Major Bank Loan Defaulters in India Face No Consequences
Photo: Wikimedia Commons
By Romar Correa*
September 29, 2023
Two independent items in the newspapers of the day, Monday, September 25, 2023, call for the construction of a connection. “PM compares Urjit to ‘snake who sits on hoard of money: Ex-Finance Secretary” in The Indian Express, and “RBI may allow borrower-bank deal to shed tag of wilful defaulter” in The Times of India.
Urjit Patel, who was reportedly compared to a snake by Prime Minister Narendra Modi, was the Governor of the Reserve Bank of India (RBI), the country’s central bank, from 2016 to 2018.
With regard to the first item, our suspicion that verbal abuse, by officials of the Modi’s ruling Bharatiya Janata Party (BJP), of Indians who do not agree with their views, did not originate with Ramesh Bidhuri. Last week, Bhiduri, a BJP Member of Parliament, speaking in that august body, called a fellow member a pimp and Muslim terrorist.
The witness to the language of Modi is former Finance Secretary Subhash Chandra Garg in his book, We Also Make Policy, published by HarperCollins to be released next month. One contentious issue, between Modi and Patel, was the disbursement of RBI profits. The profits of the RBI have been rising and in the financial year 2023 was Rupees 2.20 lakh crores ($27 billion.)
The Central Bank of a country retains a buffer to meet untoward contingencies and the number is the outcome of technical deliberations of Central Bank economists. In a simple accounting or arithmetical framework, I have shown that monies disbursed to the government are unavailable for other purposes like the recapitalisation of banks.
I traded aphorisms. The RBI was “banker to the government”, not a “bankers’ bank”. The government salivates over this pile of cash to help plug its deficit, now that measures like progressive income taxation have been consigned to the dustbin of policy.
Patel and Modi share a vulgar, unarticulated view of markets in the sense of laissez faire laissez aller. That is, government intervention is anathema. Other disciples of relevance include former U.S. President Ronald Reagan and former British Prime Minister Margaret Thatcher. All propagated a brutal rolling back of the State. Inflation is regarded as a monetary phenomenon and, in the U.S., under the Chairmanship of the Federal Reserve of Paul Volcker, inflation was wrung out of the system as were the wheels of production and commerce, which ground to a halt. Likewise in England, Thatcher crashed inflation and crashed the economy.
Patel was also an inflation dragon-slayer and was all set to yank interest rates upwards to whatever it took. In principle, Modi would not have demurred, believing that the forces of demand and supply would take care of output and employment. It bears reporting that the trade-off between inflation on the one hand and employment and output on the other, the so-called Phillips Curve, was never completely digested by academic economists.
In recent years counterexamples are beginning to abound leading to scepticism about the relationship, among the best in the mainstream profession. It looks like we CAN have the best of both worlds, low inflation, and activity and labour markets buzzing. The explanation is a nuanced view of markets. Political economy is significant in the varying fortunes of Capital and Labour behind the movement in the Phillips curve. The critical third are the macroeconomic arms of the State, the monetary and the fiscal authorities, that can steer the two classes in the direction of good equilibria.
To return to our narrative, it is likely that the Indian government began to suffer cold feet from Patel’s hawkishness on inflation. There is the basic contradiction, of course, that rising interest rates hike the interest burden of the government. It is also possible that the government feared widespread protests from trade unions, the employed and job seekers, as well as informal workers at the vanishing of the inadequate employment opportunities.
The second troublesome subject brought up in the first news item and that leads us to the second item concerns the subject of “wilful defaulters/fraudulent borrowers” from banks. Patel’s untrammelled position of the efficacy of markets went along with an austere, purist view of the dispersion of knowledge in the information sets of people. Information is private and it is in production and exchange that it is revealed and delivers the famous theorems about the optimality of market outcomes. Thus, he wanted only the RBI to issue electoral bonds, the identity of the subscribers being known thereby. He planned to come down like the wrath of God on shenanigans in the nationalised banking system with its opaque selection and screening processes.
Patel’s naiveté was extraordinary. It was already common knowledge by that time that the colossal loans taken out from the nationalised banks and their consortia by the largest capitalist conglomerates in the country in the blink of an eye, sans checks and balances and due diligence, was at the behest of the government. Patel and Modi part company here. The latter is focussed on data aggregation and centralisation for commercial purposes (crony capitalists) and political purposes (identification of dissent).
Urjit Patel, former Governor Reserve Bank of India
We can now move to a Draft RBI Master Direction on Treatment of Wilful Borrowers and Large Defaulters that was quoted in the Times of India. Earlier, bank unions and the general public were horrified by a communication to the effect of mollycoddling “wilful defaulters”. By definition the gamesmen possessed the ability to repay. The action called for, then, was straight confiscation of assets. In cases when funds were siphoned off to uses other than those sanctioned, the perpetrators should be imprisoned.
The case made by the officials of interminable time taken for the conclusion of arbitrations is impossible to understand. In earlier drafts, an independent authority was supposed to oversee the process of resolution. The government has washed its hands off the process, as seen in the draft of RBI’s Master Direction. The “primary objective of these Directions was to provide a non-discriminatory and transparent procedure, while complying with the principles of natural justice …”
Firstly, once again by definition, the information between members of the Board and borrowers is bilateral and private. The subtleties of credit relationships are unknowable to outside observers. Secondly, this and earlier communications are long on redefinitions, categorisation of shady customers, and movements of items this way and that. How are the principles of natural justice being served? The solution is to be a bilateral bargain between the boards of banks and “wilful defaulter”, at the end of which the baneful tag would be removed. What stops the “compromise” number arrived at by lender and borrower being zero?
The legal process would continue to wind itself and the hitherto defaulter would not have access to credit from the aggrieved financial institution and other banks but these are not even slaps on the wrist. What is the meaning of punitive action when the criminal is not called out as such? Also, with the infinite fungibility of finance, “wilful defaulters” live to enter other fertile territory another day.
The difference between “wilful defaulters” and the other we will call ‘hapless defaulters’ must be made. The latter might be victims of the downturn of the cycle. To twist the familiar metaphor, a receding tide grounds some seaworthy ships. Or, a perfectly viable green scheme may encounter technical or financial hurdles. It is the job description of bankers to nurse and nurture and, on occasion, pull the plug on projects that have turned unviable. Overseeing it all is the “bankers’ bank”.
With technological developments, the adjective “costly” can be deleted from “monitoring” in the literature on information asymmetries between Central Banks and banks, banks and borrowers. “Wilful” defaulters, on the other hand, are criminals of intent. Fraud masterminds Charles Ponzi and Bernie Madoff were “wilful defaulters”. The distinction between a meticulously planned murder and involuntary manslaughter applies. They plan and conspire and connive to not return the loan. They should be jailed.
The RBI directive is a master chainsaw taken to the roots of justice and the law. In all civilised societies, even in crony capitalist setups, the law acts rapidly and fairly. Recall the rolling of heads at Wall Street in the aftermath of the bloodbath of 2008. The implications for India are easy to work out. Without government teeth, leave alone bite, incentives will get perverse. If you can’t beat ‘em, join ‘em, bankers would resign themselves. In a fiercely competitive milieu, managers will be induced to scour the highways and the byways for subprime takers of funds. “Wilfully defaulting lenders” will be the counterparty to “wilfully defaulting borrowers”. The “compromise” would be the periodic cleaning of the slate of those pejorative terms, and back to business as usual under fresh names.
Patel exited unceremoniously as Governor of the RBI on December 10, 2018. His career and academic background are impeccable. Earlier, from 2013 to 2016, he was a Deputy Governor at the bank. He is now a vice president at the Asia Infrastructure Investment Bank. A fellow at Oxford University, he earned a Ph.D. in Economics from Yale. His claim to fame was joint work on fiscal economics with special reference to India with the formidable macroeconomist, Willem Buiter.
Ever since Patel’s departure, there has been a been a closing of the mind at the RBI. Around his time, in a Governor and Deputy Governor, the country boasted banking scholars of international star status. Now, we have an unqualified bureaucrat, Shaktikanta Das, in charge of the Central Bank of the country. The blue funk at the RBI started spreading earlier. At the time of the appointment of a Deputy Governor, the convention was to select an outsider. The names of applicants were in the public domain, all Indians with first-rate credentials, any one of whom would have brought a wealth of experience and honour to the position. Instead, the RBI chose Michael Patra, an insider, as Deputy Governor, breaking the convention of decades The Garden of Eden is now sealed, all snakes dancing to the tune of one Charmer.
* Romar Correa retired as the Reserve Bank of India professor of economics at Bombay University.
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