After allowing banks to tar an entire business group as “wilful” defaulters in case even one firm in the group defaults on loan, the Reserve Bank of India has now tightened screws on bank customers who default on loans despite having the ability to repay their debts. It has created a new category of followers and classified them as “non-cooperative”.
The RBI guidelines issued on Monday define a non-cooperative borrower as one who does not engage constructively with his lender by defaulting in timely repayment of dues while having the ability to pay, thwarting lenders’ efforts for recovery of their dues by not providing necessary information sought, denying access to assets financed/collateral securities, obstructing sale of securities, etc.
Non-cooperative borrowers are separate from those classified as wilful defaulters, a category first introduced under RBI guidelines in July 2012. A wilful defaulter is one who not only does not pay back bank loans, but also siphons off funds advanced by banks to put them to other uses. Borrowers who dispose of pledged property or moveable assets without the knowledge of creditors are also classified as wilful defaulters.
The latest move is another step by the central bank to plug loopholes in bank lending processes and curb the rise in non-performing assets (NPAs) in India’s banking industry. Apart from putting the fear of god in recalcitrant promoters, government, bankers and India Inc. will be forced to rethink the way they chummed up in the past.
Seen in the context of the broader moves towards greater transparency in public action that results in significant, and often unwarranted private benefits to the rich and powerful, the central bank’s decision will over the next few years lead to a cleaner, meaner and more robust capitalism where merit, not connections, will be rewarded by the markets.
RBI governor Raghuram Rajan is thus about to end the free lunch offered to crony capitalists under the garb of socialist principles. Clearly, under him, the banking regulator is using its powers to curb cronyism in the financial servicing system. Rajan had made his intentions clear while delivering the Lalit Doshi memorial lecture in Mumbai a few months ago when he warned against crony capitalism that creates oligarchies and slows down growth. “One of the greatest dangers to the growth of developing countries is the middle income trap, where crony capitalism creates oligarchies that slow down growth. If the debate during the elections is any pointer, this is a very real concern of the public in India today,” he had argued.
While extolling the virtues of India’s democracy, Rajan had underlined its darker aspects. He asked whether we had substituted the crony socialism of the past with crony capitalism, where the rich and the influential are alleged to have received land, natural resources and spectrum in return for payoffs to venal politicians. “By killing transparency and competition, crony capitalism is harmful to free enterprise, opportunity, and economic growth. And by substituting special interests for the public interest, it is harmful to democratic expression.”
Under a proactive governor, the RBI has had to step in to protect the banking system and depositors’ money because there is no sensible bankruptcy law, because the courts give endless stays on debt recovery processes, because public sector bank boards are not asserting themselves enough and questioning loans to dubious parties, and because government is mucking around with bank autonomy and top-level appointments.
If applied in letter and spirit, the new RBI guidelines can serve as a useful antidote to the problem of crony promoters treating public money as their own. In essence, the RBI is striking at the root of crony capitalism. Unlike the West, where conglomerates are dying, India Inc has built itself around large business groups. The concept of group provides banks with a false sense of security on the flawed assumption that a large group is somehow more bankable than a single company. The RBI has undercut this comfort factor by putting groups at the centre of the firing line on loan guarantees.
In future, group companies will think thrice before guaranteeing the loans of fellow groupies, and independent directors will start acting “independent” for fear of attracting the defaulter tag which could dog them everywhere. Indian conglomerate thinking, in turn, will undergo a transformation as groups will be forced to choose between genuinely profitable business plans and the dubious ones.
The fact that nationalised banks funded most of Indian private businesses in the past ensured that India Inc got away scot-free even when they failed to pay up and landed banks in a mess. In the sixties and seventies, entire industries in textiles and jute went sick and got taken over by public sector corporations which racked up losses paid for by taxpayers.
The banks which funded the losses were also recapitalised by the government in order to keep up the good work. This system of endlessly bankrolling bad investments meant that the tab for bad (or malafide) business decisions was picked up by the taxpayer—and businessmen faced no social or economic consequences of business failure.
It is an open secret that India is a country rife with crony capitalism. Big borrowers, mostly industrialists, borrow money, spend it poorly and then walk away from bad debts. The bigger the borrower, the easier it is to escape. Conversely, small borrowers—from farmers to middle class households—have nowhere to run. The fate of Kingfisher Airlines and the UB Group are synonymous with this kind of bad behaviour. The other side of this perceptions story is that banks collude with these borrowers. This is no longer the stuff of allegations and conspiracy theories. In recent years, restructured loans—simply bad loans whose recovery is postponed to the future—exceeded the non-performing assets both in number and the amount involved. Now, the RBI norms on defaulters will come to haunt promoters who left their old companies sick and think they can start new ones without guilt.
However, the proof of the pudding is in the eating. Despite Rajan’s best intentions, it remains to be seen if he can do what the politicians in the Union and state legislatures have not: create an effective bankruptcy law and strong court-barred systems to speed up recovery of bad loans. The world has seen many great nations succumb to cronyism. India should avoid that fate.
The writer is a former professor of sociology, IIT-Kanpur.
Email: upendrasarojsharma@yahoo.com