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How banks are always the willing suckers

It needed the flamboyant Vijay Mallya to go public about the cosy nexus between politicians and industrialists. He told The Times of India a couple of weeks ago that — "Politicians want liquor money, liquor planes, liquor helicopters and liquor itself during elections," but they didn't want him in the upper house of Parliament in his capacity as liquor baron. "Where does the money come from?" Mallya is reported to have asked with a wink.

That is a good question, and one which we would like the answer too. After all the talk about corporate governance cannot be merely about seminars and talks. The answer to Mallya's question is all about corporate governance, the prime subject of discussion of India's leading industry association -- the Confederation of Indian Industry. For instance, is it Mallya personally who is forking out money to keep politicians happy? And is he doing it without a quid pro quo? Naturally not.

Mallya has not been cultivating politicians and promising them liquor, helicopters, planes and more because he had long ago planned on being a Rajya Sabha member and was working towards that goal. In fact, the liquor business is among the trickiest in the country. Each state makes its own laws to sell liquor and some have the nasty habit of declaring prohibition from time to time (Andhra Pradesh, Gujarat, Haryana to name a few), so it makes good business sense to keep the politicians happy and also remind them of tax revenues generated by the liquor industry.

Clearly, it has other compensations as well. When the liquor business stops doing as well, or when he is embroiled in controversial takeover battles (remember it was Mallya who first tried to take over Shaw Wallace through the Sime Darby route and lost it to Manu Chhabria?) or misguided diversification, then the political clout keeps him out of trouble.

His extremely flamboyant lifestyle is also unhampered by the losses notched by his group companies. For instance, the Bank of Tokyo-Mitsubishi shows United Breweries as a loss account as of September 1998. He owed it Rs 47.2 million. In Herbertsons, he is locked in a nasty takeover battle with Kishore Chhabria whom he invited to be an investor with a hefty 25 per cent stake. Chhabria has now upped his stake to nearly 40 per cent and is still struggling to get management control. There is Best & Crompton, which used to be a blue chip engineering company until Mallya took over. A clutch of banks, financial institutions and investors have lost their investment. The biggest problem is Mangalore Chemicals & Fertilisers which owes several banks over Rs 1,700 million as of March 1999 and ticking.

In fact, as defaulters and borrowers go, Mallya is not even a big player, which is probably why he seriously believes that his liquor money ought to have bought him all these concessions as well as a berth in Parliament. Mallya's defaults pale into insignificance when compared to the borrowing and defaults of the Essar group. The Industrial Development Bank of India, alone has an exposure of Rs 23.3 billion to the Essar group. Add up the exposure of ICICI, IFCI, IL&FS and the Indian and foreign banks to which it owes money and the exposure balloons into a mind-boggling number.

There are at least a dozen large groups whose bad loans and inability to repay borrowings are systematically hidden by banks and institutions to keep their bottomlines in shape. Again, in this case too, the attempts to use political influence to squeeze out more funds from the financial system have been well exposed by Mohan Guruswamy, who was once an advisor to Finance Minister Yashwant Sinha.

But let us not look at the large groups alone. The declared bad loans of the banking system are an enormous Rs 580 billion. The exact composition of companies which make up this huge number has been exposed by the All India Bank Employees Association and it shows that banks have been ripped off every time there is a primary market boom too.

The first time that the primary market really blossomed in the licence-permit era (after the FERA dilution issues of the seventies) was the rash of issues that hit the market in the early eighties. The name of the game was huge over-subscriptions and float funds. Everybody who could cobble together a prospectus seems to have tapped the market; hundreds of these companies are sick today. Every one of them has borrowed from banks and most are in the defaulters list. Unknown industrialists walked away with millions of rupees and many did not even attempt to set up projects.

The mid eighties in fact saw a race between SBI Capital Markets and Canara Bank to get as many companies as they could to the market. Naturally, the parent banks State Bank of India and Canara Bank lent working capital funds and the financial institutions forwarded term loans. These lenders have lost as much as ordinary investors, but since the money drains out of public sector bodies, nobody is really counting.

Did the banks learn any lessons? Not at all. In the big boom of the mid-1990s which led to a three year collapse of the market until early 1999, banks were suckers again. During the 1993-96 days, ever so often one read the prospectuses of companies going public and wondered why on earth would any sane investor invest in them. But the issues were fully subscribed and had their backers. They found investment bankers who helped them tie up working capital and underwriting which lent credibility to a shady project. The promoters quickly vanished with the money, ditching both banks and investors. They too are found in the defaulters list — and examples of unpunished greed or corruption of bankers.

Other names are those of notorious industry groups, where banks should have spotted problems fairly early in the game. These include — the CRB group which built up a high profile financial pyramid of over Rs 10 billion which collapsed one day and took with it the savings of several millions, Parvez Damania's companies, NEPC which took over Damania Airlines, Pavan Sachdeva's shattered dream - M S Shoes, Rita Singh's Mesco group companies, the Kedia group's liquor companies which had splashed out on a huge advertising campaign in anticipation of a public offering of shares which never happened, companies like Bombay Offshore Supply Services, the one time takeover tycoon from the south Rajarathinam, the Parasrampuria group, Ganapati Exports, East West Airlines and group companies and Orkay.

The process of reckless lending goes on. In fact, some really large groups which are on the verge of a default are not even in the list as yet. Ultimately, it is the honest taxpayer who pays the price, since bankers responsible for the bad loans simply retire and go away, the industrialists don't pay and hide behind weak recovery laws and the government dips into the exchequer to repeatedly bail out banks.

Sucheta Dalal

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