Bad Loans: Essar Destroys Government’s Credibility On Loan Recovery

In one fell swoop, Essar Steel has managed to destroy the credibility of the Modi government’s serious new effort to tackle bad loans through an ordinance empowering the Reserve Bank of India (RBI). Within three weeks of RBI identifying 12 large cases of bad loans to be fast-tracked, Essar Steel rushed to the Gujarat High Court and got a stay. This has further dented RBI’s credibility which is surely at an all-time low today.

With just two years to the general elections, most of our nationalised banks are on the brink. They have already been made to waste three years on opening Jan Dhan accounts, seeding Aadhaar numbers in bank accounts and handling demonetisation, rather than concentrate on their core function of lending—make new loans smartly and recover outstanding loans. Now, with a major strike planned by bank unions in August and consumers angry at being ripped off, we have the prospect of large defaulters continuing to game the judicial system to their advantage to avoid repayment.

Ironically, the government’s loan recovery effort has been stymied by an industry group which has often been in deep financial trouble from the early 1990s, barring a short interregnum. It has extracted innumerable concessions and write-offs from banks through debt restructuring in bad times, and then extracted bigger loans during good times. Essar Steel’s outstanding loans, at over Rs45,670 crore, make Vijay Mallya’s Rs9,000-crore borrowing appear puny. Yet, it is Mr. Mallya who is the poster boy for bad industry, while Prashant Ruia is giving interviews to mainstream media claiming that RBI has been ‘unfair’ to the group.

Essar’s suit before the Gujarat High Court is a template of what every large Indian industrialist has done for the past 50 years when faced with recovery or restructuring action. Essar’s lawyers pounced on a badly drafted RBI order which seemed to direct the National Company Law Tribunal (NCLT) to accord priority to 12 of the most egregious default cases. This was enough for Essar Steel to get its petition admitted; it also forced RBI to eat humble pie and amend its order. While the hearing continues, Essar Steel has already delayed action and can still appeal this case before the Supreme Court (SC).

When the government formulated the Insolvency and Bankruptcy Code (IBC) last year, it intended to take the bad loan issue out of the domain of civil courts and into that of the NCLT. The law provides for appeal before an appellate tribunal after which the case can land up before the SC. Essar Steel has managed to torpedo this architecture by going to the Gujarat High Court. Even if the Court throws out its case, it can still file an appeal before the SC and buy more time. When the government formulated the Insolvency and Bankruptcy Code (IBC) last year, it intended to take the bad loan issue out of the domain of civil courts and into that of the NCLT. The law provides for appeal before an appellate tribunal after which the case can land up before the SC. Essar Steel has managed to torpedo this architecture by going to the Gujarat High Court. Even if the Court throws out its case, it can still file an appeal before the SC and buy more time.

While Essar’s super-rich promoters have all the time and resources to prolong litigation, neither its lenders nor the government can afford a delay. Bad loans of banks have crossed Rs8 lakh crore, of which public sector banks account for over Rs6 lakh crore. This has opened an opportunity for devious people to take advantage of poor financial awareness and literacy in India to manufacture panic. In the past two weeks, I have received WhatsApp messages asking people to withdraw their money from nine public sector banks (facing prompt corrective action), allegedly because “the RBI plans to shut them down”! Shockingly, these are blindly forwarded by educated persons, some attached to the banking sector! Such inflammatory messages could foment a run on banks and inflict further economic damage.

The bad loan issue, to my mind, is the government’s biggest economic challenge. But, it has yet to attract the attention of our raucous but influential electronic media, which is only focused on the cow, Kashmir and communal issues. The finance ministry is also too busy with demonetisation, digital India and the roll-out of a tax revolution (Goods and Services Tax) to worry about a looming disaster.

However, there is a silver lining. My industry sources say that the prime minister’s office (PMO) is directly monitoring the 12 cases marked for insolvency proceedings by RBI’s internal advisory committee. These have an outstanding debt of more than Rs5,000 crore each, 60% of which was classified as non-performing on 31 March 2016. These account for 25% of stressed bank assets. Until Essar Steel’s bombshell action, banks had already started recovery action and there was a clear signal that there will be no leniency anymore. At least five on the list were on the verge of finalising buyers for their assets. After Essar Steel’s audacious litigation and director Prashant Ruia’s aggressive media interview, these and 488 other defaulters (who have been given six months to restructure debt) are watching the government’s next move with interest.

Essar Steel’s petition calls RBI’s action as “hostile, arbitrary and unreasonable” and claims that the company has been ‘discriminated’ against. It questions RBI’s cut-off date, of March 2016, for identifying the worst defaulters and argues that it had almost reached a settlement with its creditors to restructure its debt once again. Essar wants the Court to direct RBI to consider its recent interest payments (Rs3,467 crore in FY16-17) and improved capacity utilisation and earnings to include the company in the second category of 488 defaulters who have been given six months to restructure debt. In the media interview, Prashant Ruia argues for time to close its restructuring package with lenders that was agreed in January this year. However, this was largely on Essar’s terms and probably because banks didn’t have a better alternative.

Essar Steel also argues that RBI cannot fast-track 12 specific cases and must look at each one on a case-by-case basis. But isn’t that exactly how shady bankers allowed the Essar group to borrow recklessly for two decades, despite multiple defaults? Another argument in Essar’s petition is that the UPA government was partly to be blamed for its losses, because it cut off gas supply to the plant that hit production. RBI’s ability to counter these claims will decide the case. It is hard to imagine how a Court can be asked to direct bankers to restructure Essar Steel’s loans when nationalised banks are in no position to decide bailouts. Most of them are desperately pleading for capital infusion by the government which is at the cost of the taxpayer.

Will the brazen Ruias beat the banking system again? Unlike the flamboyant Vijay Mallya, who attracted public attention by flaunting his over-the-top lifestyle, the Ruias have so far escaped public opprobrium by flying below the radar and kept away from the society pages. Essar group’s outstanding debt is stupendous and estimated at anywhere between Rs1.17 lakh crore to Rs1.38 lakh crore. This debt nearly halved with the sale of Essar Oil (with Vadinar Port and Vadinar Power) to Roseneft of Russia for Rs86,000 crore. However, that has, by no means, ended Essar’s woes. Almost all its businesses continue to haemorrhage, losses run into a few thousand crores of rupees and banks have already taken a big hit on loans to several of Essar companies.

In March 2016, Caravan magazine, in an article on the group, attributes a quote to promoter Shashi Ruia boasting, “I’m worth 1.5 billion abroad.” While we know that the group was forced to sell its oil business and may have to let go of steel too, it would be no surprise if Ruia’s alleged boast remains true even today. Meanwhile, we, the taxpayers, see more of our money vanish into his balance sheets or those of reckless banks capitalised by the exchequer.

NOTE: This article went to print before the single-judge bench order of the Gujarat High Court.