Blamegame won’t end crisis in banking sector

The RBI-brokered bailout of Yes Bank on Thursday has set off a new blamegame between the ruling BJP and the Congress-led Opposition parties over who is responsible for the current state of the country’s banking sector. Finance minister Nirmala Sitharaman ordered the RBI to fix responsibility for the Yes Bank crisis, and the Enforcement Directorate raided the house of the cash-strapped bank’s former promoter Rana Kapoor. All this happened in just 48 hours. This makes one wonder why the government didn’t act over the past 48 months when Yes Bank’s wobbling finances were fairly obvious.

In fact, if fixing responsibility was the way to solve the crisis, why didn’t the government order a probe into the finances of all state-run and private banks and non-banking financial companies (NBFCs) five years ago? An early solution might have prevented 21 public sector banks from facing lending curbs because of deteriorating finances. Prime Minister Narendra Modi and the RBI governor have been playing host to bankers and top officials of NBFCs every year for two days in the form of a “Gyan Sangam” since 2015. But the banks and NBFCs still remained tethered, which shows the government and the RBI are either clueless about a solution or simply not interested in finding one.

To find a solution, one needs an honest diagnosis of the root cause — and the answer is surely not in politics or blamegame. India’s four balance-sheet problems began with the crisis in the corporate sector after the 2008 global recession, which later spread to the banking sector. The new crisis began under Mr Modi’s watch when the banks, flush with new money, funded NBFCs, which bankrolled real estate. With real estate’s fall, the contagion spread to NBFCs and once again the banks.

Creating public sector asset restructuring companies to take over bad loans from banks and NBFCs was part of a six-point solution suggested by former chief economic adviser Arvind Subramanian. However, if the BJP wants to continue with its current narrative that all defaults — by corporates who borrowed between 2006 and 2014 — were caused by their criminal intent to steal public money, it cannot set up the bad loan bank for fear of public reprisals. But without such swift action, there would be no immediate solution to the banking crisis, which would continue to be a drag on the economy.

Bad business judgments — taken based on easy money and optimistic business assessments in the pre-2008 period — were the reason for corporate defaults, which spilled over to the banking sector later. Among the prominent groups facing bankruptcy, for example, is the Anil Ambani Group, and it will be preposterous to assume that the person who was once the country’s third richest man wanted to steal public money just because his companies had defaulted on loans. The same logic applies to most other business groups and to the banks. There may have been kickbacks for sanctioning loans in some cases, but that doesn’t mean the entire intent was to dupe the bank. Unless the government understands this, it cannot find an immediate solution to India’s banking crisis.

If fixing responsibility was the way to solve the crisis, why didn't the government order a probe into the finances of all state-run and private banks and non-banking financial companies (NBFCs) five years ago?