The Joint Lender Devastation
Why the latest ordinance on bad loans may end up making things worse than they already are
Why the latest ordinance on bad loans may end up making things worse than they already are
The fact remains that the decision to revive or shut down a business will now be taken at the PMO by those manifestly not trained to evaluate these choices
When the entire banking industry of a country as large as ours is paralysed to a point where it becomes necessary to empower the Reserve Bank of India, the banking regulator, “to issue directions to any banking company(ies) to initiate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016”, can we agree that further proof of complete institutional breakdown is unnecessary? How did we get to this point?
Allow me some oversimplification. Till Indira Gandhi’s socialist ideal of the 1970s, India worked on the idea that lending decisions must be driven by commercial considerations. Bank nationalisation ushered in the age of priority sector lending and monkey circus that her Minister Janardan Poojari called ‘ loan melas’. Nationalisation converted lender decisions into ‘political decisions’ which, if you know your Indian English, means you arranged a pay-off to get credit. Since pay-offs aren’t sensitive to commercial common sense, as many good projects got funding as bad. Bad debts mounted, but that apart, even if a project was good, how did you finance a payoff? In the crudest scheme, borrowers over-invoiced project cost, siphoned off money and round-tripped cash to the lender. Most ended up under-financing the project. Sickness was implicit in the scheme of things.
It took 40 years for the probity backlash to come; much of the credit goes to our judiciary. While that was playing out during the UPA- II rule, two things followed. First, every debtor was looked down upon as a crook till proved otherwise and court-encouraged criminal persecutions became the remedy of choice for this complex problem. Second, since it takes two to tango, bankers began to be viewed with suspicion. Kafkaesque compliance requirements proliferated like maggots on dead flesh. A debtor who wanted to settle his outstanding found he had no one to talk to. How could a banker write off part of a debt without being accused of corruption? The system’s decimation was complete.
If you are not one of those who hate Vijay Mallya simply for his flamboyant lifestyle, you will see how he is the perfect case study of the impact of this institutional breakdown. He fell because of four factors: (a) He decided to take on an airline owned by politicians, and just because he was in the liquor business he thought he knew how to manage governments; (b) his taking to the skies pronounced a death sentence on Air India, forcing it to sell tickets at a loss, bringing the whole sector on its knees, (c) his attempts to bail out Kingfisher were thwarted by the aviation minister, who announced change-by-the-week policies that supported competition and prevented him from getting in foreign investment. Needless to say, the policies were reversed immediately after Kingfisher went bust. Ask Vistara. (d) Banks rejected Mallya’s settlement offers as no one wanted to carry the can for the decision, putting the Supreme Court in the unenviable position of becoming Mallya’s principal prosecutor.
The point is that businesses fail due to complex reasons, and many hands are sullied in the saga. The bigger reality is that Mallya remains in the dock because no institution exists to evaluate and act on what he has successively proposed.
The main damage the Kingfisher saga did to the country was to designate the Central Bureau of Investigation as the official witch hunter of anyone who had anything to do with any loan that went bad. Once we got past that point, the demonization of the commercially defeated reached its logical culmination with the Insolvency and Bankruptcy Act of 2016. I have recorded my objection to the attitude inherent in this new law which I may summa-
rise as follows: (a) If you want to ‘Make in India’, you cannot afford to follow the mediaeval practice of criminalising bad commercial calls and throwing debtors in jail; (b) the coercive nature of India’s compliance regime forces promoters to defalcate funds in the dying moments of their floundering businesses in order to satisfy the extortion demands of officials; (c) entrepreneurs are precious for every economy and many advanced economies hammer revival plans down the throats of bankers and employees to secure health of their business leaders. Societies suspicious of businessmen will end up with none. Bankruptcy laws in advanced economies, therefore, exist to protect, promote and revive businesses rather than shut them down.
Instead, India has chosen to go down a road where the inevitable impact of unsustainable business losses is takeover by insolvency professionals who are incentivised to break up and sell bankrupt businesses. The system is geared to prosecute all those who have participated in financing of the business in any capacity whatsoever. Bankruptcy means huge write-downs for lenders without exception. Is it then a surprise that bankers are simply not willing to call a spade a spade and get on with the job of restructuring failed businesses? Here is the central irony: you can shout from the pulpit that you want to Make it India, but when it comes down to dust, the government acts not like a commercially savvy partner of businessmen but as the local thanedar out to lathi-charge the stragglers. That’s not the best attitude to have if you care about the economy.
Be that as it may, the government has reacted to the banking logjam by empowering the RBI to tell banks what decision to take. I completely fail to see how a quicker and more certain death is a better solution to a bad sickness, especially when the doctor is incentivised not to prescribe medicines. Is that acche din or deindustrialisation of India?
This, however, is not the main source of my disquiet with the ordinance. Since death to debtors is the primary driver in the new law, we now have a dispensation where death sentence is pronounced not by those who have the most to lose by doing their deathly duty. It is pronounced by the regulator who supervises these lenders. At one level, this may be a perfect case of change changing nothing. If bankers are practically public servants petrified of being accused of corruption, RBI officials are also public servants petrified of being accused of corruption. Nothing has changed.
But that’s not true. At the elemental level, we must recognise that the RBI is an independent regulator thus far and no further and in truth not very far at all. Do we need to ask ourselves who will decide which industrialist gets it in the neck? Not RBI for sure. This in itself may be no problem. No allegation of corruption attaches to India’s widely-admired CEO or those who support his laudable attempt to drag our economy forward. Still, the fact remains that the decision to revive or shut down a business will now be taken at the PMO by those manifestly not trained to evaluate these choices. Even more worryingly, I doubt if big liberal democracies have advanced themselves by dispensing with institutions, discarding plurality of decision making and marginalising regulation. For all the good that is intended to be done, this is a scary concentration of power, the consequences of which will be apparent only long after a succession of corporate corpses have been burnt at the stake.~
I fail to see how a quicker and more certain death is a better solution to a bad sickness, especially when the doctor is incentivised not to prescribe medicines