By Nantoo Banerjee
Pledging inflated stocks to borrow big from India’s public sector banks seems to have become a routine practice in India. Surprisingly, the Reserve Bank (RBI), the banking regulator, and the government, are doing little to control such practices by holding bank management as responsible as those adventurous borrowers. There are reasons to be worried about the growing financial frauds. RBI’s mind-boggling admission that India lost Rs.100 crore to bank fraud every day over the past seven years under the present government hides more than it reveals on how the practice has been gaining ground year after year right under the nose of the regulator. From April 2015-December 2021, a total of Rs. 2.5-lakh crore worth financial frauds was detected in India.
In the case of listed companies involved in such frauds, were the lenders fully satisfied with the real value of stocks or assets which were pledged with them at the time of borrowing funds? Did the lenders follow the industry-specific debt-to-equity norm before granting large loans to companies? Most of the large bank frauds in the past were due to wrong assessments of the borrowers’ assets quality. Fraud-hit banks have been lending recklessly to certain aggressive borrowers ignoring the consequences of such actions. This gives rise to the question of a possibility of an unholy bank-borrower alliance. A debate on the subject is relevant in the context of growing cases of bank frauds in the country.
For instance, the price-to-earning (P/E) ratios of a whole lot of listed companies, led by some of the Adani firms, are uncomfortably high. Advancing loans on the basis of such stock prices can become highly risky. Are the lending banks concerned? Probably not. Acceptance of highly inflated stocks as mortgages to sanction large loans often made banks get stuck with sticky assets in due course. The proper stock valuation is important for all investors, including lenders. Also, banks are supposed to consider industry-linked debt-to-equity ratios to provide fresh loans to companies.
Of the country’s 18 listed firms having P/E ratio above 70, Adani Green Energy ranks No.1 boasting 254. Three other Adani stocks — Adani Total Gas, Adani Enterprises and Adani Transmission — have P/E ratios in the 100-200 range. Adani Wilmar has a P/E ratio of around 79. The only non-Adani company under this range is Bajaj Holdings. The P/E ratios of DLF, Tata Power, Avenue Supermarkets, Pidilite Industries, ABB India, ICICI Prudential Life Insurance, Siemens, Nestle, HDFC Life, Titan, Apollo Hospitals and Asian Paints are in the bracket of between 70 and 90.
Interestingly, Adani companies rank mostly at the bottom when it comes to dividend payout ratio. The dividend payout ratio of Adani Green, Adani Transmission and Adani Wilmar is 0.0 as against Adani Total Gas 5.4 and Adani Enterprises 23.1. Compare them with the dividend payout ratio of DLF (88.0), Pidilite Industries (42.1), Nestle (88.7), Asian Paints (60.2), Titan (30.3), Siemens (28.2) and Bajaj Holdings (31.6). Yet, Adani firms such as Adani Green, Adani Transmission and Adani Power are rated as blue eyed borrowers by certain lenders. Such lenders’ logic may not be easy to understand by many. It may be noted that a majority of the firms with high P/E ratio are not even big borrowers.
The P/E ratio is one of the most widely accepted metrics used by investors and analysts to determine stock valuation and help judge if the stock of a company is undervalued or overvalued, along with the comparison of the valuation with the benchmark or industry peers. It suggests if a stock is trading at a high price relative to earnings may be overvalued. In the US, the P/E ratio reached a staggering 123.73x in May 2009, the highest in its history, mainly because of the depressed earnings during the “great recession” and has been the only instance since 1970 in which the P/E ratio reached triple digits.
High P/E ratios and debt-to-equity ratios normally make lenders and stock investors cautious about betting on such firms. However, Adani firms seem to challenge the concept. Adani Green’s debt-to equity ratio is as high as 45 against a generally accepted limit of 2. The state-controlled LIC of India, the country’s largest investor in public markets, finds investment in Adani stocks rewarding at a time when mutual funds are trimming their exposure in Adani shares. LIC raised its stakes in four of the six listed Adani group companies in the last March quarter. According to a report, LIC’s combined investment in Adani group stocks plunged to Rs 62,621 crore on January 27, 2023 from Rs 81,268 crore on January 24, 2023, indicating a notional loss of Rs.18,647 crore.
Last year, a junior finance minister stated in Parliament that banks have written off Rs 11.17 lakh crore bad loans from their books in the last six years till the financial year 2021-22. Union Finance Minister Nirmala Sitharaman herself stated that loans amounting to over Rs.10.09 lakh crore were written off by scheduled commercial banks in the past five financial years. Little is known about those systematic bank defaulters or robbers. Minister of State for Finance Bhagwat Kishanrao Karad said that as per RBI guidelines, names of loan defaulters could be disclosed only once their assets were put up for auction. The banking regulator or the government could at least mention how the banks are systematically robbed by borrowers year after year although most defaulters, wilful or not, follow their own modus operandi. Few will be surprised if bank management are involved in the operation.
More often than not, most large bank frauds seem to invariably involve public sector banks, especially in terms of value. Yet, the state sector bank management at the top level would appear to stay more insulated against penal action than its counterpart in the private sector. The value of frauds is much lower at private sector banks. Lately, the Central Bureau of Investigation (CBI) had arrested and chargesheeted Yes Bank co-founder Rana Kapoor in a Rs 466.51 crore bank fraud case. In another private sector loan fraud case, former ICICI Bank managing director and CEO Chanda Kochhar, her husband Deepak Kochhar, and Videocon Group Chairman Venugopal Dhoot were arrested by CBI.
It may be time that the services of CBI and Enforcement Directorate are used to detect the involvement of top public sector bank management in big bank fraud cases before fund embezzlers manage to escape from the country. As of now, over 30 financial fugitives are hiding abroad. They include Vijay Mallya, Nirav Modi, Neeshal Modi, Mehul Choksi, Nitin J. Sandesara and Dipti Chetankumar. They flouted all established norms to borrow large funds from public sector banks or bank consortiums. Little is known about the involvement of top level bank management in such public fund swindles. (IPA Service)