Recent news reports that SBI would be lending $1 billion to Gautam Adani-led Adani group for its mine project in Australia have given rise to usual comments of cronyism and favouritism given that SBI is a public sector bank (i.e. Government of India being its owner) and given that Adani is perceived to be close to Prime Minister Narendra Modi. Much of the criticism that has been generated since yesterday on this development is hurried and absurd. There are several reasons for this. Firstly, it is important to note that SBI has not already sanctioned a $1 billion loan to be effected through an immediate cash transfer. As Adani Group’s press release and other news reports indicate, SBI has entered into an MoU with the Adani group providing a credit facility up to $1 billion, but “subject to detailed assessment of Adani group’s mine project in Carmichael in Australia.” Two things arise from this – one, the grant of credit facility is subject to SBI’s detailed assessment of the group mine project. Therefore, the requirement of conducting due diligence before extending the credit facility has been taken care of by this MoU. If, therefore, SBI’s assessment shows some red-flags, the terms of the deal may, indeed, change. Two, this is a credit facility of up to $1 billion. Therefore, the amount of credit extended to Adani group may not necessarily be the full $1 billion. Indeed, even if Adani avails of the full amount, it is likely that it won’t be extended all at once or there may be milestone criteria on release of different installments. Indeed, once SBI completes its assessment and decides to go ahead with the credit facility, we will know the fine print. But, to say that this is an outright loan of $1 billion is plain ignorant. Secondly, a critical fact that seems to be forgotten is that SBI has long been in the business of lending to businesses. It has led several lender consortiums as well. For example, in 2010, it led a consortium that lent $1.7 billion to Naveen Jindal-led Jindal Power. This amount is coincidentally 70 per cent more than the maximum amount envisaged as a credit facility to Adani Group (which, as I explained above, is still conditional subject to assessment of the project). Of course, there is nothing wrong with SBI being a leader of a consortium that lends amounts to a Jindal. There is nothing to show that such a huge loan at the relevant time suffered from lack of financial soundness. If, of course, the criticism is based on the fact that public sector banks shouldn’t be in the business of lending to big businesses at all, that is then a separate matter. Then any loan to a Jindal, Reliance or Adani or any business by a public-sector bank is amenable to criticism on that yardstick. But if one is okay with the idea of public sector banks lending to big businesses and competing with other lenders, then Adani Group, like any other business group, is an entity many lenders would be willing to extend credit facility to once a detailed assessment is made about the coal project. Thirdly, while the allegation of cronyism and favouritism is rather easy to level, there must be some substance buttressing such allegations. To be sure, there is the menace of nominees on public sector banks advancing obscene amounts of loans to companies that do not rouse any confidence. Former CAG Vinod Rai has clearly stated this to be a big problem. The rising loans to Kingfisher Airlines that Rai cites as an illustration incidentally happened during UPA tenure. While there is no direct evidence yet of Vijay Mallya benefiting from favouritism during the UPA rule, many have questioned the soundness of the debt extended to Kingfisher Airlines. In that regard, it is, therefore, vital to understand the meaning of “cronyism”. Take this incident mentioned in Livemint as an example. In 2011-2012, i.e., during UPA’s tenure, SBI advanced loans of Rs. 70 crore to PCL – a company founded by UPA’s textile minister and headed by his daughter. Other PSUs lent the company more money. The Rs. 70 crore lent by SBI was classified as non-performing asset. Indeed, even in this episode, there is no legal evidence that this loan was extended due to cronyism. However, a suspicion that there may have been a possibility of cronyism wouldn’t be completely bizarre. The possibility gets some more traction given that there has been a bad loan problem with that company. This, therefore, merits investigation. The suspicion of cronyism in the MoU between SBI and Adani, however, woefully misses the real basis upon which a credit facility of this sort must be assessed. The real study must be whether the terms offered to Adani Enterprises for the credit facility mark a significant departure (indeed, without convincing reasons) from the usual terms existing in the current market – for example, whether lender’s rights have been significantly diluted, whether exposure to SBI is significantly higher than usual etc. But, as of today, we don’t have the fine print. We only have an MoU under which credit facility is to be granted provided the assessment of the project brings up no red-flags. Crying cronyism simply because SBI has indicated its willingness to lend money to Adani Enterprises – that too, without waiting for SBI’s assessment to conclude and the ensuing fine print – is shallow and suffers from the same shrillness and vacuity that Rahul Gandhi’s ‘toffee model’ charge suffered from – something that was busted well in time by the judiciary.
Posted on: Thu, 20 Nov 2014 17:25:30 +0000
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