I met Ganeshji not in the century that I was born but had to wait for the onset of the new millennium plus almost eight years for the planets to synchronise and be at the right position to create a favourable grah dasha.
Ganesh ji a prolific blogger, banker, company secretary, connoisseur of music and a foodie plus many things known and unknown.. had earlier written for Vrikshamamdir about Raju Thapa our guest house care taker and Bahadur our watchman.
He now writes about Banks, NPAs, Auditors and Scams.
1992 SCAM – the Ostrich style in the banks
Banks and Non Performing Assets
The web series on Sony TV ‘1992 Scam’ gives a gripping account of how Harshad Mehta played the system in the early 1990s. The screen play, production and the performances are all brilliant and I found it difficult to pull myself away from the TV screen until the end. Well done Sucheta Dalal and Co.
The story also took me to that period when fooling a bank was not very difficult and the system or the lack of it was tempting to any borrower with the most lame excuse to attempt a quick diversion. Clearly the malady portrayed by 1992 Scam in the incapacity of the rule makers to look beyond the rules was all pervasive and bankers were unfortunately paralysed by the question “who will bell the cat?”.
One wonders how a low rung bank manager could have taken a decisive stand against a delinquent client when even the RBI Governor and the JPC members were seemingly incapacitated! ‘Let my successor face the music’ was the favorite theme of the day!
The disease in the banking system originated with the general ignorance of the bank manager at the operational level about how the industry actually worked exacerbated by a lack of courage to question the borrower.
Bankers were good ledger keepers and expecting them to foresee how the borrower would behave was a little misplaced! Whatever expertise the bank manager possessed was all superficial as there was no cross infusion of talent and banks never recruited anyone from outside the sector if at all they looked at anyone with experience. Attitude issues including dip your hands since nobody is looking added to the general failure. It’s not that every banking officer was blind or corrupt. Unfortunately the honest and intelligent officer mostly lacked the spine to take a hard stand.
The fast paced expansion of the banking system driven by the social banking phobia and political loan melas had also created a huge gulf between the borrower and the bank. Whatever was left of the much needed human element in the system was gradually neutralized by the mechanical paper work and politically driven targets. The essence of banking of the good old days was in the personal rapport with the borrower and the consequent assessment of the individual character and honesty. However, that implicit human element started getting eroded when human robots came to occupy the chair.
It was also not that every borrower was dishonest and keen to cheat the system. In the scenario that was evolving bankers were not and perhaps unable to act as the friend, philosopher and guide to the borrowers. Notwithstanding their knowledge deficit, bankers had the advantage of overviewing the general business scenario from the pavilion and that gave them an advantage of being able to guide the borrower. However, they were more forcefully driven by the cover your ass approach. That in turn resulted in the borrower not honestly sharing their business problems with the banker in the fear that funding would be withdrawn and so the cat and the mouse played the game merrily in the hope that they would never be caught. Consequently any one who sounded the warning was hounded out as the ostrich like stance was extremely convenient to the lender. “why should I recognize the problem and be blamed for it?” was the underlying strain. It was easier to lose sleep rather than lose the job!!
Non Performing Assets
The NPA crisis we have today so blatantly manifested by the Mallayas and Choksis was perhaps inspired by the large scale systemic failure with the banks as was demonstrated by Harshad Mehta.
It was also not that the regulators were totally unaware of what was wrong with the system. However, attempts to correct were weak and always lagged in terms of effect and commitment. Lending norms and credit monitoring systems were introduced to “effectively” monitor the end use of the funds provided by banks. However, while lending decisions were based on future plans of the borrower, the monitoring was unable to keep pace with the actual events and was relegated to a post mortem exercise akin to bolting the door after the horse had fled! Whatever action was then contemplated were more for covering ones back side and lacked the teeth to bite. Typically no lender wanted to own the problem!!
One of the monitoring exercises was engaging outside professionals to verify the borrower assets. As a concept this was promising as it made up for what the bankers missed viz insightful industry knowledge. The exercise essentially aimed to verify if the borrower indeed utilized the funds for which they were provided. Where it was working capital finance, the borrower was expected to utilize the same to build the agreed levels of current assets in terms of inventory and receivables. And what happened in reality was that the borrower misreported the assets held in his monthly statements thereby hiding his genuine business problems or simply his dishonesty. The external auditor was then required to assess as a post mortem exercise if the borrower maintained the assets as he had reported. In essence the banker delegated his responsibility to the outside professional!
The efficacy of the process in turn depended on the ability of the auditor to see beyond what was presented to him by the borrower. And, since the inspection visits were always with prior notice, the auditor invariably received the red carpet treatment and VIP hospitality as an attempt to soften his probe and conclusions. The auditor was always under a challenge in having to protect himself from the over effusive reception and the subtle attempts of the borrower to hide the real picture. Yet, if he was smart enough, he managed to see through the screen and get a glimpse of the underlying problems at the borrower’s operations. However, were his findings put to genuine use and taken to their logical end was a million dollar question!
Mostly the reports were ignored or the professional encouraged to soften the impact so as not to alarm the banking system. Honest reports posed a problem to the banker as he was either a party to the malpractice or even if he was not, he was worried that the system would dump the garbage at his door step! It was hence convenience as well as fear of being victimized that guided the banker’s reaction to the findings leading essentially to inaction!
The experience of my friend Raghav engaged by a few banks for the asset verification program was quite frustrating. He scribbled his notes from time to time in a bid to retain his sanity and they form the basis of this blog.
The asset verification exercise carried out by Raghav threw up mainly three types of cases:
– Fraudulent disclosures viz reporting ghost assets
– Misreporting of data
– Bad project planning
There were several instances of each type and make an interesting case study.
Fraudulent disclosures required lot of courage on the part of the borrower and a confidence that the fraud will never be found. It was nothing but sheer brazenness and an attitude that smacked of contempt for the banking system.
A textile export house was one such case that came Raghav’s way. It was rather the first assignment that he handled and he had a lot to learn! The Borrower had a smallish office in the Kalbadevi area of Mumbai dominated by textile agents and outlets. The buildings were dilapidated and looked as if they could collapse anytime. However, whatever be the façade of the office building was no disincentive for the borrower managing to procure a bank facility running into fairly large amount not that it should. The interiors of the office on the fourth floor (the building had no lift!) gave Raghav no confidence and he struggled to draw any conclusion from those appearances. He was wondering “is this borrower genuine”?
The Managing director of the company gave him a warm welcome and even condescended to raise himself a little in greeting from the old and rickety chair he was occupying. He seemed offended that a non bank employee was deputed to conduct the inspection and let Raghav proceed only after he reconfirmed with the bank manager that the process was mandatory. The quarter cup of tea as is usually served in the market area was served and Raghav gulped it at one go still wondering what he was likely to see.
The managing director asked for the Kaka, the Chief Accountant.
An elderly uncle in pajama and kurta with a black topi adorning the head walked in and peered at Raghav thru his thick lenses. His question was uttered in total silence “what are you here for?” Raghav could sense the underlying animosity and ignored it.
He asked for the stock registers managing to hide his own nervousness. He was taken to the adjoining room which competed with the director’s room only in its shabbiness and perhaps displayed more bulky registers and dust than the other.
As Raghav went about tallying the stock registers with the statement submitted to the bank, two items caught his attention. The register showed zero balance as of date whereas a large value against the consignments had been included in the bank statement as at previous month end. Nothing unusual he thought but still wanted to query the Kaka. There was no hesitation in Kaka’s voice when he said “yes… those two items have moved since last month end..” Again nothing usual yet Raghav persisted. “Ok .. where are they now?”. The reply came too soon said Raghav’s inner voice “the Bill of Lading for both is available and I will provide them tomorrow”.
Raghav continued his verification on the second day and had not forgotten the two consignments. On being queried Kaka had a ready answer “the BL is on its way from our Tuticorin godown”. That seemed little odd considering that the loading was to have taken place three weeks ago. Now Raghav was worried but something inside him warned him from exhibiting his alarm. At the end of the day he asked “Kaka I am planning to visit south India.. can I visit your godown and take a look at your current stock position?” the request seemed innocuous and Kaka agreed to keep his godown manager suitably informed.
The visit to Tuticorin had a sole objective .. of locating those two consignments and by now Raghav had assumed he had been appointed by the CBI to detect the fraud! The godown was a huge public facility with material stored all over the place and each area marked by a placard indicating the owner name. Essentially they were huge bales of cloth stacked in three layers upto a height of at least about 12 ft and Raghav had no means of reading the label on each. The forklift was reportedly under servicing and was not expected to be ready for two more days in view of a festival holiday. Raghav realized his job was being made more difficult but could not assess whether it was by design.
Physically verifying any material was close to an impossibility and Raghav had no option but to peruse the ledger maintained by the godown. So he proceeded assuming that the ledger was reliable and started matching the items on the statement provided to the bank against the ledger balance. But lo and behold the two consignments in question were not traceable! The kaka on the phone had a ready answer “the ledger does not show if the consignment has already been shipped..”. he surely thought the inspector representing the bank must have been stupid and went about elaborately explaining why those two were missing. Raghav kept his cool and continued to act like an ignorant simpleton.
“sure.. I agree the stocks as of date will not show the two consignments but as at the end of last month they should have been included in the ledger balance?”
The kaka was now aggressive “sir.. you don’t understand the trade practice … I will get you the bill of lading to verify the shipment”. He had no clear explanation why the items were missing at previous month end even on book records. Raghav was to take the evening flight to Mumbai and kaka was aware of the schedule. He offered to send the B/L copy to the hotel and failing that to Raghav’s Mumbai office! It was really an evasive run around not enabling Raghav to draw any meaningful conclusion. And, he could not ignore the two items as they contributed to significantly to the aggregate value. But what options did he have?
Raghav was certain that he will never see the promised B/L and started writing his report after waiting for a week. He was now under a dilemma. Can he with confidence state that the two consignments did not exist and the stock reports were actually a farce! However, that meant he had to call the bluff and also face the backlash in case he was wrong. He was worried that his new career might take a beating even before start and he could be labelled as incompetent!
The language used by the financial auditors is often funny as they do not firmly assert the position and try to hide behind a hint lest they are accused of professional negligence (which also was experienced by Raghav in a later case). Raghav realized he could not call a spade a spade as the client was insisting he had the documents and had merely misplaced them! Raghav was now compelled to finalise his report with a comment that “the borrower had not adequately demonstrated as to the existence of two stock items as at the statement date…” He hoped that the bank manager would draw the right inference from that remark and initiate necessary follow through action. Raghav was certain that there was more to be unhidden and the bank was leading itself into deep trouble by ignoring such behaviour.
Sadly there was no call from the bank and no further explanation was sought. Raghav received his cheque by post and later learned from his acquaintance that he had unofficially been blacklisted by the branch! Much later he also learnt that the account had become a NPA!
To be continued