Budget Proposal for Providing a"Government helping foreign banks to loot Indians Legal Framework for Trading of Securitized Debt

Text of Open Letter of 12.03.2005 to Congress President Smt Sonia Gandhi from Congressman Namit Verma (5 Vidyadhar Colony, Khajuraho - 471606, Madhya Pradesh, India; Khajuraho: 94-251-45678; New Delhi: 98-910-70020)

Editor’s note: this text, received by e-mail, is posted on azplan in view of issues that the author’s analysis raises about reforms concurrently underway in legal frameworks for urban and regional planning, development and management.

Respected Congress President,


At a time when the credibility of the entire political process is under fire, the Congress led United Progressive Alliance (UPA) government opted for an ostensibly apolitical economist to lead our government. Even the left which has been a bitter critic of Dr Manmohan Singh’s policies in the past, has now found him acceptable. The one issue on which Dr Manmohan Singh was believed to be head and shoulders above other political contemporaries, was clearly the issue of "probity in public life." However, with the arrival of his government’s budget for 2005-2006, this image has been destroyed.

Finance Minister Palaniappan Chidambaram’s Budget Speech of February 28, 2005 is a travesty of the nation-enriching, people-serving economic policy statement it is expected to be. As I shall detail hereafter, this budget is an anti-national instrument meant to bleed the Indian people and sell them into the slavery of foreign commercial banks. It is the duty of every honest Congressman to expose, resist, contest and fight such treason. That is what I shall do in the following paragraphs. I sincerely hope that you will lend me your support to defeat the anti-India designs of former Swiss Banker, current purveyor of American diplomatic initiative and incumbent US Ambassador HE Mr Thomas Mulford and his stooges in the Indian cabinet.

Easily the most dangerous of Mr Chidambaram’s gambits is his proposal to "amend the definition of `securities’ under the Securities Contract (Regulation) Act 1956 so as to provide a legal framework for trading of securitized debt including mortgage backed debt." (See paragraph 86 of the FM’s Budget Speech; underlined stress mine.)

Most business assets in our country are tied against mortgaged bank finance. Interestingly, in our country, when a business seeks a bank loan, the bank offers him around 60% of the project cost by way of loan; the balance 40% is generally promoters/market equity. Further, the bank generally gets (i) a hypothecation of the entire project and (ii) a lien on collateral which is at least one-and-a-half times the loan it advances. Thus, the bank advances a loan of 60% of project cost, against a mortgaged-collateral valued at 190% of project cost, on the day of the loan’s issuance (hypothecation of project valued at 100% of project + lien on collateral valued at 90% of project). Thus, the mortgage to loan ratio works out to 190:60, or more than 3:1. As time passes, the value of landed-collateral goes up to fantastic real-mortgage-value to loan-cum-interest value ratios of 20:1 or even more! No wonder Banks would rather have their customers default, than pay back their debt, specially after the advent of the Securitisation Act 2003. Every borrower, who has been willing to settle his genuine outstandings after the 2003 Act came into force, knows how banks harass borrowers and thwart such attempts by making unreasonable demands for penal interest and by forgetting about RBI norms relating to interest freeze on Non Performing Assets (NPAs).

Under the provisions of the Securitization Act 2003, banks are allowed to conduct the sale of mortgaged assets to recover their outstanding advances. Empowered with this provision, banks have taken advantage of weak borrowers, harassed them and spurned offers to settle, and finally rigged auctions to dispose off high valued property at nominal costs: an operation which yields high-value-kickbacks for unscrupulous the bank employees involved.

Under the present Securitisation Act, while banks can merely recover their outstandings, can even illegally favour chosen auction bidders, and while individual bank employees can get illegal personal gratification; yet, it is still not possible for banks to directly takeover the assets and book the entire windfall gain themselves. Worse, everytime an auction disposes an individual property at a huge discount, the deal smacks of very obvious corruption; and lower level functionaries like Deputy General Managers with the powers to supervise the auctions, have to be accommodated. This small and demeaning case by case approach is not acceptable to the big international financial players who have been eyeing the asset rich Indian banks.

Meanwhile, the Securitization Act 2003 has transformed the so-called Non Performing Assets (NPAs) of public sector banks into a treasure trove. Such PSU bank NPAs in the category `one crore and above’ alone are valued at 3,00,000 crore, and command a lien over property worth 60,00,000 crore. This is the treasure which every foreign bank is eyeing. The provision in paragraph 86 of the Budget Speech 2004-2005, to make this debt tradeable, will enable the banks and their prospective new owners (an issue that I will discuss in successive paragraphs), to appropriate a sizable chunk of these riches.

But the figure of 3,00,000 crore is only a compilation of NPAs over 1 crore; what of all NPAs including those below 1 crore and the properties held on lien against these advances? I am referring to, amongst others, NPAs arising out of rural and other priority sector advances. If these NPAs are included, as also is the lien-tied-property against these NPAs, then the total worth of property that Mr Chidambaram intends to bring to the auction table, will exceed 200,00,000 crore (Two hundred lakhs crore), and that is a conservative estimate!

Consider the case of the rural unemployed youth who mortgaged some 7 acres of cultivable land under government schemes for Village Industries to draw a loan of 25,000 rupees. Post liberalisation policies would have guaranteed the death knell of his business venture. But if that loan advance, ostensibly against a government welfare scheme, is now used as a pretext to grab his 7 acres of cultivable land worth anything between 14 and 21 lakh rupees, is that justice. Mr Chidambaram may say that he can repay his loan (sic). Will the babus in the banks accept his repayment, or will they delay it until they can grab the property. A visit to any rural branch these days will tell you the truth. In the old days, it was believed to be difficult for banks to get physical posession of rural land, but what resistance can a lone poor farmer put up, specially when goons of the denomination of the D Company come to dispossess him of his land? More so, when these criminal enforcers have the might of law passed by the parliament of India to back their strongarm tactics?

Now, think of the lakhs of cases in rural India where tens of acres of prime agricultural land was offered as lien for a loan to acquire overpriced farm machinery against a government scheme. If Mr Chidambaram is allowed his way, these schemes will be rendered nothing short of entrapment. Perhaps this is vindication for the Finance Minister’s Chettiyar roots whose business practices (moneylending) was struck a severe blow by stringent legislation by the late Indira Gandhi?

Armchair economists and jurists may argue that loan defaulters are getting their just dessert. But, surely, there ought to be a parity between the loan amount and the asset dispossessed? Moreover, the creation of these NPAs is the result of systemic changes in the Indian Economy: changes authored by Dr Manmohan Singh, Yashwant Sinha, Murasoli Maran, Palaniappan Chidambaram, Kamal Nath and their ilk. After all, many of the bankruptcies are the result of policy changes of the government of India.

Millions of Small Scale Industries were sacrificed by Dr Manmohan Singh’s new fangled policies. Lakhs of SSI businesses were exterminated by the then Commerce Minister Murasoli Maran’s decision to prepone the withdrawal of Quantitative Restrictions on 1400 odd items, under the WTO accord, by a full two years. The resulting bankruptcies were achievements of the Union Government. The present Finance Minister’s designs and intentions of profiting from this situation, by acquiring the lien held property is a classic case of entrapment, with the Government of India acting as an agent of mercenary moneylenders.

The above machinations explain Mr Chidambaram’s stated sentiment that American banks are just waiting to takeover Indian banks. Is that something that a patriotic Indian should gloat over? Or, have I missed the point?

We have evaluated some aspects of the financial fallout of the FM’s proposal. Let us endeavour to understand what this will mean for our society and economy.

First and foremost, there will be a boom in the newly legalised goon based recovery industry. After all, the asset buyers will need to acquire possession of the mortgaged properties. And who can achieve that? The Dawood Ibrahims, Chotta Shakeels, Abu Salems and Shettys of Mumbai are the first ones to come to mind. Or maybe, the pehelwans of Karol Bagh and Najafgarh in Delhi, or a Babloo Srivastava, Romesh Sharma or Pappu Yadav operating out of Tihar Jail? Or a Daduaa in the Hindi heartland? These, then, will be the new legitimate policing arm of Indian society, thanks to Mr Chidambaram’s vision. After all, the process of recovering 2,00,00,000 crore will require many enforcers! So much employment creation! All of it achieved by the simple act of pitting every other Indian against his fellow Indian for the compulsions of a measly income! Madam Congress President, is this the future that you want to bequeath to this country?

But, there is a catch to this grand design. Prime Minister Manmohan Singh, his Honourable Finance Minister (as the PM referred to Mr Chidambaram at least a dozen times during his summation of the Debate on the Motion of Thanks to the President) and their cronies have structured a scheme for the transference of India’s riches, but even they haven’t been able to come up with any existing entity capable of such a huge operation. Thus far.

But, if this Budget goes through as the FM proposes, then they have full plans to overcome this hitch as well. Two proposals mooted by the Finance Minister, in paragraphs 82 and 83 of his Budget Speech, serve as a two part strategy capable of achieving this target.

The first provision states, "RBI has prepared a road map for banking sector reforms and will unveil the same. While most proposals will be implemented by the RBI on its own authority, some legislative changes would be required to be made." Subsequently, as the Business Standard reported on March 1, 2005, "the Reserve Bank of India (RBI) has made it clear that the 10 per cent cap on voting rights in private banks would be removed and the domestic private banks could be foreign owned up to 74 per cent." I am quoting the financial daily to borrow a simple staement for the record. A contrite and bashful RBI said the same thing in the following language: "appropriate amending legislation will be proposed to the Banking Regulation Act, 1949, to provide that economic ownership of investors is reflected in the voting rights." An even more bashful FM just authorised RBI to issue this amendment without breathing a word about it. I have been duly educated that Mr Chidambaram is a great lawyer and fine print is important. I hope members of parliament as well as UPA decision makers will also don their magnifying glasses.

My discussion with parliamentarians makes me believe that Parliament has not been explicitly informed of the intent of para 82 of the FM’s speech, as has been made clear by the RBI statement or the newspaper observation. But, these technical observations apart, 74% foreign owned private banks would also serve as traders/owners of tradeble mortgage backed debt securities!

Second, leave alone deep discounts and even 74% ownership of some private banks, there is just not enough depth in the system to afford adequate liquidity to these international cartels, to mop up the entire (or even a substantial portion) of the 200 lakh crore worth of lien-tied assets which Mr Chidambaram proposes to make tradeble. The solution to making this leveraged buying scenario possible is found in paragraph 83 of Mr Chidambaram’s Budget Speech, where he says that "I propose to introduce amendments to the Act to remove the lower and upper bounds to the statutory liquidity ratio (SLR) and provide flexibility to RBI to prescribe prudential norms." Again, in the same paragraph, Mr Chidambaram says, "I also propose to introduce amendments to the Reserve Bank of India Act 1934 to remove the limits of the cash reserve ratio (CRR) to facilitate more flexible conduct of monetary policy." As any economist will point out, the removal of the SLR and CRR provisions do not augur well for our banking system, that too at a time when the same team is at the helm of financial affairs, which was in power during the infamous Harshad Mehta scam:. You will recall, Madam Congress President that the Harshad Mehta scam was precisely about circumventing these statutory banking reserve ratios which Mr Chidambaram is now seeking to legalise. The resulting dilution of the fiduciary powers of the Indian state, once condoned by law will destroy the Indian economy.

As one amongst many anguished Congress workers, I beseech you Madam Congress President, to defeat these nefarious designs of Budget 2005-2006. Otherwise, our grand old party - by virtue of having sponsored the likes of Prime Minister Manmohan Singh and Finance Minister Palaniappan Chidambaram - will have to take responsibility for destroying the Indian economy, society and everything that we hold sacred. In the eyes of the voting electorate, the suffering millions of India, who have been targeted by unscrupulous foreign banks to prey upon, we will be damned forever.

Yours in Congress,