Big consulting firms’ role in stressed assets under RBI & Public Sector Banks scanner

The role of big consulting firms — even with foreign parentage — in creating sick and stressed assets has come under fire of the regulator Reserve Bank of India (RBI) and public sector banks.

Bankers have complained that the same consulting firm which originally drafted the project report, then conducted the forensic audit and even came back to the banks for restructuring the loans, seeking more sops.

“I was surprised when a consulting firm recently came for loan recast of a company. The same firm did the project report, corporate advisory and also conducted the forensic audit as well. They claim there’s a Chinese wall and different departments in the organisation are doing these things. But that’s not the case. They are taking everybody for a ride,” said the top official of a PSU bank.

“These big consultancy firms which do everything for promoters are involved in a money-making exercise using the borrowers. The promoter blindly follows the advice given by the consultancy firms and set up the projects. Banks have now realised their game,” he said. The projects get stalled mid-way and the firms find it tough to service their debt and get fresh loans. As many as 299 mega projects involving an outlay of Rs 18.13 lakh crore remained stalled with the Project Management Group (PMG) till March 2015.

The RBI also expressed its uneasiness over the role of consulting firms in creating stressed projects. “Ironically, the same consultants who advised on the project initiation are also called in when the project goes bad. Banks need to have these skills in-house so they are not forced to follow the herd,” RBI Governor Raghuram Rajansaid last month.

Rajan didn’t spare the banks either for listening to the consultants and approving the projects. This problem is most apparent in public sector banks, though private banks are not immune.

“Today, too many of our project decisions are made by banks listening to the same set of consultants, which means that too few independent views get embedded in the evaluation decision,” Rajan said.

Meanwhile, banks are unlikely to get any immediate respite from stressed assets as some of the loans restructured by them are set to fail and become non-performing assets (NPAs) in the current year.

Out of around 530 borrower accounts with restructured loans of Rs 4,03,004 crore cases approved by banks, 178 cases involving Rs 67,667 crore have already failed and another 20 per cent is on the verge collapse in the current year, said an official involved with the CDR Cell of banks. Banks are now handling 269 live cases involving a debt of Rs 2,74,026 crore. The CDR process, including the status report, of almost all of them are handled by consultants.

Bankers indicate that another Rs 55,000 crore is set to fail in the coming months and eventually become NPAs in the books of banks. The biggest case involves a telecom services company with a debt of around Rs 15,000 crore.

As the Reserve Bank has already closed the CDR window, banks which want to revamp loans will have to make higher provisioning of 15 per cent. Some of the borrowers have approached the banks for restructuring under the 5/25 scheme, Joint Lender Forum (JLF) route and Strategic Debt Restructuring (SDR) scheme. Banks have already implemented SDR in some cases and acquired majority stake in companies like Jyothi Structures and Visa Steel.