At a time when non-performing assets and bad loans have become subjects of national debate and media analysis, a new study Down the Rabbit Hole – What the Bankers Aren’t Telling You! finds that poorly planned and poorly assessed projects of the private sector together with lack of lending regulation by the Indian banking sector and Parliament are major contributors to the towering bad loans.
Lending regulations, RBI mechanisms, global mechanisms for accountable and transparent lending, socio-environmental norms for lending to projects and the implications of socio-environmental violations on project loans, reveal shocking data and analysis regarding lending practices adopted by Indian financial institutions. Through thorough investigation of social, environmental, legal and financial issues in six case study projects across India – the GMR Kamalanga Energy, Athena Demwe Lower Hydro Electric Power, Sasan UMPP, Lavasa Hill City, Lafarge Surma and Krishnapatnam UMPP, the study establishes beyond doubt the negative implications of socio-environmental violations by projects on the loans sanctioned by banks. On an average, 75% of the total project cost for most projects is secured by companies through loans and this disproportionately burdens financial institutions. In the project finance mode, loan and interests are repaid from the revenue generated by the project itself and therefore any sustained delay in a project is a risk on the loan. Projects embroiled in illegalities, violations and legal suits or facing resource crunch or opposed by affected communities due to adverse impacts, are facing slow or no progress. Out of the six projects discussed in the study, five are facing civil, writ or arbitration cases and public interest litigations before courts and other authorities. Five of the projects are also delayed, two of which have not even begun construction six years after initiation. Athena Demwe Lower HEP, Lavasa Hill City, Lafarge Surma and Krishnapatnam UMPP have openly reported deteriorating loan quality. The loan quality in the case of Sasan Power is unexplained but the two-time restructuring of the loan and the escalating project cost is indicative of a financial predicament. While facing cases before the Supreme Court for violation of major environmental legislations, both Lavasa Corporation and Lafarge Surma reflected losses. The Athena Demwe Lower HEP had secured all loans by the last quarter of 2010 but is yet to begin construction. The Demwe Lower HEP reveals serious lapses in risk assessment by public sector banks, which sanctioned and transferred large loans to a project which did not even have the most basic clearances from the Government. When the Rural Electrification Corporation sanctioned loans in January 2010, the project had neither environmental nor forest clearance. The case of Athena Demwe narrates a reversal of logic. Instead of sanctioning loans subsequent to following due diligence and the sanction of clearances by relevant Ministries, clearances are being requested to save the deteriorating quality of loans granted in injudicious haste. In the cases of Sasan Power, Lavasa Hill City, Athena Demwe Lower and Lafarge Surma, deteriorating quality of loans sanctioned by financial institutions were used as an argument to push for clearances. It is not in the interest or mandate of the Ministry of Environment and Forests (MoEF) to clear a project merely because a consortium of banks sanctioned hundreds of crores to a project without due assessment! The study reports that Indian banks are not only lending to projects which are violating fundamental rights of people and crucial laws of the country, but are continuing to support such projects after the violations and adverse impacts are exposed. When Lafarge Surma was taken to Court by the Indian Government for violating one of the most crucial national environmental legislations and the company defaulted on repayment of loan to international financial institutions due to a stop-work order from the Supreme Court of India, Indian banks unconditionally bailed out the project with short term loans. In the case of Lavasa Hill City, after the innumerous violations came to light, banks approved another Rs. 600 Cr for work on the second phase of the project. Bad loans (Non-Performing Assets or NPA) in Indian banks almost tripled within four years between March 2009 and March 2013; rising from Rs. 68,220 Cr to Rs. 1,94,000 Cr. While it is no more a secret that bad loans are hitting the roof, Down the Rabbit Hole explains this steep rise of bad loans through a set of indicators. Banks, especially the Public Sector Banks (PSB), are showing an unexplained bias towards private corporations. For instance, in the five years between 2006 and 2011, Life Insurance Corporation (LIC) scaled up loans to private sector companies from 3 to 100%. In the eight years between 2004 and 2011, loans sanctioned by State Bank of India (SBI) to private sector companies increased fivefold from Rs. 58,467 Cr to Rs. 2,96,362 Cr and the non-performing assets on these loans nearly doubled from Rs. 5620 Cr in 2004 to Rs. 9217 Cr in 2011. On the other hand, the bank’s non-performing assets on its loans to public sector undertakings (PSUs) reduced drastically from Rs. 109 Cr to Rs. 6 Cr. SBI’s total NPA in private sector companies for the eight years ending in 2011 is Rs. 41,103 Cr. Banks are allowing corporate loans to be restructured at an insane pace. Data shows that in the three years between March 2009 and March 2012, restructured loans in Indian banks grew by nearly 300%; from Rs. 75,304 Cr to Rs. 2,18,068 Cr. Banks are citing lower NPAs (referred to as ‘ever-greening’ of loans) to exclude corporations from being in the defaulters list. It is precisely this masking of bad loans that has caused the NPAs in Union Bank of India to skyrocket by 188% within the 8 months between March and December 2013. Another matter of great distress is that the share of bad loans and restructured loans is higher for public sector banks as compared to their private sector competitors. Out of the total bad loans of Rs. 1,94,000 Cr in Indian banks in March 2013, the share of bad loans in public sector banks is Rs. 1,64,461 Cr or 85 per cent! The other important aspect that the study highlights is the manner in which all and any information on loans to corporates is being aggressively guarded by banks. Ten out of the eleven PSBs, with whom the researchers of the study filed applications under the Right to Information Act 2005, denied access to basic information. Information on banks’ lending to specific projects was entirely denied. This hostility by financing institutions in providing information on loans, date of sanctioning, the terms, interest rates, repayment periods, etc is most evident while attempting to understand the financial records of individual projects. In the case of the Rs. 13,144.91 Cr Athena Demwe Lower HEP, there is almost no information publicly available on where the money is coming from. Interestingly enough, different banks provided information to different questions and quoted different sections to deny information, implying the arbitrary usage of the RTI Act to refuse information. The withholding of all information on loans to corporate projects by banks under the pretext of commercial secrecy has resulted in unaccountable and non-transparent lending practices, predisposing institutions to malpractice and corruption. While LIC refused to provide information on its NPAs, Canara Bank, Central Bank of India and Punjab National Bank claimed not to have separate figures for NPAs on loans to companies. While Punjab National Bank denied providing the amount of loans sanctioned annually to companies, Bank of Baroda, Canara Bank, Bank of India, Union Bank and Indian Bank claimed to not have ‘centrally’ available information on the volumes of loans provided to companies. If it is indeed true that some banks do not maintain data of the volume and number of loans provided to public sector and private sector companies, then it is shocking that banks are operating and continuing to provide large project finance loans to companies in the absence of a consolidated understanding of their exposure on such loans. For instance, Bank of Baroda did not provide information on total loans advanced to companies ‘as the same needs to be compiled from all branches of the bank’. Bank of Baroda also does not have figures of non-performing assets for different sectors and industries. This goes to show that there is no mechanism within banks for standardised and scientific classification of loans and non-performing assets. The minimum information received in response to RTI queries did however expose the extremely weak regulation of financial institutions with regard to financing of corporate projects. While banks have internal loan policies or Credit Risk Management policies, they do not have a policy to specifically deal with Project Finance and none to assess social and environmental issues and risks in projects. The project finance mode, where project proponents create a legally independent subsidiary company, referred to as a Special Purpose Vehicle (SPV) with the narrow purpose of executing a single project, further allows for optimum risk allocation in favour of the company and protects the assets of the parent company in case of default of loan or bankruptcy. It has become clear in this study that corporations are making use of the huge gaps in the Indian regulatory system to push through projects with adverse impacts and huge financial risks. Even in instances where the project proponents and parent companies are taken to task for destructive impact of projects, no responsibility is placed on the lenders whose money made the project possible. This weak link in regulating finance has lead to a Catch-22 situation. As long as financiers ensure unbridled flow of funds, project proponents feel no need or pressure to address environmental and social issues. And banks continue to finance projects regardless of the potential harm it can cause because they do not have any guidelines to direct them otherwise. If banks continue to provide loans in the absence of a robust mechanism to assess social, environmental and financial risks, the saga of bad loans will turn further disastrous to the Indian economy at large. The study makes strong recommendations for stringent regulation of lending through a national legislation to ensure accountability, transparency and social and environmental sustainability in lending. Safeguards and due diligence mechanisms to identify, assess, regulate and monitor environmental and social impacts of projects will ensure accurate assessment of issues in a project prior to lending. The study also calls for prohibition of ‘ever greening’ loans, universal disclosure policy for financial institutions and mechanisms to hold parent company responsible for default of loan.
The Research Collective of the Programme for Social Action
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