Venal
Politico-Business Nexus & Plunder Of The PSU Banking System
The State Bank of India, today’s public sector banking
mother-ship, was the former Imperial Bank of India. It was the first to be
summarily nationalized by the Nehru administration in 1955. Justifications for
bank nationalisation include promotion of “social welfare, controlling private
monopolies, expansion of banking, reducing regional imbalances and priority
sector lending”.
Prime Minister Indira Gandhi, nationalized 14 banks in
1969. And again, another five of them, in post-Emergency 1980.
All this, in a frenzy of misguided socialist inspiration
that never yielded more than 2% growth in GDP per annum, for five decades or
more. But banking was not the only sector suborned to work for “social upliftment”,
rather than “neo-colonial” profit.
The entire system
and administration, including the Indian Administrative Service(IAS), the
Judiciary, and the Planning Commission, was harnessed to promote Socialism.
Combined with the
peculiar restrictiveness of the infamous Licence-Permit Raj, it was very
difficult to be entrepreneurial indeed. At least, till the economy was first-stage
liberalised in 1991. And this too was forced on the country due to a foreign
exchange cum balance of payments crisis that hit the economy.
But quite soon after the advent of nationalisation, the
record began to show, the public sector banking system (PSU banks), was
disproportionately serving a witch’s brew of politicians and their crony
businessmen. This, alongside the richer farmers and fixers, rather than the
impoverished - with rural branches, loan melas, and the like. This distortion
between intent and practice has not been resolved to date.
Gradually, as the banking pie grew, the farmers ended up
with a small slice of PSU banking loans, and businessmen, sometimes proxying
for the enabling politicians, got the lion’s share.
And as any bribe-giver will tell you-once he has paid-off
banker and politician alike, for the money given out, he’s not about to give it
back. The larger farmer, not to be outdone by his rich co-borrowers, also
started merrily defaulting on those loans that were not wiped out by a
vote-seeking government. The landless and marginal farmers, sincere about their
debts, routinely commit suicide when unable to pay back what they owe.
Tax-payer money and government debt has been utilized
meanwhile, without a by-your-leave, or any serious attempt to fix
responsibility or punish the guilty, to recapitalize over Rs 1.5 lakh crores,
spread over the last 30 years.
But now, thanks to the momentum and scale of plunder during
the UPA decade between 2004-14, the banks will need a minimum transfusion of
over Rs. 2 lakh crores. This is to partly amortise over Rs. 10 lakh crores (
$150 million), in “non-performing assets” (NPAs). Nearly 80% of these list
private companies as the borrowers. These were exuberantly loaned large sums
without adequate scrutiny or safeguards, in the boom years between 2000 and
2008.
When the tide went out, after the economic slowdown post
2011, the defaulters turned out to have come from textile, aviation, mining and
infrastructure sectors. Basic metals had 45.8% gone bad. Cement had 34.6% in
bad debt.
In 2016-17, the Modi government wrote-off PSU bank loans
worth Rs. 81, 683 crores with the bland assurance that borrowers of these loans
would continue to be liable for their payment.
Despite the number of sizeable scams and defaults flushed
out of late, it is still a tenth or so of the entire loan book. The PSU banks, could have, when all is
tallied, bad debts at 10 -12%. It does place India with the second highest
ratio of NPAs even at a 9.6% assessed so far. Only Italy has a worse figure at
16.4%. A small country like Greece has 36.3%. Ukraine has 30.5%. China claims
to have just 1% in NPAs, but this is
doubtful given its internal debt at 2.5 times its $ 12-15 trillion GDP.
Europe saw a number of near sovereign collapses post 2008.
The bailouts have been legion- at the rate of billions of dollars per month and
zero interest rates. Otherwise the US would have experienced a second Great
Depression, and the EU would have broken up. It has, in any case, taken a
lateral casualty, in the form of Brexit that threatens, even now, to tear apart
the United Kingdom.
“Moral Hazard”, despite its merits, was not thought to be a
viable argument, in order to save the world economy. The malaise had spread too
far and wide into the real economy to withstand the crack of a whip.
In India too, we are fortunate that we have the wherewithal
to both absorb such blows, and move on to a better tomorrow. This is not to say
the government is not making every effort to both recover monies and catch/punish
the culprits.
All things taken together, this is an undeclared crisis. It
is, after all, a vast sum to lose because of criminal neglect and collusive
corruption. But, at the same time, it is mitigated by an economy grown to $2.5
trillion, with a GDP growth rate of over 7% per annum - the fastest for a major
economy in the world.
One that is likely to double to $5 trillion by 2025, and
become the 3rd largest from a current 5th largest. The
bad debt problem, causing justifiable outrage because of a score of rich
company promoters responsible, is not yet, in absolute terms, alarming. It
won’t capsize India’s economic boat.
The PSU banks have
strayed very far from their founding objectives. That it now accounts for 80%
of banking credit in India is another reason why it is central to the problem.
Huge dubious loans have stayed hidden for years, as
politicians, bureaucrats, bankers and borrowers colluded to restructure debt,
kicking the can down the road. But, in 2015, the Reserve Bank of India (RBI) issued
guidelines that forced banks to own up. Still some are still trying to dodge
the dictat, and have been censured and fined heavily, a couple of them, very
recently.
Private and foreign banks, albeit fewer in number, also
have their NPAs in the Rs.1 lakh crore region, suggesting much better
loan-vetting and governance, and presumably, reduced levels of corruption/collusion.
But the recent Nirav Modi/Mehul Choksi scam has not spared them either.
Would this bad debt balloon have gone up if the PSU banking
sector stayed away from private enterprise? Would the reckless lending and
subversion of banking systems have shifted to the private banking universe
instead? It is hard to say. The borrow-and-spend boom in the West lasted twenty
years, and when the party ended, it produced a hangover that has already lasted
a decade too.
Theoretically, the cure for the Indian PSU banking malaise
could still be privatization, if only to keep the politicians out of the till. Any
amount of regulatory tightening in reaction to the present goings on cannot
keep the discretionary powers of politicians
at bay.
Instead, over-regulation is likely to dry up credit,
thereby damaging the growth of the economy. Or it would shift the action to
private banks and the stock/debt market instead. That could, of course, be a
good thing.
On the fixit side of things, there is talk of using big data
analytics and constant technology upgradation for automatic machine monitoring.
Reform of the PSU banking sector must happen. Some analysts
say, keep the State Bank of India, to go back to basics – priority sector
lending, distribution of subsidies, loans to the poor, etc. but get shot of the
rest.
The politicians, beyond lip-service, won’t want to lose the
funding and patronage the PSU banking system affords. They will want to wait
for these scandals to blow over for resumption of business as usual. But if this
Prime Minister can attempt the privatization of Air India, he can do likewise
for the PSU banks too.
A proportion of the current NPAs, may well be recovered -
though the banks are themselves reluctant to take a sharp ‘haircut”. By
untangling stuck infrastructure projects, against which there are substantial
borrowings, there will be substantial relief. Also, the vigorous implementation
of the new bankruptcy law aimed at seizing unencumbered assets, and the Fugitive
Defaulters Bill, about to be enacted, will allow the confiscation of every asset
of those who run away.
For:
The Sunday Guardian
(1,396
words)
March 7th,
2018
Gautam
Mukherjee
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