Columnists

IL&FS crisis a repeat of Satyam

By Nagaland Post | Publish Date: 10/7/2018 12:45:08 PM IST

 The IL&FS is a national crisis. It may be or not a Lehman moment in Indian economy – as the media says it, the government accepts it is a serious moment but not a scam – but has certainly questioned how the society is mismanaging its finances.

It also is a fact that people’s deposits in banks or financial institutions like LIC or mutual funds are at risk. It is also a wonder that for 31 years nobody noticed that loans were being granted on a mere guarantee on a piece of paper without a security. 

Even now but for sudden severe stock market crash and SIDBI approaching insolvency court to recover dues and IL&FS moving the company law tribunal for protection from creditors, it could have remained under garbs. 

India needs to reaffirm pre-1991 financial ethics. Today poor man’s deposits are easy target. The culprit is fuel cess to road toll to non-repayments.

No wonder the company was downgraded to junk D – default grade from AAA. The surprise is how it could have super AAA rating for so long.

Are the monitoring systems, including that of Reserve Bank, so weak? Or is there a deliberate apathy and the system is being milched by the unscrupulous aware of the loopholes. It means our experts like the western experts, who allowed the world to plunge into Lehman crisis, are equally naïve or negligent.

Possibly, it means that more difficult situations may be knocking the doors as SBI and LIC are being told to fill the hole. 

The IL&FS is a strange creature. It is dubbed as private entity but fully depends on finances from public bodies like LIC, Central Bank and mutual funds including that of SBI and pension funds like HDFC, India Discovery Fund, Japan’s Orix and Abu Dhabi Investment Authority. Today these entities are in crisis. It means people’s hard earned money is being liquidated by various Nirav Modis and Vijay Mallyas and the nation remains mute spectator.

It may also affect fund flows from foreign companies. The country’s finance management since 1991 globalisation is in a mess. It has aggravated the more it was tried to be solved. 

It calls for a study why during 1947-1991, public finance institutions or banks rarely had such dark moments despite low GDP growth. The silver line was its high savings and internationally acclaimed secure system.

Let the nation not forget that it is a moment as dark as another “private’ bank, ICICI, manipulated by its CEO, Chanda Kochar and her family, had. Much of that is also not public knowledge. 

More than a Lehman, possibly IL&FS is a Satyam moment, where accounts were covered up if not fudged.

The sum is that banks are having over Rs 12 lakh crore NPAs and a high portfolio of unsecured loans, ‘private’ or government entities – in fact nomenclature may differ but all are dealing with the poor man’s money, euphemistically called the middle class – a group that is just at the poverty line and a mistake anywhere can lead them to abyss. 

It also means that across the political spectrum either nobody understands the intricacy of securing public deposits or are part of the mess.

 Else how would Rs 91,000 crore debt pile up with IL&FS in 2017-18? There is another Rs 5 billion such pile up with its 169 subsidiaries. May be it is not a scam, but how come the most of it has been lost in the road construction and not in a year but almost over two decades. 

The lending to infrastructure companies, in short the National Highway Authority (NHAI) contractors, were to be recovered through tolls. Where has the toll collection at super high rates gone? The NHAI in various statements have averred that not more than one-third of the collections were being paid to it. It raises a serious question who gobbled up the toll money, which has caused an all-round inflation. 

There are questions also on why at all people are being fleeced at toll gates despite high petrol cess of Rs 8 per litre, being paid by even non-highway users. The nation was given to understand that the cess would replace the tolls.

 It means the mess is there possibly at every step from cess to toll collection to high credit being given to “infrastructure” companies to their nor-repayment. 

India is living moments of severe extortions of people’s deposits. Earlier it was supposed to be restricted to banks. Now it is non-banking finance companies (NBFC) like IL&FS, which stepped into to fill the banking sector void. They succeeded in growing fast and grabbing a lot of market share. But now, with IL&FS defaulting, investors will be reluctant to lend to NBFCs. This will increase cost of borrowing and impact their profitability. Corporates too, will find it difficult to raise money from NBFCs.

That the entire financial system is in crisis is evident from the way the SBI and other banks halved the levels of ATM withdrawals from Rs 40,000 to Rs 20,000 post IL&FS crisis. The banking system is having a severe cash crunch. Let the nation hope that they are not going “cashless” as the west had seen during the Lehman moment.

The government itself has hinted at it. It alleged that the debt-laden IL&FS suffered due to “mismanagement and misgovernance”.  Neither a mere change of guards as the government has done will solve the problem nor is any finance body secure. Repeated mismanagements, if not scandals, point to grim situation.

The country has not learnt. Former US president Barack Obama’s chief of staff Rahm Emanuel had said, “Never waste a crisis”. The IL&FS has exposed several fault lines. The 2008 Lehman crisis also started with over-leveraging by shadow banks like NBFC.

It exposes the fault lines at the RBI, where the IL&FS is registered.  The nation has to think twice now before trusting the regulator. 

The rating agencies registered with SEBI also failed. The fees to rating agencies are paid by the rated. Giving a generous rating has incentives for the rating companies. The reality is rating is advertising and people need to treat these as scraps. Was SEBI not aware of it?

The company auditors also either were too incompetent to read the books or if they did it deliberately, they are guilty of breaching public trust.

The nation needs to be aware that such unethical fault lines erode the entire finance system. Is that the difference that the nation had before 1991 and after?

Launched on December 3,1990. Nagaland Post is the first and highest circulated newspaper of Nagaland state. Nagaland Post is also the first newspaper in Nagaland to be published in multi-colour.

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