If banks are the heart of an economy , India has a hole in the heart. Up to 20% of public sector bank loans are impaired. Chief economic advisor Arvind Subramanian says India is being held back by a “twin balance sheet problem“-dodgy balance sheets of banks as well as its borrowers, burdened with huge, unrepayable debts.
This can be resolved only by the banks taking a big “haircut\’ -writing off a big chunk of unrepayable loans. But this will spur accusations of cronyism, which Narendra Modi seeks to avoid at any cost.
Subramanian says only political courage can cut through the Gordian knot. He suggests creating a “bad bank“ to take over the impaired loans and dispose of them at whatever discount the market requires. Finance minister Jaitley is very wary of financing a “bad bank“, and the private sector won\’t. The impasse continues.
Two-third of impaired loans relate to 24 big companies, mainly in infrastructure and steel. India needs most of them for its proposed infrastructure push, but they will remain hobbled unless they get a haircut.
Competition means that some companies succeed and others fail. Those that fail merit another chance unless they have committed crimes. Companies and banks that take no risks at all are headed for stagnation. Crooked businessmen must be jailed. But when there are unforeseen problems -price shocks, lack of coal, land acquisition delays, etc -the lender and borrower should share the pain.
Hence haircuts are the norm globally, putting the past behind and giving both banks and businesses a chance to revive and thrive. Several ventures of Donald Trump went bust, yet he survived and flourished thanks to write-offs.These were commercial decisions, not political favours.
The Economic Survey says public sector banks avoid tough but essential decisions for fear of the four Cs -courts, Central Vigilance Commission, Central Bureau of Investigation, and Comptroller and Auditor General.Now, banks should be accountable to and not afraid of the four Cs. But they are afraid, because the four Cs do not provide quick justice, often levy unfair accusations, show ignorance of haircut procedures, and sometimes launch witch hunts.
The former Chairman and other top officials of IDBI Bank were recently arrested by the CBI for giving unwarranted loans to Vijay Mallya\’s Kingfisher Airlines. Bankers in Mumbai are fuming at what they call scapegoating -flimsy charges smelling of political vendetta. IDBI officials are accused of giving loans to Kingfisher although it was rated below investment grade; because some officials met Mallya on holidays; and because some politicians phoned to expedite the loan. But such things happen in every bank effort to revive faltering companies. Many sick companies with a far lower rating than Kingfisher have got loans and been revived in the past, benefiting everybody .Bankers often work on weekends and holidays. Politicians cannot say “no“ to any petitioner and routinely call bankers to help. I once asked Narayan Vaghul, doyen of bankers in the 1980s, whether he got calls from politicians. He said his phone never stopped ringing.
The Supreme Court held in the Antulay case that even if he received “donations“ from builders, who later got big deals, guilt was unproven unless a direct quid pro quo was shown between money received and a favour granted. This is a tough standard, but common globally . Charges of corruption often fail for want of evidence of a quid pro quo.
Has the CBI found any quid pro quo before arresting IDBI officials? None has been disclosed so far. Hence incensed Mumbai bankers fear this is a political witch hunt aiming to show that Manmohan Singh and Chidambaram sought to help a crook like Mallya. If bankers are treated as cannon fodder in political battles, they ask, why take any decisions at all?
All parties launch vendettas. The UPA barred Gautam Adani, old Modi supporter, from bidding for various port contracts. It said he was a security risk, citing some Enforcement Directorate remarks about Persian Gulf deals. But Adani was already running India\’s largest port at Mundra, plus berths at many other ports. If these did not endanger national security , why ban him from new ports?
India needs a skilled police-judicial system that collects hard evidence and produces quick convictions. Instead we have a post-truth India (created long before Trump) with unending accusations but no final convictions. So guilt becomes a belief, not an objective fact. Such a country cannot thrive.