Down the Rabbit Hole

1 Down the Rabbit Hole What the bankers aren’t telling you! ---------------------------------------------------------- An Analysis of Lending Practices Adopted by Banks to Finance ‘Developmental’ Projects in India The Research Collective - PSA February 2014 2 The Research Collective, the research unit of the Programme for Social Action (PSA), aims to facilitate research around the theoretical framework and practical aspects of development, industry, sustainable alternatives, equitable growth, natural resources, community & people’s rights. Cutting across subjects of economics, law, politics, environment and social sciences, the work bases itself on peoples’ experiences and community perspectives. Our work aims to reflect ground realities, challenge detrimental growth paradigms and generate informed discussions on social, economic, political, environmental and cultural problems. Cover Design : Studio Kirukal Cartoon Illustration : Balaji Mohan R Printer : Jerry Enterprises | 9873294668 For Private Circulation Only Suggested contribution : Rs. 100/- PROGRAMME FOR SOCIAL ACTION H – 17/1, Malviya Nagar, New Delhi 110017. Phone Number: +91-11-26687725 | 26671556 Email: [email protected] | [email protected] 3 ACKNOWLEDGEMENT We, at PSA, are happy and excited that our work on scrutinising lending to mega projects, which was initiated in July 2011 and spanned over two years, is seeing the light of the day in the shape of this report. Down the Rabbit Hole – What the Bankers Aren’t Telling You! is a consolidation of the preliminary work undertaken by The Research Collective of PSA. I thank the communities of people in Siang, Singrauli, Lohit, Dhenkanal and Shella for sharing their stories and trusting me with information. Vijay Taram, Ba Chyne, Awadhesh Kumar, Amulya Nayak and Bhakta Bandhu Behera - thank you for enabling my field visits to the project areas and introducing me to the communities. The final report was made possible only because of the critical inputs provided by a number of individuals who took the time to read through and provide feedback. I am grateful for the significant feedback provided by Appu Esthose Suresh, Ashish Kothari, Dunu Roy, Himanshu Damle, J John, Justin Guay, Kanchi Kohli, Nityanand Jayaraman, and Shripad Dharmadikari. Ram Wangkheirakpam, Persis Taraporevala and Himanshu Thakkar - thank you for your vital comments on the specific case studies. I thank Kavaljit Singh and Professor Arun Kumar for meeting with me to discuss the contents of the report and for providing their valuable feedback. For the many critical discussions, frequent feedback and prompt help, a special thanks to Himanshu Damle. I thank Alex, Sura, Joe and Bala for their assistance. Vijayan MJ, thank you for trusting and believing in the abilities of an individual with little experience and background in economics, finance and academia to pursue this study. I thank you for initiating this work, for the one million ideas, for having an ever-open ear, for being a constant support. And most of all, for helping shape this report! PSA Collective of friends and colleagues, thank you for standing by me while I struggled to comprehend the complexity of the crisis in the lending world and then all through the numerous phases of writing, structuring and restructuring of this report. And finally for owning up the work! Aashima Subberwal, thank you for rescheduling other work and numerous other meetings to ensure the completion of this report. I salute the struggles of the communities of people in Siang, Singrauli, Lohit, Dhenkanal, Shella, Mulshi and Velhe, Krishnapatnam and the thousand other places across the country. I earnestly hope that this work is useful and assists the process of bringing about responsible lending in the country. Lakshmi Premkumar The Research Collective Programme for Social Action 4 CONTENTS Preface ………………………………………………………………………………………………………………..………………….. 7 Introduction ………………………………………………………………………………………………………….………………… 9 Chapter ONE 1.1 Case Studies …………………………………………………………………………………………………………………………… 12 1. GMR Kamalanga Energy …………………………………………..…………………………………………………….. 13 2. Athena Demwe Lower Hydro Electric Power ………………………………………………………………….. 18 3. Sasan Power …………..………………………………………………………………………………………….…………… 23 4. Lavasa Hill City ………………………………………………………………………………………………………………… 30 5. Lafarge Surma ………………………………………………………………………………………………………………... 37 6. Coastal Andhra Power ……………………………………………………………………………………………………. 42 1.2 Flawed Mechanisms & Implications …………………………………………………………………………………...… 44 Social Impacts of Projects ……………………………………………………………………………………….………. 45 Environmental Impacts of Projects …………………………………………………………………………………. 49 1.3 Financial Risks in Poorly Assessed Projects …………………………………………………………………………… 53 Chapter TWO 2.1 The Project Finance Bug ……………………………………………………………………………………..……………….… 60 2.2 What is a Bad Loan Worth? ………………………………………………………………………………….…………........ 61 2.3 Banking Sector ‘Reforms’ …………………………………………………………………………………….…..…….……… 67 2.4 Rewriting ‘Development’ Finance - The Changing Trends …………………………………….………………. 69 2.5 Reserve Bank of India (RBI) ……………………………………………………………………………………….………….. 70 Conflict of Interest at the Reserve Bank of India ……………………………………………………………. 72 Chapter THREE 3.1 Public Sector Banks - A Pandora’s Box! …………………………………………………………………..…………….. 73 3.2 Stonewalling Information - A Complete Lack of Transparency …………………………………….………. 81 Chapter FOUR 4.1 Democratically Accountable and Publicly Transparent Investment ………………………………..…….. 84 4.2 Global Mechanisms for Accountable and Transparent Investment…………………………………...... 85 4.3 Voluntary Guidelines Lack Teeth ……………………………………………………………………………………………. 86 4.4 Regulation of Socio-Environmental Norms in Lending in India ………………………………………….. …. 88 The Veil of Internal Guidelines ……………………………………………………………………………………….. 89 Chapter FIVE 5.1 Conclusion ……………………………………………………………………………………………………………………….……. 93 5.2 Recommendations ………………………………………………………………………………………………………..………. 97 Annexures Annexure 1 – List of current Board of Directors at the RBI ………………………………………………………….. 99 Annexure 2 – Information provided by eleven banks to applications under the RTI Act ……….… ….. 101 Annexure 3 – SBI Circular on Credit Policy and Procedures Department; March 2008 …………………. 103 5 TABLES Table 1 Financial information of the six case study projects Page 54 Table 2 Status of the six case study projects Page 55 Table 3 Basic statistics of the eleven public sector banks Page 73 Table 4 Loans sanctioned by LIC, SBM, CBI and SBI to public sector Page 74 undertakings (PSUs) and private sector companies (PSC) Table 5 SBI’s non-performing assets in public sector undertakings and Page 75 private sector companies Table 6 IB and SBM’s non-performing assets in public sector undertakings Page 76 and private sector companies Table 7 Non-performing assets in Union Bank of India and Bank of India Page 77 Table 8 Losses suffered due to loan default by State Bank of Mysore Page 77 Table 9 Sectoral increase and decrease in loans and NPAs in the eight year Page 78 period between 2003-04 and 2010-11 along with loans and NPA for 2010-11 at SBI Table 10 Distribution of SBI’s loans to private sector companies in selected Page 79 sectors Table 11 Distribution of SBI’s NPA on loans to private sector companies in Page 80 selected sectors ABBREVIATIONS Cr - Crores Kms - Kilo Meters Ha - Hectares M - Meters Ft - Feet MTPA - Million Tonnes Per Annum MCFT - Million Cubic Feet MCM - Million Cubic Metre MLD - Mega Litre Per Day MT - Million Tonnes MW - Mega Watts PLF - Plant Load Factor Rs - Rupees in INR USD - US Dollar 6 PREFACE - A Robinhood Antithesis: The Great Indian Banking Scam Why does the Reserve Bank of India have representatives of the Indian corporate sector1 sitting at the helm of its affairs? While small entrepreneurs, farmers and students are finding it difficult to get loans worth few lakhs, why are big corporations sanctioned loans worth hundreds of crores, even while topping the defaulters list? Why are banks not held liable for the bad loans they grant to disastrous projects? More importantly, why are banks funding projects that are inherently undemocratic, irreparably damaging the environment, displacing large number of people and ultimately, serving only to increase private profits? Bad loans in Public Sector Banks (PSB) shot up by more than 400 per cent in the last five years, hitting Rs. 1,64,000 Cr in March 2013! Accounting for the bad loans that are restructured and shown as good loans, this amount doubles to Rs. 3,25,000 Cr. In the five years between 2008 and 2013, PSBs transferred and adjusted Rs. 1,40,000 Cr from their profits to provision for bad loans. It is important to note that out of the Rs. 1,64,000 Cr bad loans in PSBs, Rs. 64,000 Cr or 39 per cent is only from the top 30 bad loan accounts!2 Corporate borrowers in India are demonstrating exemplary skills in taking huge loans from banks and not repaying them; rendering them bad loans or non- performing assets (NPAs)! Today, corporations operate neither with their money nor with the money they generate from the market through shares. This aspect of ‘corporatocracy’ must be understood for us to get into this study and realise its relevance. Corporates float Special Purpose Vehicles (SPV) and garner much of the finances required through Project Finance loans from financial institutions and banks. In India, flow of finance to corporations through loans is largely unregulated and based on sheer brand trust, often openly violating safety mechanisms and standard due diligence

Load more