May 12, 2024

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UNRAVELLING MEGHA

Please come to Tower 3," says the helpful voice on the phone once the person realises we are lost at the foot of the six gleaming towers housing Megha Engineering & Infrastructures Ltd (MEIL) that stand out in Balanagar, a decrepit industrial zone in Hyderabad. In Tower 3, we are ushered into a large conference room with a table that can seat 17 (the boss's chair at the head has the regulation white towel on its armrest) and two massive TV screens hooked up to Megha's projects. Zoji-la tunnel, anyone? Or a Mongolia refinery in real-time? With 4,000 people working out of this office, it is a beehive of activity. Venkatakrishna Reddy Puritipati, 53--better known as P.V. Krishna Reddy--walks in briskly. He is a lithe 5'8" or so and looks very fit. "I work out for at least an hour every morning. There is no stress in my life," says the MD of the closely-held company that has been in the news ever since it was revealed as the second-biggest buyer of electoral bonds (worth `966 crore) between 2019 and 2023. A little over 60% of those bonds were encashed by the Bharatiya Janata Party (BJP), which is in power at | the Centre, followed by the Telangana-based Bharat Rashtra Samithi (BRS) (See chart `Political Bonds'). According to a CRISIL report, the company is India's second-largest EPC player by revenue and the largest in irrigation and drinking water works. As an EPC or engineering, procurement, and construction company, MEIL also does projects in hydrocarbons, roads,

THE DARK SIDE OF GOLD LOANS

THE RBI ASKED the company to immediately stop its gold loan operations, which accounts for a third of its business. The reason: the regulator found some major lapses in how the company handled the loansWhen the regulator looked into the company's finances as on March 31, 2023, it found several lapses, like how the company checked the purity and weight of gold when giving out loans and during auctions after borrowers defaulted. It also found that IIFL Finance had given out and collected cash loans way above the statutory limit. It had not adhered to the standard auction process, and there was a lack of transparency in the charges being levied on customer accountsAnd IIFL Finance isn't the only one under the scanner for concerns related to the gold loan book. Bank of Baroda's internal audit found that many gold loan accounts were closed within one to three days, 238 were closed on the same day they were given, and 2,512 were opened and closed during a gold loan drive. When contacted, the bank said it had done a thorough check and found no discrepancy in the vast majority of cases. In fact, some of the bank's branches reportedly disbursed gold loans without the collateral of gold as they scrambled to meet tough targets. A spokesperson for Bank of Baroda (BoB) said, "We would like to clarify that the bank has conducted an audit of its gold loan portfolio. We have found that all gold loans are adequately secured by gold jewellery as security." The restrictions on IIFL will remain till the RBI conducts a special audit. "In response to the RBI's directive, we've thoroughly revised our policies, systems, and processes to align with the RBI's guidelines. Our commitment to compliance is unwavering, and we are optimistic that the special audit by the RBI will validate our adherence to these standards," Jain tells Business TodayBut this isn't a problem restricted to gold loans. There has been visible exuberance in the personal loan space, including gold loans, since the Covid-19 outbreak, and some financial institutions appear to have resorted to questionable practices when the going was good. To get a sense of scale, one need only look at the RBI's actions in the past six months. First, it pricked the bubble by increasing risk weights on unsecured personal loans, which meant banks and non-banking financial companies (NBFCs) had to reserve more capital against such loans. Then it came down hard against Paytm Payments Bank for persistent compliance issues. That was followed by the actions in the gold loans segmentIt's evident that the RBI, stung by a series of NBFC failures before the pandemic that threatened the stability of India's financial system, will move fast at the first sight of froth.