Banking system forms the very backbone of a country’s economy. A banking crisis creates almost insurmountable hurdles in a nation’s progress and requires urgent measures from the government to set it right.
In the wake of the 2007-09 global financial crisis, the US government provided a huge bail out to private banks such as JP Morgan Chase and Wells Fargo to prevent bank runs and stabilise the economy. That was an instance when laissez-faire capitalists prostrated before the government to seek public money to extricate from the mess they had themselves created through subprime lending.
Now in India, we have a similar situation. Ironically, the nation’s corporate tycoons, who hate whatsoever public, are banking on public sector banks (PSBs) to borrow and appropriate crores of household savings. Strongly entrenched crony capitalism enabled many of them to wilfully default on their debt service obligations with sheer audacity and virtual impunity.
Socialisation of NPAs
The Indian banks, especially the PSBs, are sitting on a mountain of around Rs 10 lakh crore of non-performing assets (NPAs). A default, whether it is genuine or willful, has to be treated as a default and should be dealt with sternly. Socialisation of corporate losses through write-offs is infinitely unjust and will result in ‘socialism for the rich and capitalism for the poor’.
Recently, Oxfam stated that the country’s richest 1% have garnered 73% of the wealth generated in the country in 2017. At a time when the wealth of the ultra-rich has grown to obscene proportions and the governments are toeing their line through an obsessive talk of ‘ease of doing business’, the very claim that they are in distress and not able to service their debt is highly suspicious.
Even while the government is grappling with the NPA crisis and gave a breather to the PSBs in the form of bank recapitalisation, which is actually a huge bailout to the country’s corporate borrowers, two back-to-back scams involving Nirav Modi and Vikram Kothari, delivered a fresh blow to our banking system.
These scams, when seen against the backdrop of the deep rot in the PSBs, appear to be only the tip of the iceberg and many more scams are likely to be unearthed shortly. The scams, when fully unearthed, will not only have a profound negative impact on the entire economy but also expose the duplicity of the country’s political and business classes.
When a poor man approaches a banker seeking a loan to create a livelihood opportunity for himself, he is asked to produce collateral. When a distressed farmer defaults on his loan repayment, he/she is named and shamed. However, nothing stops the PSU bankers from granting massive amounts of unsecured loans to tycoons and from maintaining maximum opacity to safeguard their ‘reputation’ when they default. The criminal nexus between politicians, bureaucrats and businessmen, which is all pervasive in India, has created this mess and led to the siphoning off mind-numbingly large sums of public money from the banking system.
Magnitude of Loot
To understand the magnitude of the defaults and defrauds in the banking system, we should compare it with the amount spent by the government on some welfare programmes. The amount that has been allocated in this Budget for MNREGA, which is intended to create at least 100 days of employment for the rural jobless, is Rs 55,000 crore.
The country’s corporates defaulted on their debt service obligations to PSBs to the tune of around eight lakh crore and this excludes more than three lakh crore, which has already been written off. These figures enable the people to vividly visualise the enormity of the crisis faced by the country’s banking system. The corporate sector has been batting for the privatisation of the PSBs for quite some time and they see the crisis as a blessing in disguise to push for privatisation.
The private banking companies in the West, taking advantage of the non-separation between commercial banking and investment banking, speculate with household savings and pension funds on the Wall Street to accumulate obscene wealth. The country’s corporates want to replicate the same even in India.
If the market economies are compared with lakes, they are infested with hyacinth called finance. In these economies, only a small percentage of money is utilised for exchanging goods and services and the rest is used to speculate in the financial markets. As a result of this reckless speculation, the entire world economy has become highly unstable and the bubble-induced crashes have wreaked havoc.
At a time when the world is getting increasingly wary of the Wall Street bankers and the Occupy Wall Street movement gave definite signs of revulsion against them, the Indian government must not resort to the destruction of PSBs.
The nationalised banks, though afflicted with poor work culture, give stability to the country’s economy in addition to offering a sense of reassurance to their depositors. Moreover, only the PSBs have the widespread rural presence and provide loans to the agriculture sector. Once the PSBs are privatised even the Indian economy will become unstable and will be prone to things such as financial meltdowns and bank runs, which it has been largely immune to.
Therefore, the government, instead of falling into the trap of privatisation lobby, should seriously execute a systemic clean-up plan to set the PSBs in order. The clean-up measures must aim at pre-empting the nefarious political influences, bringing greater accountability, repairing and reinforcing the seemingly defunct regulatory and audit mechanisms. The deployment of distributed ledger technologies such as blockchain should also be explored to bring in greater transparency in transactions.
(The author is a former Associate Professor)