HONESTLY DISHONEST

#Vitarkka: ‘Convolution’ is rife in India on how our entire system is setup to cater to business. Be it the laws which govern business, banking mechanics, how our courts operate and the hygiene between business-people. In every corner an ecosystem is created which favours a particular community or clan. There are certain communities which get government work done with a flick of a finger, then there are those who get the banks to dance to their tunes and the great lobbyists who create laws to suit their environment. It hasn’t changed much with the new-age ecosystem either as its now the privileged community coupled with a degree from say an IIT, IIM or Harvard where all the private equity or venture capital lands up.

When a startup or company gets capital, a lay person wonders ‘HOW’ in the blazes could they have pulled it off? Especially when it’s a business anyone who gets the money can execute. A few years later a minuscule percentage of startups who manage to pull off the MAGIC by dragging along more VC’s, PE’s and banks with them, tend to attract a buyer (if they are lucky) whilst most end up broke or losing their businesses to the sharks who come in the form of investors. Over 90% of startups have failed thus far dragging down billions of dollars of investor money (So much for the intense VC scrutiny of these ventures). If you examine the ventures that initially attracted heavy duty valuation and investment which went bust, they had zero USP, hardly any IP/patent, were mostly an American copycat and had almost no revenue streams worth talking about (similar to the early 2000 dot-com bust). The ones that are getting the Unicorn tag don’t really belong to India and are either owned by firms from America, China or the Middle East. So are we really building the market for Americans and Chinese mainly? Back to colonialism? Food for thought! Our laws are really not keeping up with the times and we are really just being setup for predators. Uber, Amazon, Yahoo, Whatsapp and many giant American firms couldn’t break into China but they did so in India to take poll positions. Yet our leaders are clueless or disinterested as to why China is running away at such great speeds.

Truth be told, the government is so busy trying to stay in power and muster up capital for themselves to stay in power that the attention to creating a fabulous ecosystem for the larger population to thrive is just wishful thinking. Rankings whether locally or globally can be bought. So if you see India’s ease of doing business going up when on ground things still stink, you must wonder if something fishy is going on. The very fact that respected international rating agencies like Moody’s and Standard & Poor, which dished out certificates with so-called deep research, landed up taking a whole bunch of cash to give triple ‘A’ ratings to bogus asset classes which lead to the 2008 economic crisis in America. Therefore it is safe to assume that these rankings have a price. These ranking agencies are all cartels which dish out reports which are so complex that when they themselves are quizzed about it, they would need a Tequila shot or ten to give you the rationale behind these reports.

Business is nothing but common sense. Voltaire said ” Common sense is not so common”. So thats that. It is evident from what is visible that when something is fishy, it is! Hence, when there is money moving into companies or startups where common sense tells you that it shouldn’t belong there, then most likely there is something fishy going on with that money. From the early 1900’s, dominant businesses in oil and engineering used philanthropy (religious or educational) as a front to move money into a different pocket. It could very well be an opportunity now to create an in-thing and move money whilst sharing some, albeit a small percentage, with the vehicles which support them.

The banks always insist on assets as security to lend money. But they also insist on a track record. How convenient! So if a freshly minted entrepreneur offers an asset as a collateral which is far more valuable that the money asked for, the bank puts conditions which literally make it feel like the entrepreneur is climbing a steep mountain instead of focussing on the business idea on hand. So many schemes are floated which say that loans are available for an entrepreneur upto 1 crore or 2 crore without collateral but this is not available to an honest businessman. If a bribe is paid, say 10-20%, it can easily be procured. But then the interest rates are so high (16% onwards) that whatever business the entrepreneur is raising the money for, has to be so unique that the margins should support paying such interest. So if its not a technology related business (which has high margins), forget raising capital as any manufacturing business will send the entrepreneur into China shock in the global and local markets. Interest rates in Singapore are as low as 3% for entrepreneurs and in China as low as 6-8%. India in the last 3 decades has never seen interest rates below 11% ever, but this rate of interest is only available for a privileged few. For the junta, it is 13-36% depending on which type of banking system one chooses.

It’s difficult to blame the banks as they are purposely setup to serve a few. The managers are paid so less that for them, it makes sense only to process larger loans as this ticks off their targets and is less hassle versus them having to process many hundreds of smaller loans of entrepreneurs which are a nightmare in their books to manage. Also, most of the large loans happen at the behest of the powers. 31 Economic fugitives like Nirav Modi, Lalit Modi, Mehul Choksi, Neeshal Modi, Mayuriben Patel, Hitesh Narendrabhai Patel, Nitin Jayantilal Sandesara, Diptiben Chetankumar Sandesara, Chetan Jayantilal Sandesara, Kamlesh Parekh, Umesh Parekh, Nilesh Parekh, Jatin Mehta, Vinay Mittal, Vijay Mallya, Sunny Kalra, Sanjay Kalra, Sudhir Kumar Kalra, Aarti Kalra, Varsha Kalra, Eklavya Garg, Ritesh Jain, Sabya Seth, Rajiv Goyal, Alka Goyal, Priti Ashish Jobanputra, Ashish Jobanputra and Pushpesh Baid are being pursued by both CBI and ED with sufficient theatre to keep the public at large on the edge of their seats. Extradition, if easy, would have brought all these people to justice immediately. However, the legal system is almost always a brilliant vehicle to keep the case on for years by which time the fraud is long forgotten as new ones would emerge to take their place (Deflection). Nirav Modi and his uncle Choksi from news reports have siphoned off 13700 Crores. This is what was unearthed, but one never knows if this is just a number the government wants to show and the scam may be far more costlier to the taxpayer of India. After all, when a route to scam this much money through a simple piece of paper went undetected for so long, the quantum could be far more that what has been shown. Jatin Mehta of Winsome diamonds walked away with over 7000 Crores, Chetan & Nitin Sandesara with over 5300 Crores, Vijay Mallya of United Breweries with 9000 Crores and Nilesh Parekh of Shree Ganesh Jewellery of over 2200 Crores. Of the over 40000 Crores owed by these 31 people, the top 5 families owe over 37000 Crores and the balance just some 3000 odd crores.

What intrigues is this, banks have gone scot free and the one odd scapegoat has been jailed to show the public that action has been taken to punish the errant. For these 5 families to get so much of money with very little or no collateral could not have happened without a few phone calls from the Delhi offices to the heads of these bankers. Therefore, why are the heads not rolling? It’s because of ‘Chemistry‘. 2 bonds are linked so tight that if separated, it could cause an explosion.

Now imagine if these politicians and bankers for one moment didn’t interfere in ensuring these companies get this much of money and if this 40000 Crores had reached say between 40000-80000 small and mid sized entrepreneurs who gave the bank hard collateral to raise this debt? Make in India would actually take-off and the banks and the governments would not have to spend crores of tax payers money to catch these offenders. But wait… the 40000 Crores is only a scratch on the surface.

Prime Minister Modi said that from 1947 till 2008, banks had advanced Rs 18 lakh crores as loans. But from 2008 to 2014 this figure swelled to Rs 52 lakh Crores.

The NPA story is getting murkier and scarier every year. As of March 31st 2018, the NPA value was Rs 10,35,528 crore. While State Owned banks led the pack with over 8 Lakh crores, the pack leader is SBI with over 2 Lakh crores followed by PNB with over 80000 Crores. About 3,75,000 Crores belonged to 8 other banks (BOI, IDBI, BOB, UBI, Canara, Central, IOB & UCO). Amongst the private banks, ICICI leads the pack with over 50000 Crores whilst Axis follows with over 30000 Crores. What’s worrisome is that 10 public sector banks have between 17-30% gross NPA’s vis-a-vis advances made (Corpbank, Oriental, PNB, Bank of Maharastra, CBI, Dena, UBI, IOB, UCO, IDBI). On the other hand private banks have far lesser gross NPA vis-a-vis advances made ranging between 3%-11% (CUB, IDFC, SIB, Karnataka Bank, Axis, KVB, ICICI, Dhanalakshmi, J&K and Lakshmi Vilas). So a key question which arises out of this data point is whether private banks are better run than public banks?

K C Chakrabarty, former RBI Deputy Governor said “There is nothing like technical write-off. It’s non-transparent and without any policy. Generally a write-off is small and used sparingly when there is some crisis. A technical write-off creates non-transparency, destroys the credit risk management system and brings all types of wrongdoings into the system. You must declare how much you are writing off. You are writing off public money. It’s a scandal.”

Small loan defaulters get the raw end of the stick if there is a suggested default of any kind. It’s interesting to note that the CIBIL score has become a norm and what the banks represent to CIBIL dictates an individuals score. If there is a suggested default of any kind, it drags the score down, also if a loan applied for is rejected. It’s all stacked against the common man but never against the bank. After all why should it not be like the olden day money lending scheme where the concept of being equitable didn’t exist. We have courts and if a bank has a dispute, it should get an award from the court against an individual. This then should become the basis of CIBIL deciding the individuals score. Also, for the score to decrease if the bank rejects a loan is preposterous. Do they know whether the bank has legitimate reasons or if they actually have the money to give or not?

Corporates on the other hand seem to have a jolly good time with the small account holder who pay for all their sins. There have been umpteen instances where defaulting companies have been given loans again and again and the bankers somehow go scot-free. The banks just keep writing off loans. RBI does not have loan write-off data from 1991-2000. However in the following years the write offs were as follows: In 2001 it was 6446 Crores, in 2002 it was Rs 8,711, in 2003 it was Rs 12,021 crore, in 2004 it was Rs 13,559 crore, in 2005 it was Rs 10,823 crore, in 2006 it was Rs 11,657 crore, in 2007 it was Rs 11,621 crore, in 2008 it was Rs 11,653 crore, in 2009 it was Rs 15,996 crore, in 2010 it was Rs 25,019 crore, in 2011 it was Rs 23,896 crore, in 2012 it was Rs 20,892 crores and in 2013 it was Rs 32,218 crore. RBI further stated that between April 2014 and April 2018, 21 state-owned banks ended up writing off Rs 3,16,500 crore of loans. ‘WOW’!

The sad part is that the recovery is abysmal. This beckons the need for special courts to ensure that the defaulters are properly tried and the banks recover the money. The courts could also convict errant bank officers to ensure that the banking system in time works for those who have a clear intention of paying back and not defrauding. The courts however should dispense justice in less than 3 months or as the saying goes ‘Justice delayed is justice denied’. The other need is that bank managers who dispense large loans should be extremely well educated, paid really well and highly experienced so that their level of decision making to lend to a particular company or individual based on the project and credentials ensures lower NPAs in the future. Banks also need a better system to ensure that the money is going in the right place and if they find anything wrong, the plug should be pulled before too much money is lost.

We now live in the age of fast money. Entry and exit of investments should happen within 5-7 years which is the life cycle of investor-money be it debt or equity. The new mantra is the ‘x’ after a number. If the return to the investor is 5x, then kudos all round. If it is 100x, then thats Facebook status, the platinum carpet. Surprising that we spent 1200 years trying to fend off foreign invaders and another 70 years post independence to have our democratic voice heard. We must thank cheap internet and mobile connectivity and the ton of opinions flying off at every corner from the billion plus population. Giant companies have become so as a result of years of strategy, hard work, trial and error, mistakes etc., to still be standing today. To have a company do that in 7 years is asking for a minuscule percentage of winners which with a large population should not be the case. There has to be tremendous and sincere encouragement for smaller firms where many may succeed over time.

We have a highly successful neighbour in China and we can learn a lot from them especially in business as they have in the past 2 decades raced ahead of India to becoming a dominant player not just in the region but the world. SME’s contributed 60% of China’s industrial output and 80% of all the jobs. BRILLIANT! The government also supports the SME sector to thrive and does not choke it with red tape, bureaucracy and high capital costs. There are over 35 Million SME’s which are thriving in China and are also manufacturers to the world.

India needs to encourage more entrepreneurs and not oligarchs. While Oligarchs pay the political bill, their power should not make laws which stifle smaller companies. The government has to work hard to make cheap capital available to honest entrepreneurs and have a new-age powerful judiciary available to make the cheats disappear. Government officials should have no role to approach firms and harass them. The solution for this has to be a strong national police force which acts as a deterrent to discourage local politicians from harassing businesses. After all. businesses fuel the centre through taxes both direct and indirect.

The continuous forgiving of dishonesty should stop and people should scream from their rooftops to remove dishonest people from the system. For a better more competitive India, this has to be the new way.

Raj Kaushik – Vitarkka

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