Mr Prime Minister, Contrary to Your Claims, the System is Still Being Gamed by Crony Capitalists

The same set of businessmen, big and small, who were gaming the system earlier continue to thrive under the Modi regime.

The personal honesty of a prime minister does not matter if the system is not cleaned up. Credit: PTI

The personal honesty of a prime minister does not matter if the system is not cleaned up. Credit: PTI

When the system and institutional arrangements continue to be gamed by crony capitalists, it really doesn’t matter if the prime minister is personally clean or free of corruption charges. This is not about the individual at all.

We learnt this when the system was being gamed under Manmohan Singh. We are seeing a repeat of it under Narendra Modi. The prime minister hasn’t spoken a word on the bank fraud perpetrated by diamond merchants Nirav Modi and Mehul Choksi whose companies now owe Rs 20,000 crore, if one adds to the bank fraud the amount of bad loans that they have to repay Punjab National Bank and other banks.

The prime minister’s repeated claims that he was successful in cleaning the system of all its ills is proving more and more hollow as frauds and scams tumble out of the  closet in regular intervals.

Modi recently claimed his government had deregistered over 3 lakh dormant and shell companies listed with the Registrar of Companies. But it is apparent that this did not include the 200 shell companies of Nirav Modi and Choksi which the Central Bureau of Investigation and the Enforcement Directorate found to have been used to invest the Rs 11,400 crore of fraudulently obtained money.

The fact that Nirav Modi and Mehul Choksi had enough clout within the banking system for their company officials to be able to independently operate the international inter-bank financial messaging system, SWIFT, using the log-in credentials of various PNB bank officials is a shocking reflection of cronyism and fraud at its worst.

The fact that the bulk of the fraudulent LoUs (letters of undertaking) were issued by PNB in early 2017 makes a mockery of finance minister Arun Jaitley’s claims that banks were being recapitalised on the condition that they will strictly adhere to internal reforms and improved governance. Punjab National Bank got about Rs 5,000 croresas fresh capital in the first wave of recapitalisation. Unfortunately PNB may have already lost three times what it has received as fresh capital.

The government plans to inject Rs 2 lakh crore as fresh capital over two to three years. One can only hope this new capital injection doesn’t get eaten up by fresh cases of fraud and NPAs in general. Remember, of the total declared NPAs of Rs 9 lakh crores in the banking system, about 30% is already provided for from past profits and as they are being referred to the insolvency courts the recovery in each case so far hasn’t exceeded 30%.

Roughly 40% of the total loans which have turned NPA or about to turn NPA – totaling approximately Rs 4 lakh crore – represents the black hole in the banking system. So, the Rs 2 lakh crore of fresh capital being injected by Jaitley will merely fill half of that black hole.

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The more fundamental point here is the same set of capitalists, big and small, who were gaming the system earlier continue to thrive under the Modi regime. Assets are being put up for sale by insolvent companies which haven’t repaid bank loans but distant family members are bidding for the same company at dirt cheap prices, thus making a mockery of the process.

Some of these corporate groups have entered special public private partnership arrangements with the Modi government in captive businesses such as defence manufacturing and other infrastructure projects even though some of these companies still owe the banks about Rs 3 lakh crore of unpaid dues.

A key indicator of the kid glove treatment of these big corporate groups by the Modi government is that some of them are not being declared wilful defaulters by the RBI and banks when investigations by the finance ministry clearly show that they diverted borrowed domestic bank funds abroad by over invoicing imports of infrastructure equipment in the power sector. Why are the prime minister and finance minister not acting on fully investigated findings by their own departments which show massive over invoicing of imports? This is a big puzzle really.

At some point when these cases blow up into full fledged scams – as has happened with Mehul Choksi and Nirav Modi – the government and regulators will be called to account but it might be too late by then.

If the prime minister and finance minister are really serious about stemming the rot in the banking system they must immediately form a full team of investigators including members from the RBI to monitor closely the top 50 corporate loan accounts which are either NPA already or severely stressed. This must be followed by by quick action before things go out of control.

The lines between fraud and plain default are blurring ever so quickly. It is not enough for Modi to say these loans were given during UPA period. The fact is some of these corporate groups thrived under NDA-1 as well when massive write-offs happened. The truth is these entities are still gaming the system whatever the prime minister may claim.

As I noted in the beginning, the personal honesty of the prime minister and his men is simply not helping the common taxpayer who is paying through her nose for those continuing to loot the system.