Companies and banks NDTV spoke to largely blamed regulatory reversals and delayed clearances for stalling of projects, the key contributor to the mountain of corporate debt.
As the Narendra Modi government attempts to jumpstart the economy, attention is turning to a less discussed aspect of the financial system that is threatening a revival: high amounts of debt.
The results over the past two weeks from India's banks confirmed this worrying trend: of total loans of Rs 63 lakh crore, non-performing assets (NPA) or defaulted loans stood at 4 per cent. Restructured loans make another 5 per cent and along with stressed loans (repayments due for more than 30 days), the amount of bad debt in the economy was Rs 14 lakh crore, about 20 per cent of all advances.
Pradeep Kumar, Managing Director in charge of corporate lending at the State Bank of India, the country's biggest bank, described it as "a great cause for concern".
He said "growth last year has been very muted. SBI has grown only about 7.5 per cent, which is actually low," and that "lending to corporates has become very muted in the last year".
The current imbroglio traces back to the immediate aftermath of the 2007-8 slowdown, where to trigger economic growth, banks were encouraged to lend, especially to the infrastructure companies, with less stringent norms.
Former RBI Governor Usha Thorat said that the central bank did lay down guidelines for banks but "concessions were given in terms of higher exposure limits for infrastructure because one knew that the country needed infrastructure and that it requires a huge amount of funding," she said.
Banks were allowed to advance up to 40 per cent of their capital to single companies; projects could be executed with up to 80 per cent debt, the borrowers bringing in only 20 per cent with their own equity, sometimes even less.
"Beyond that also, RBI gave them [banks] some sort of a levy to dilute further from 80-20," said Lagadapati Rajagopal, one of the founders of the Lanco Group, with interests in power, roadways and steel. Lanco, which announced 11 power projects in that period, has an outstanding debt estimated at around Rs 36,000 crore.
Such a scorching pace of expansion resulted in huge amounts of debt on the books of every major infrastructure player: Adani (Rs 81,000 crore), Ambani (Rs 1.13 lakh crore), Jaypee (Rs 63,000 crore), Essar (Rs 98,000 crore) and so on. The debt estimates are from a 2013 report by the Swiss asset management company, Credit Suisse.
Today, in the urgency to revive these projects, there are worries that the mistakes of the past are being repeated without little scrutiny into what went wrong.
Companies and banks we spoke to largely echoed each other in blaming regulatory reversals and delayed clearances for the stalling of dozens of projects, the key contributor to the mountain of corporate debt.
But this begs the question why banks were lending without clearances in place.
Banks claim they do have covenants that must be met by companies before they lend. But "what happens in the Indian environment is that in the interest of completion of projects, many of us tend to relax these conditions," explained BK Batra, Deputy Managing Director at IDBI, a long-term lending institution. "That is where you need to exercise greater caution and greater restraint."
A more candid admission comes from CVR Rajendran, the former head of Andhra Bank. For a bank of its size, it has worryingly high levels of debt because a bulk of infrastructure companies are from Andhra Pradesh. "Looking back, it was a mistake. We should have insisted on all these clearances," he told NDTV.
Besides, recent data suggests that the role of regulatory clearances in stalling projects may be overstated. The Economic Survey commissioned a study of around 580 stalled projects and cited adverse market conditions, over-exuberance among lenders and a lack of promoter interest as primary reasons for the delays.
Questions were also rarely asked by lenders as to how companies would provide their equity, or service their loans. A look at the books of three companies among the most stressed today - Essar, Lanco and GMR - doesn't indicate where the equity could have come from.
Between 2007-2013, as the debt of Essar Group's power subsidiary shot up from Rs 15,000 crore to Rs 52,000 crore, so did the debt in the rest of the company's verticals - rising from Rs 10,000 crore to Rs 46,000 crore - according to Credit Suisse estimates.
Similarly, neither Lanco nor GMR seemed to have a source of cash flow large enough to service such massive borrowings.
Despite repeated requests, Essar and GMR refused to comment.
Mr Rajagopal claimed Lanco brought in equity "partly from internal resources, partly various funds, partly from capital," he said. This sounded like corporate-speak for more debt. But "equity was not debt," he claimed, adding, "It has come from financial investors, strategic investors and through public markets."
Banks typically refuse to name companies. But Pradeep Kumar at SBI admitted to instances of companies bringing in equity as debt from elsewhere. "Yes, some of it [equity] may be borrowed. Many of them had holding companies abroad; may be, to an extent, the holding companies would also be leveraged," he said. But when it came into the country, he said, it was pure equity, not borrowing. "This is an acceptable way of doing business worldwide. This is nothing new."
But Ms Thorat said this was unacceptable. "That's just not done... Why didn't banks pick up on it?... I guess it must have been because so many different banks were involved in so many different parts of the companies," she told NDTV.
This has led to worries of a darker dimension to corporate debt. According to Neelkanth Mishra of Credit Suisse, there may have been instances of funds ''clearly siphoned off''.
"There are various ways of doing that: one is to overstate the capital expenditure (land, buildings, equipment, etc.)," he said.
Mr Rajagopal denied any such wrongdoing at Lanco. "Once we don't have gas or coal, definitely it hits the cash flows. When the cash flows are hit, money expected from ongoing projects gets stopped," he claimed.
Bankers did admit that this was known to happen, but claim that it was only in exceptional cases. IDBI Bank's Executive Director, RK Bansal, said that ideally, costs are compared with other projects, in India and abroad. But given the volume of transactions, he admitted, only a comprehensive inquiry can establish the extent of funds being siphoned off. "That has not been done," he said.
And yet, despite the absence of such an exercise, banks are back to lending to the same companies at the same promoter-friendly rates. SBI's Pradeep Kumar says "now in many cases, to ensure that the project is complete, we are even diluting the debt-to-equity ratio to 80(debt):20(equity). Sometimes to complete projects, we will have to take a risk."
"I cannot abandon (projects) half way. The best way I will be able to recover my money is to ensure that the project is complete," Mr Kumar said.
RBI Governor Raghuram Rajan has warned against this vicious cycle. In a speech in November last year at the Institute of Rural Management Anand (IRMA) in Gujarat, he said, "Too many large borrowers insist on their divine right to stay in control despite their unwillingness to put in new money. The firm and its many workers, as well as past bank loans, are the hostages in this game of chicken - the promoter threatens to run the enterprise into the ground unless the government, banks, and regulators make the concessions that are necessary to keep it alive. And if the enterprise regains health, the promoter retains all the upside, forgetting the help he got from the government or the banks - after all, banks should be happy they got some of their money back! No wonder government ministers worry about a country where we have many sick companies but no 'sick' promoters."
For now, regulators and banks claim they are trying to learn from mistakes. The RBI now has a common platform where all the banks are required to report on any exposure over Rs five crore, so each knows what the other is lending. "This information gap was used to play one bank against the other and they were not wise enough," said SS Mundra, a deputy governor at the RBI.
Banks are also insisting that promoters need to shed assets in order to bring in equity. Companies like Jaypee and Lanco have begun the process. But it's unclear if the funds they have raised will be enough to service the staggering debt on their books.
Hemindra Hazari, an independent banking analyst, told NDTV that carrying on with business as usual will only make matters worse. "Banks have to start actually factoring in the losses because a lot of the assets to which they have lent actually do not exist."
The price, as Raghuram Rajan put it in his IRMA speech, will be borne by average Indians.
"The total write-offs of loans made by the commercial banks in the last five years is Rs 1,61,018 crore, which is 1.27 per cent of the GDP," said Mr Rajan. "1.27 per cent of GDP would have allowed 1.5 million people to send their children to get a full university degree from the top private universities in the country, with all expenses paid. That's the size of the write-offs that we are talking about."