Adventures in Banking - Milking the Regulations

B was a joint venture undertaking between a State Government and a large and respected industrial group. It had been set up to produce Caustic Soda for captive consumption of a group company. The technology involved is not complex. Common Salt (NaCl) is dissolved in water and electricity is passed through this solution which results in production of Caustic Soda (NaOH) and Chlorine. The main raw material, in terms of cost, is electricity. Some of such plants are set up for production of Caustic Soda with Chlorine being considered a by-product while others are set up for the production of Chlorine with Caustic Soda being considered a by-product. Naturally, financial viability is substantially enhanced if there are nearby customers for both Caustic Soda and Chlorine, since transportation of both the products is difficult and expensive.

B had made substantial losses and were approved a revival-cum-restructuring package, which envisaged all possible kinds of reliefs and concessions, not just from the financial institutions (deferral in repayment of principal, waiver and reduction in interest rates etc.), but also State Government (deferral of Sales Tax) and Electricity Board (concessionary power rates) etc. There was minimal sacrifice by the promoters. After all it was a matter of industrial development and generation of gainful employment for the country.

Visits to the company’s plant however did not remotely suggest that the company was sick. Sick companies have a typical odour.

All was well till implementation of the relief package came up. To effectuate which a joint plant inspection by the bank and financial institution-cum Operating Agency (OA) was arranged. This is where things started to unravel. The OA team consisted of a very young and smart CA and a much older Manager.  They started asking some seemingly innocuous questions and then we realized that suddenly there was a chill in the atmosphere. Anyway, the inspection was completed and we returned to our respective offices. Incidentally, reaching the plant involved an overnight train journey from Patna. The OA team would have come from Bombay to Patna and then by overnight train to the plant. 

The fireworks started at the next hearing at the rehabilitation team, where status of implementation of the package was to be reviewed. The Operating Agency in its report submitted detailed particulars which showed that the “sickness” was essentially due to under-invoicing sales to its group company, who were the sole buyer. Consequently all the approved reliefs and concessions were withdrawn.

This was a major shock to the group’s top management and I understand heads of the many of company’s managers rolled for not being able to handle a bunch of bankers.

Soon after, since I had completed more than two years in this particular assignment, I was given a fresh assignment and got transferred. Much later, I came to know that on an appeal by the company, a similar rehabilitation package was approved and implemented!

Credit Lesson 104: Handling government regulations for the benefit of the borrowing entity is something of an art which many of our business groups have perfected, and getting classified as "sick" is the ultimate perfection of that art. It starts from producing attractive project reports, getting financial and regulatory approvals, syphoning out the borrowed funds, declaring the project sick and getting all kinds of reliefs and concessions from the government and lending banks.

They cannot really be blamed. We have built up a lending eco-system where it would be irrational not to game the system. 

The situation is well summed up in the preamble of the Omkar Goswami Report (Report of The Committee on Industrial Sickness and Corporate Restructuring – July 1993) that, “There are sick companies, sick banks, ailing financial institutions, and unpaid workers. But there are hardly any sick promoters”.

Adventures in Banking - Recovery in Small Agricultural Loans

Around the year 1988, ie nearly 40 years ago, soon after completion of probation two of us (colleagues and batch mates) were sent on a three weak assignment to a bank branch specializing in making agricultural loans. Our mandate was to prepare insurance claim forms for loans which had gone bad for submission to DICGC (ie Deposit Insurance and Credit Guarantee Corporation, a subsidiary of RBI which provides insurance both to small bank deposits as well as certain classes of bank loans). The branch had a huge back-log of such claims to be submitted and the work was to be completed in mission mode.The received wisdom was that making small agricultural loans was a sheer waste of resources – and at best a kind of charity - and the only way to make any recovery was through such submitting claims on the underlying insurance (which was also limited as to the amount of loan).  

Under manual accounting systems, details of each loan (name of the borrower, address, amount disbursed, interest charged, repayments etc.) was maintained in physical ledgers. When loans went bad the details were transferred to another ledger which are designated as PB&RD (Protested Bills & Recalled Debts) ledgers, which was designed to have some additional details. Since there were hardly any repayments, instead of transferring individual account details to the PB&RD ledgers the original ledgers were classified as PB&RD ledgers. Logical and fine.

While preparing the DICGC claims we came across instances in some of the ledgers where there had been repayments in nearly all loan accounts, albeit small amounts, over the same time frame.

Being young and curious, even though it was much outside the purview of our mandate to prepare the DICGC claim forms, we tried to find out what had triggered these repayments. The explanation turned out to be quite simple. All that the concerned Field Officer or most likely his assistant had done was to send out reminder notices by way of pre-printed Post Cards to all the loanees whose details were available in a particular ledger. Cost of each PC was I think Rs.0.15 at that point of time. The recovery in each of the account was in the order of Rs.20 to Rs.50.

Credit Lesson 103: No security enforcement, no legal hassles, no convoluted lengthy recovery measures. Just plain and simple follow-up with minimal exertion. Not even a physical follow up was done in getting these recoveries.

PS: Over a 3-week period we ended up preparing over 3,000 claim forms, each of us averaging 80-90 forms a day. Initially, we are advised by the branch officials (Field Officer and Rural Development Officers), who were primarily responsible to make the claim forms, that filling up the forms accurately was a fiendishly complex exercise and we would be lucky if we could fill up 3-5 forms in a day. This advise was initially taken at face value, but in a couple of days, once we got a hang of the job, our output increased substantially. Then the same guys came and advised that in case of mistakes, the entire lot would be rejected by DICGC and all our effort and the bank’s expense would go waste - and so there was no need for us to be proud of our output since it would surely end up as a waste of time and effort.

The proof of the pudding is in eating it. After we had completed the exercise, the data from the physical forms were digitized by the local computer center (Purnea).  Thereafter, my colleague who was involved in preparing the forms along with me, got an opportunity to carry the computer tapes for submission forms to the DICGC office in Bombay. He not only submitted the data but hung around for a couple of days, got the insurance claims processed by, and collected the cheque for the full claim amount. I still remember the triumphant smile on his face when he returned with the claim amount. 

The feeling of satisfaction of a difficult assignment well-completed was immense.