Banks: Lending, Fraud, Failures, Survival:
The Indian Penal Code defines fraud as any dishonest act and behaviour by which one person gains or intends to gain advantage over another.
History establishes that there is uncertainty in any business enterprise. There is no guarantee as to a successful mighty business not failing. It is a global phenomenon. So many mighty businesses had failed, have been failing, and will be failing. Failures of small businesses are in millions- those from the MSME sector that could not stand the iron blow and storms of external and internal factors, even after being run honestly without breach of trust.
Business failures do not fall in the category of fraud as defined by the Indian Penal Code.
An entrepreneur ventures to start a business based on information of government policies, government reports and project reports prepared by professional consultants. Banks also lend funds based on such reports and their own analysis and perception. If a business fails, where is the intent and behaviour for illegal gains?
An industry can be and will be under stress beyond the control of a businessman. Many factors can be responsible for this:
1. External effects ― (a) Global competition, (b) dumping of goods, (c) go slow, strikes, low productivity, (d) unions’ militancy, (e) non-payment or delayed payment by debtors, internal and external (f) fall in demand, (g) rise in cost of production, (h) creation of excess capacity, (i) springing up of new industries with large incentives by the government, and (j) incentive like tax holiday etc. in some region in order to promote the setting up of new industry ignoring the impact on existing industries.
2. Changes in government regulations and administrative delays/no action ― (a) Frequent policy changes, (b) cancellation of license like that of coal mines, (c) non-payment or long delays in payment by the government and their agencies, (d) reneging on contracts by the government and their agencies, and changing perceptions/assumptions, (e) multi-level and multifold approvals leading to administrative delays, (f) fear psychosis in decision taking, and (g) public hearing for green environment.
3. Changes in Banking regulations ― (a) Inadequate funding, (b) stopping of fund or treating as NPA even for one day default now, (c) high rates of front charges compounded every month and penal rules of interest, (d) stringent RBI provisioning norms not aligned to market realities, (e) frequent policy changes and compliance norms by regulatory authority, (f) administrative delays leading to heavy cost overrun, (g) errors in judgments by professionals in loan evaluations, and (h) inadequate fund given for modernisation and/or balancing equipment.
4. Global trade threats – Imports are allowed despite the campaign of ‘Make in India’, impacting the capacity utilisation and price realisation of an industrial sector.
World Economy: Sluggish world economy will suffer a severe recession in 2020, says the IMF Chief Kristalina Georgieva. She said that the international body is proposing to use all of its USD 1 trillion lending capacity to support countries battling the Covid-19 outbreak.
Bharat Economy: India’s GDP rate has been differently forecast between 0.8% to 1.5%. Moody’s forecast is 0.2% in FY2020. Moody’s says that India’s growth may be zero in FY2021 and 6.6% in FY2022. The negative outlook is due to growth risks. Fiscal deficit is expected to hit 10% of GDP in FY2021 including high government debt. The Confederation of Indian Industry (CII) estimates India’s 2019-20 growth rate at 1.5%, which may contact to 0.9% in 2020-21. Fitch states India’s GDP will be 0.8% in FY2021.
i) India had Balance of Payments (BOP) crisis in 1990-94. Today it is comfortable with a reserve of USD 480 billion.
ii) Price of crude oil, which is major import item for India, has fallen to USD 25 a barrel, sliding further from USD 50 to USD 60 a barrel in October-November, 2019.
iii) Strong inflow in capital account.
iv) Foreign Direct Investment (FDI) is up compared to the previous year.
Some credit rating is thinking to downgrade ‘Sovereign Rating’. Yes, the economy is in a mess. The government is mulling over what decisions and actions will boost the economy and create employment. The government needs to understand the past and incorporate lessons from it.
The RBI has made some announcements: i) Refinancing window of `50,000 crore for NHB, SIDBI and NABARD for on-lending to MFs, HFCs, RRBs and cooperative banks.
ii) Banks to extend moratorium to all; without treating them as NPA, but must incur 10% additional provision.
iii) Banks to not pay further dividend for FY20 till September30, 2020.
iv) One-year extension of loan to commercial real estate by NBFC.
v) An account will be considered NPA in June instead of March. However, moratorium of loan to NBFCs is not considered, but is being discussed by IBA (Indian Banking Association).
The RBI should create a Stress Fund of ` 1.5 trillion.
Present forex reserves can currently cover about 10 months of imports. Rising external debts and servicing and payment is a matter of worry. Earning from exports will not be adequate for the servicing the debt. Remittances by Indians will fall. In 2019, it was USD 82.2 billion.
Jio, after having investment of USD 5.7 billion, will be the largest telecom impacting the survival of Airtel, Vodafone, and other players.
MSMEs have a share of 30% in GDP, but receive just 6% of total bank credit. About 71% of MSMEs failed to pay wages fully or partially for March.
Dr. Abhijit Banerjee, the co-recipient of the Nobel Prize for Economics in 2019, advised that the government should extend moratorium beyond three months and give cash to a large part of the population and not just the poorest.
Reality is that cash might be misused. It is good to give grains free or at 25-50% lower price to the poor and all abundantly. Creating employment is the critical need of the hour. History tells us how rulers engaged populations to work with proper remuneration, instead of handouts. Give moratorium to all sectors to revive working and create employment. Bharat has to bring all to work. Employment opportunities are to be created for 21 to 22% of the population. Moratorium boosts employment and economy, Chief Economic Advisor, K.V. Subramanian advised for relief package but not free lunch.
Covid-19 will severely hit the working of all sectors in respect of working fund, payments to banks against loans with high rate and compounded interest.
After independence, to promote industrial growth, employment and self-reliance, the government had set up bodies including the Industrial Finance Corporation. Lately, to tackle industrial sickness, the Board for Industrial and Financial Reconstruction (BIFR) was set up to revive stressed units. Few years back it was done away with.
Under the Insolvency and Bankruptcy Code, a lender can push a company under the process. It is time-taking and the lender has to take a haircut of 40 to 80%. It would be better to structure the loans with a simple rate of interest of 8 to 9% and moratorium depending on cash flow and revival of economy.
Often non-payments by government/government agencies and PSUs under so many pretexts and litigations with ulterior motive, disrupt cash flow of the service providers industries. Once these service providers falter in servicing their loans, they and their bankers become easy targets, but those whose delay in payments led to the default are spared. It is easy and popular to attack the bank officials and entrepreneurs damaging the repute of both, giving them trauma and ignoring their right to human treatment. In the process, the reputation of the entrepreneurs and the bank officials who approved the loans gets tarnished.
In a significant ruling, the Supreme Court has held that failure to repay a loan is not a criminal offence unless there is a fraudulent intent. Mere breach of a promise, agreement or contract does not, ipso facto, constitute the offence of criminal breach of trust contained in Section 405 of the Indian Penal Code 1860 without there being a clear case of entrustment. A lender can recover the loan by taking legal course of action – sale of mortgage assets, encashment of personal guarantee. It is not natural law of justice to refer the case to the Central Bureau of Investigation (CBI) who may immediately put the bank official and the borrower under their custody for investigation.
Wealth creators and wealth generators should not be looked at through the lens of suspicion. A fear psychosis has gripped the business sector. Business can fail for a myriad reasons, not just fraud.
In the past, several enterprises were nationalised by the government. Why many of these units shut down, leading to large army of workmen losing their livelihood? Why so many units have been incurring heavy losses? Were there frauds?
These sorts of actions have dampened the spirit of wealth creators affecting investments.
The government needs to revise the targets for various sectors on capacity addition and capacity utilisation. After Covid-19, capacity utilisation will not be more than 25 to 50%. Before Covid-19, capacity utilisation had varied from 30 to 75%. A concern is on adding capacity and getting investment that include debts, might lead to bad and stressed funds.
Prime Minister Modi has announced a Rs 20 lakh crore financial package for self-reliance and economic reboot. In his message to the country, he said, ‘“Be Local and Vocal”– use local products and boost Make in India and self-sufficiency. Confidence of wealth creators need to be created.
May God bless Bharatwasi to realise the present alarming position of negligible investment, rising unemployment and declining national wealth - either being wasted or being passed on to overseas investors through different routes/channels.