one justifying him always? So, the RBI argument stands good. Or else how can they protect their own shortcomings and the laggard bankers whom they seem to control but never control? 

A drunkard, who habitually drinks, beer can justify his action thus. It is a medically proven point that alcohol kills the weakest brain cells first and the stronger ones later. So,

A Case for More Beer

A herd of buffalo can move only as fast as the slowest buffalo, and when the herd is hunted, it is the slowest and weakest ones at the back that are killed first. This natural selection is good for the herd as a whole, because the general speed and health of the whole group keeps improving by the regular culling of the weakest members.In much the same way the human brain can only operate as fast as the slowest brain cells. Excessive intake of alcohol, we all know, kills off brain cells, but naturally it attacks the slowest and weakest brain cells first.In this way, regular consumption of beer eliminates the weaker brain cells, constantly making the brain a faster and more efficient machine.


Targeted Approach :

Prior to nationalization of banks in 1969 and 1980, banks were lending to select (read rich) borrowers. There was no government control on the lending though Reserve Bank was acting as big brother to monitor that there was no indiscriminate lending and banks did not resort to usury practices.After nationalization, government intervention increased, small, poor, needy borrowers were able to enter the bank steps and demand loans. So far it was so good. As the experiment politically succeeded and fresh vote banks in the form of rural poor came to the fore, the rulers turned greedy and a targeted approach of loans was thrust upon the banks. Many flagship schemes like IRDP, 20-point, 10-point program, BC welfare, SC welfare, Minority welfare, Women welfare etc., were rolled out and banks were the main sufferers. A new term Priority sector lending was coied and a fixed percentage of loans were earmarked under this segment. as time passed by this was sub-divided into agriculture, this and that welfare, small business, self-employed, women etc., and sub-targets were fixed and the banks were under tremendous pressure from RBI to meet the targets. The resultant effect was banks were after borrowers to take loans. Once, I inspected a rural branch in Telangana where a total of 135 borrowers were given loans for starting "PAN BEEDA" shops.  The Branch Manger asked e whether I would report the matter. I told him the Head Office people and RBI mandarins would chew pans and spit on my face. All in the game!" Here, if the borrowers default whose fault it is? Clearly the bank's fault. When there are no 1350 pan chewing people how can one expect 135 pan shops to survive. This is systemic failure.

Likewise, banks lend to farmers. Ninety percent of farmers are sincere in their approach to borrowing. They take loan with high hopes of good crop, repayment of loan, save a little surplus, buy more land, take more loan and so on. Oh! What a dream? I loved these guys. Their eyes were shining like the stars in the Heaven. Hope, hope, hope! But! alas! The Gods do not favor them. Either there no rains or heavy rains, there are pests, the seed company cheated them or the fertilizer company. In the meantime a daughter is ready for marriage, a son to go to college. He defaults and we blame them. They do not travel by first class in Air Planes, they do not own Mercedes Cars, they do not own big bungalows with swimming pools, they do not own cheer leaders to kiss them lovingly. They are poor farmers that are feeding the nation. Yet, when their loans are waived there is hue and cry. It is true! 10% of the waived loans go to the undeserving. That should not deter us from helping 90% deserving. When a farmer defaults, the whole village knows. He is named and shamed by the local bankers. But to name and shame the Vijay Mallyas, we quote many reasons not to. 

The Middle classes: 

Middle classes count among the safest to be lent money and the cleverest to default willingly. Most loans the middle classes take are like Car, Two Wheeler, Housing, Educational loan etc., Unlike the farm loans or loans to allied agri activities, loans to small borrowers banks make a thorough assessment of the needs, the income, the expenses of the borrower etc., and his capacity to repay the loan and then decide the quantum of loan and the tenure. They take the average monthly income of the past three months, his remaining years of service, the statutory deductions. family size, any other loans etc., before they arrive at the loan amount and tenure. Hence, there should be no default in the loans unless the borrower meets with any calamity like loss of job, death, closure of his Company etc., Otherwise, most defaults occur because the borrowers turn delinquent or willful defaulters. WE SHOULD NOTE THAT IN THE ABOVE TWO CASES VIZ., THE SMALL LOANS OR MIDDLE CLASS LOANS THERE IS NO EXTRANEOUS INFLUENCE OF ANY KIND UNLESS THE BANKER AT THE BRANCH LEVEL RESORTS TO UNETHICAL PRACTICES., Hence, here willful default or fraudulent loaning in the barest minimum. 


Before an existing/running big business/industry is financed the bank studies the financial statements of the company/form for three years. They go through a rigmarole of ratios, the Current Assets Ratio, The Debt service Coverage Ratio, the Capital to CA Ratio, the fixed assets to current accounts ratio and many more. They are expected to study how other businesses and or industries of similar nature are performing and the credit worthiness of the Directors/Partners individually. They study their creditors/debtors' lists to study how effective they are in recovering debts or how frugal they are in raising credit. After studying all these aspects the banks lend the money. In such a case, it is understandable if a few businesses/industries fail due to extraneous circumstances. And even if they fail, it is always a mystery how those close to the political bosses of the day only face these vagaries and why not others. 

One more fact, the layman never considers is that most of the defaulters in a particular period are in the same line of business. Why does this happen if banks are prudent. We have a "FLOCK" mentality as far as lending by banks is considered. Sometimes, I feel banks fall prey to rumor mongering and speculative tendencies in Industry. For example, as on date many government contractors are major defaulters. this is because of the "FLOCK" mentality of the bankers that funds from government are the safest bet or because ninety percent of the contractors are close to the ruling party and ninety percent of the top executives of banks owe their position, not to their capacity, but to their close proximity to the powers that be, if you understand the meaning. 

During the 1980s granite industry was financed by all banks in the South India to such an extent that every Tom, Dick and Harry with head on his neck who started a granite industry was financed. All lending norms were thrown to the winds. It was not surprising that banks on a hunt for granite industrialists. The industry went bust under its own weight and all the banks that financed them stared at huge defaults in loans. The story ended there. By this time, most of the loans might have been written off. 

How did this happen? While financing a new business/industry banks take a project report that comprehensively states the position of the industry in the country, in other nations, threats from competitors etc., besides financial projections. Based on this and their own study the banks make a SWOT (Strengths, weaknesses, Opportunities, Threats) analysis. Did they not do this? Did they not find it peculiar that so many are after the scarce raw material that involved huge equipment to mine and that the market is limited as the finished product is very high priced? They saw it. But there were "EXTRANEOUS" considerations, if you understand what I mean.

To prove how these extraneous considerations work, I will quote one or two examples. In the case of Progressive Constructions Limited, a Hyderabad based Construction Company (Now, I read in the Press that they are overdue by about Rs.1000 crores to banks and bankers hit the streets shouting slogans for recovery), during '80s I refused to recommend renewal of limits and I was forced to go on leave and my next officer was made to sign the recommendation. Now, the chicken is coming to their home to roost. 

During the same period, the nephew of one ex-chief minister of AP started an Alloy and Steel Industry. I still remember our Chairman and me savoring tea and snacks in his garden in Somajiguda  where our Chairman gave in-principle approval to the loan that went bust even before the machinery was erected by the promoter. It became NPA even before the LC issued for import of machinery was honored and the bank had to go to court almost immediately. There were no extraneous circumstances here except that the borrower was nephew of the ex-CM and no one knew where the funds went.

So the very basis of the argument of RBI that it would not name and shame the willful defaulters falls flat on their face. Like norms for lending, they should evolve norms for identifying willful defaulters and name them. Giving benefit to crooks at the cost genuine borrowers is specious and casuistic. Let us come out of the self deceit as in the following anecdote. 

To Absent BrothersAn Irishman walks into a bar in Dublin, orders three pints of Guinness and sits in the back of the room, drinking a sip out of each one in turn. When he finished all three, he comes back to the bar and orders three more. The bartender says to him, 'You know, a pint goes flat after I draw it; it would taste better if you bought one at a time.' The Irishman replies, 'Well, you see, I have two brothers. One is in America, the other in Australia, and I'm here in Dublin. When we all left home, we promised that we'd drink this way to remember the days we all drank together. 'The bartender admits that this is a nice custom, and leaves it there. The Irishman becomes a regular in the bar and always drinks the same way: he orders three pints and drinks the three pints by taking drinks from each of them in turn. One day, he comes in and orders two pints. All the other regulars in the bar notice and fall silent. When he comes back to the bar for the second round, the bartender says, 'I don't want to intrude on your grief, but I wanted to offer my condolences on your great loss.' The Irishman looks confused for a moment, then a lights dawns in his eye and he laughs. 'Oh, no, ' he says, 'Everyone is fine. I've just quit drinking!