Big Bang Bailout

The government has chalked out a Rs 9,000-crore package to save IDBI. Or is it to save Dabhol Power?
11 Oct, 2004
Rajesh Ramachandran
Outlook


It's the Indian taxpayer who is being made a sucker again. On September 29, the Union government pumped in Rs 9,000 crore in a move to bail out defaulting promoters and infuse badly required finance to save one of the country's biggest financial institutions, the Industrial Development Bank of India (IDBI).

This is the biggest rescue package since UTI was bailed out of its mess in 2002. With this Rs 9,000 crore, IDBI can erase from its books all non-performing assets (NPAs) or loans it has not been able to recover from corporate promoters who owe the financial institution in billions of rupees.


Critics describe this generosity to corporates as an attempt to help defaulting companies which have failed to repay their debts. Bankers, however, feel it is a smart move to keep IDBI afloat. They give its chairman M. Damodaran full credit for a 'strategy' that would make IDBI healthy just when it is switching from being a financial institution to a commercial bank.


Damodaran reportedly has said: "As a result of this transaction, IDBI would not have to provide for its ageing of assets any more and thus would come out healthy. And the 20-year term (the lock-in period for the money in the form of government securities) I think is sufficient for a problem even of the magnitude of Dabhol to be resolved".


The biggest beneficiary of this controversial bailout package is the notorious US multinational, Enron. Its Indian arm, the Dabhol Power Corporation (DPC), is still mired in controversial litigation. Its new owners GE and Bechtel have slapped a Rs 26,000-crore arbitration case against the Maharashtra State Electricity Board. Yet, DPC's liabilities are being taken out of the books of its biggest Indian lender, IDBI, without any immediate attempt to take over DPC's assets.


Says Abhay Mehta, author of Power Play, an expose on the Dabhol deal: "This huge bailout is largely on account of Enron. IDBI should have ideally moved the US bankruptcy court to take over the Dabhol plant."About 25 to 30 per cent of the Rs 9,000 crore bailout package for IDBI is for Dabhol.


Then, there are the steel majors who had turned around their businesses in the last couple of years with the growing global demand for iron and steel, but are still to clear old debts. Interestingly, the government has not named corporates who owe IDBI money even while dishing out the largesse. The government note only says, "With the cleaning up of IDBI books, the net NPA position of IDBI is expected to improve."


The method adopted by the government to keep IDBI afloat is this: it has formed a 'Stressed Assets Stabilisation Fund' (SASF). This special purpose vehicle has got Rs 9,000 crore from the government. The SASF in turn will use this money to buy government securities. These zero-interest government bonds will be exchanged for IDBI's bad debts. In effect, the government would have bought IDBI's bad debts for Rs 9,000 crore through the SASF.


The catch: though the government is not paying any real money now, it is issuing bonds that would mature in 20 years. And if the bad debts are not recovered by then, the taxpayer would have actually bankrolled the promoters, some of whom the government had declared as "wilful defaulters."


E.A.S. Sarma, expenditure secretary during the Vajpayee government and member of the Godbole committee which examined the Dabhol deal, maintains that finally it is the taxpayer who will haul the burden. He told Outook: "The scheme announced by the government for cleaning up the IDBI balancesheet is not strictly 'budget-neutral'. It may not involve any cash outflow during the current year, but the government has indirectly incurred a liability by issuing securities covering Rs 9,000 crore, as the securities are required to be redeemed in the future. Budget-neutrality is only cosmetic, as bad loans cannot become good loans overnight!"


Dr Sarma is certain that this tripartite arrangement merely implies that the IDBI's bad debts are being taken over by the government through the SASF, which has been created for this purpose. "It is the taxpayer who takes the hit finally," he says.


The most optimistic projection done by finance ministry officials is that around 60 per cent of the bad debts would be recovered by the SASF. That implies writing off Rs 3,600 crore worth of bad debts. But even this is wishful thinking given the fact that the SASF does not have a magic wand to make all the IDBI debtors pay up.


After all, IDBI failed to recover funds from its debtors so it does not seem possible for the SASF to achieve that feat. Also, the NDA government had set up Asset Reconstruction Companies (ARC) to recover bad loans and the IDBI is part of one such venture. Yet, the government chose a special fund instead of ARCs implying that these bad loans are not easily recoverable.


In the case of Dabhol, the IDBI was not willing to classify it as a bad debt till the government assured it of the bailout package. Had the bank done it, its NPA ratio would have zoomed past permissible levels, ringing in the bank's imminent death. So is the case with most of the loans taken by steel companies.


Now, the government is busy planning Dabhol's revival, first by paying off its foreign lenders and then by encouraging fresh promoters to take over the assets and run the company. In fact, a committee comprising former US ambassador Naresh Chandra and Vijay Kelkar, advisor to the finance minister, had recommended 'de-dollarisation' of all loans with an Indian bank paying off all the foreign debts.


Foreign lenders thus would be relieved off their burden.On October 1, a group of ministers led by defence minister Pranab Mukherjee will have a re-look at the project. Former Maharashtra chief minister Sharad Pawar, who first struck the Enron deal, and Planning Commission deputy chairman Montek Singh Ahluwalia, who had approved the project and the counter-guarantee as finance secretary, and power minister P.M. Sayeed, are members.


Former Enron lawyer and Union finance minister P. Chidambaram has kept himself away since there could be a conflict of interest. With $1.3 billion Indian loans and $600 million foreign loans, Dabhol is not exactly a prime asset that a new promoter would look at, particularly with GE-Bechtel's arbitration for Rs 26,000 crore and their demand for $500 million as its original investment. The revival formula that is being worked out is to provide concessions to potential buyers like Tatas, Reliance, British Gas or Shell.


These concessions would obviously imply a reduction in the liabilities like the over Rs 2,500-crore loan from IDBI, along with guarantees for foreign loans. Says Sarma: "It will be interesting to watch how the government is going to deal with projects covered by IDBI's bad loans, especially Dabhol. Would the government grant all sorts of concessions to make it appear as though electricity from that project had become cheaper? If it is made cheaper, it would only be at the expense of the taxpayer again."


In effect, public money is being spent on protecting private interests. This also involves larger governance issues. For instance, the badly appraised Dabhol project was forced on IDBI in the name of "power sector reforms". And reformers who hate even a penny of public money being spent in the public sector have greeted the huge bailout package for the private promoters with silent approval.