Ever-greening of dent is bound to explode on the face of investors, promoters and bankers
Inability to rollover debt with banks and IL&FS fall have been cited as twin issues for the financial mess multi-billion dollar Essel Group has landed itself into. Its chairman Subhash Chandra, the media baron admitted to not being able to rollover the banks’ debts especially after prompt corrective action (PCA) and insolvency, bankruptcy code (IBC) became operative.
Essel–Zee Group in essence seems to have survived through recast of debts with banks, an euphemism for ‘ever-greening’ of loans by companies to stay afloat for longer. Some companies have even used debt rollovers as a mechanism to siphon off funds or camouflage over-leveraging of their balance sheets.
Several top Indian corporate groups have had resorted to ever-greening of their loans to get over possible defaults. This phenomenon is not new to Indian bankers and they have actively partnered with companies to depict healthy balance sheets. On the face of it, both banks and companies continued to have “regular” relationship in the hope of latter improving their performance.
The ever-greening is bound to explode on the face of investors, promoters, bankers and all the other stakeholders of the companies some day or the other. Subhash Chandra’s open admission to not being able to recast loans point to the phenomenon prevalent in Essel Group companies. It’s also true that all loans recast may not necessarily be loans that were ‘ever-greened’. Globally, the ever-greening has happened over decades owing to a nexus between companies’ boards and banks managements. Essel Group may be no different.
ICICI Bank under the stewardship of disgraced Chanda Kochhar who’s been booked by CBI for fraud reportedly resorted to ‘ever-greening’ of loans availed by its corporate clients to prevent defaults and enable payment of earlier credit.
Whistleblower complaint to RBI that brought the ICICI fraud into public domain had pointed to issuing letters of credit (LCs) in hundreds to 31 corporate borrowers. The list had some big names including Essar Global, Bhushan Steel, Essar Steel, Bhushan Energy etc. Not only did the ever-greening happened rampantly but ICICI Bank seems to have gone a step further by extending LCs against fictitious bills. By implication, this could lead to round tripping of funds by corporate borrowers of ICICI Bank.
In fact, RBI woke up to the issue only after ICICI Bank delayed provisioning against sticky loans and Securities Exchange Commission (SEC) of US and New York Stock Exchange began to exert pressure. Loans to at least 55 such entities was probed by Reserve Bank of India only after the international regulators and stock exchanges pointed to looming crisis of sorts at ICICI Bank.
Very few bankers or policymakers concede to the phenomenon. Uday Kotak had recently pointed out that every greening was the prime reason for mountain of debt with banks that totaled to a whopping Rs 10.8 lakh crore.
In fact, former finance minister Yashwant Sinha had on more than one occasion asked the banks managements to resist the temptation of ever-greening of loans as the way to tackle defaults.
No one should be against genuine restructuring of loans to counter economic slowdown or low phase in business cycles or failures. Reserve Bank of India (RBI) through several notifications beginning with 2004 had pointed to this issue. As late as February 12, 2018 also RBI had emphasized on the need to tackle this problem. One way suggested was to bracket some cases as special mention cases (SMA) to possibly flag the impending problem.
What’s frustrating is that neither the rating agencies, internal or external auditors have pointed to the ever-greening as a menace. Banks boards have hoodwinked the system to save their own skin. This practice should end and right now.