Loan scams endemic to finance capital
TILL a few years ago, Chanda Kochhar was a celebrity. She graced the front pages with her opinions on the state of India’s economy. On every Budget day, TV channels vied for her time to find out whether she thought the Finance Minister had got it right. Now, she has been arrested, allegedly for taking kickbacks to give big loans to the beleaguered Videocon Group. Kochhar is not the first famous banker to be arrested; a couple of years ago, Yes Bank’s Rana Kapoor was taken into custody on similar charges of taking bribes to facilitate loans to corporates, many of which could not be recovered.
The allegations, if proven, should not surprise anyone who has followed India’s NPA (non-performing assets) or ‘bad loans’ crisis, that has unfolded over the past decade. Banks, mostly in the public sector, gave out huge loans to a wide number of corporates to finance big projects. A large number of them turned out to be unviable, and the companies stopped paying back their loans. Even when these mega loans were being sanctioned, there were rumours of corrupt practices, of a nexus between politicians, corporates and bankers. Public-sector bankers would allegedly be told by the political masters to issue loans to their corporate cronies, without proper diligence. In return, the bankers would get a share of the kickbacks going back up the chain into the political system.
Even for bankers in the private sector, proximity to the government was of immense use. The grapevine during the UPA years was that there was an interconnected web of corporate houses, private banks, babus, politicians and influential public figures, who would work out mega financial deals, where everyone would gain. The official charges against Kochhar and Kapoor suggest that these deals were not just about power and promoting the bank’s business; the top bankers were personally making money out of them.
This corrupt system has come to be known as ‘crony capitalism’ and it is seen as an outcome of not allowing the market system to operate freely. I would argue that this nexus between big business, government and finance capital is a universal and inevitable feature of contemporary ‘free market’ capitalism, and not an aberration. Since the 1980s, finance has replaced manufacturing from the pole position of being the driving force of capitalism. This was made possible by central banks in the developed capitalist world deciding to drop interest rates sharply in relation to the average rate of profit in their economies. This was accompanied by the policies of ‘globalisation’ which were pushed across the world, first by the IMF and World Bank, and later by other international institutions, such as the WTO (World Trade Organisation).
Low interest rates made it cheap for banks and financial institutions to borrow large sums, while the dilution of capital controls by nations made it easier for finance capital to swiftly move across the world. Big funds travelled the world, especially the capital markets, seeking higher returns on their financial investments. Stock markets boomed, and then, periodically went bust. Banks across the world became aligned to the needs of the financial markets, and equities became an important form of collateral against which loans were given to companies.
This system, inevitably, gave an advantage to larger companies with higher market capitalisation — higher valuation in the stock markets. They could ‘leverage’ their market cap to raise bank loans, and banks, in turn, felt secure that such valuable companies would not default on the credit extended to them. Smaller players, even if they had great business potential, would find it tougher to borrow. And, when they did, they would have to pay higher interest rates than bigger companies.
Across the world — not least in the USA — banks and financial institutions acquired increasing proximity to the political establishment and the state. Bankers managed to push for increased deregulation in the financial sector, while politicians pushed to get these banks to invest and give loans to big businesses who were close to them. There is enough evidence from countries across the world that such ‘cronyism’ emerged wherever finance managed to gain an influence over policy-making.
India is part of this global process, and the ‘boom’ period of 2005-08 saw some of the worst excesses of this politician-corporate-bank nexus. As foreign portfolio capital flooded the Indian stock markets from mid-2005, it pushed up the market capitalisation of Indian listed companies beyond all economic rationality. Companies with no real assets or regular profits had managed to raise funds through IPOs and run up fabulous share prices. They used these shares as collateral to raise money from banks. They were then able to show their financial fitness to bid for government contracts for mega projects. The projects themselves were financially unviable, but in the process, the promoters of these companies siphoned off large sums of money into their private accounts or into other, unrelated, projects.
In some cases, the modus operandi was even more convoluted. A company would get a contract for building an infrastructure asset, which would be executed through specially special purpose vehicles or SPVs. The parent company would take large loans from banks and then lend that money out to fraternal shell companies. These shell companies would use the funds to buy a stake in the SPVs. The money coming into the SPVs would now show up as equity, and not debt. The SPVs would then use their equity funds to give construction contracts to the original parent company which had taken the loans. So, the loans given by banks to the parent company would return through a circuitous route as revenue. The revenues would boost the company’s share price and, again, help it leverage its shares to raise more funds.
There were many such methods by which corporates used their influence to get big loans, and then enriched themselves. Much of this has been written off by banks and might never be recovered. Right now, bankers have become careful and are lending less. But once the spotlight is off them, this ‘cronyism’ will inevitably be back in full swing.
The author is a senior economic analyst
