Vivek Kaul looks at Bad Money: Inside the NPA Mess and how it threatens the Indian Banking System
Book Title: Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System
Author: Vivek Kaul
Rachna Singh
The Nirav Modi fraud, the Kingfisher baron scam and the more recent Punjab & Maharashtra Co-operative Bank imbroglio hit the headlines and caught the imagination of the media and the Indian masses alike. What it also did was to bring to the fore the complex problem of Non-Performing Assets (NPAs) of banks. March 2018 saw Indian banks reeling under the impact of bad loans of more than Rs10 lakh crore, of which a major chunk was on the books of the PSBs (Public Sector Banks). March 2019 saw a small reduction but clearly the bad loan behemoth was going nowhere. So, the question that begs an answer is why and how did the NPA crisis hit the Indian banking system? Vivek Kaul’s book ‘Bad money: Inside the NPA Mess and How it Threatens the Indian Banking System’, answers these questions succinctly through an in-depth and incisive analysis of the whys and wherefores of the NPA crisis.
How it Threatens the Indian Banking System
by Vivek Kaul. HarperCollins. Pages 339. Rs 538
The book is divided into two parts. The first part traces the growth and development of the Indian banking system characterised by excessive government control, while the second part deals with the actual crisis. The author believes that government instigated policies like ‘loan melas’, priority sector lending and lending targets for the agriculture and small-scale sector, etc. created a system where due diligence came a cropper. The policy of ‘social banking’ made way for crony capitalism.
Kaul picks up Minsky’s financial stability hypothesis to logically explain how the high economic growth of the early 2000s made people believe that good times were here to stay. This led business houses and industrialists to plan new projects and approach banks for loans to finance the projects. It also made bankers throw caution to the winds and lend generously. The upward economic trajectory hit a roadblock when the 2008 financial crisis erupted. Hold up in clearances and policy swings led to stalled projects and corporate loan defaults, especially in the infrastructure, power and metal sector.
The Indian banking system was clearly headed for what Minsky calls the ‘Ponzi’ phase where the borrower repays old loans through new loans. However, the bank largesse continued uninhibited. Kaul rues the fact that neither the government nor the regulator nor the banks made a course correction or even acknowledged the existence of bad loans. The government did not want to be the ‘purveyor’ of bad news or pull the plug on lending that was seemingly helping economy. The bankers wanted to showcase a healthy balance sheet free of bad loans and did not hesitate to restructure loans or disburse new loans for repayment of old loans. This game of ‘evergreening’ loans or ‘extend and pretend’ also kept the corporate borrowers happy who cringed from being labelled as defaulters. The regulator also looked the other way. Kaul, with brutal honesty, points out that all the stakeholders were kicking the can down the road.
However, the RBI Governor, Raghuram Rajan’s ‘Asset Quality Review’ of 2015 brought the bad loans out of obscurity and forced banks to provision for them. Rajan also established a Central Repository of Information on Large Credits (CRILC) to share loan data which would prevent unscrupulous corporate borrowers from gaming the system. The cancellation of all restructuring schemes in 2018 further tethered the bankers. The Indian bankruptcy Code (IBC) and Prompt Corrective Action (PCA) improved the loan mess somewhat. Recapitalisation by the government and merging of weak banks with strong banks kept the system afloat and the faith of depositors in PSBs intact. But as Kaul repeatedly says in his book — there is no such thing as a free lunch. The banks were recapitalised through taxpayer money. The money lent to corporate borrowers and written off in the books of the banks could have been put to better use and was actually good money that had turned bad. The only solution to the bad loan problem, the author feels, is to dilute government stake in PSBs to 33 per cent. The author also recommends another Asset Quality Review of the Indian financial system, including in its ambit NBFCS, Mutual funds and banks.
Despite its somewhat daunting and niche subject matter, the book effortlessly connects both with an economic expert as well as a reader untutored in economics. The conversational tone of a narrative unburdened by economic jargon and condescension, breakdown of a complex subject into simple sub-units, a bit of masala about the fraud perpetrated by Nirav Modi and Vijay Mallya, interesting quotes from the economic surveys and the speeches of various RBI Governors makes the book interesting, thought-provoking and unputdownable.
