Twelve wilful defaulters of corporate India attempted to buy stressed assets, prompting the government to ask banks to be vigilant.
Is Modi protecting the loan-defaulting dirty dozen of India Inc., or is he calling them to account?
In July 2010, I asked a question in Parliament that brought the focus on the nascent but fast-growing issue of non-performing assets (NPA). The NPA problem was beginning to explode, and had grown 29 per cent over the previous year, touching Rs 60,000 crore. In 2012, I raised the issue of unprecedented concentration of risk, where a few corporates alone accounted for 90 per cent of the Indian banking system’s net worth.
In 2014, when the UPA demitted office, the NPAs had multiplied five times, and brought the banking sector to its knees. This happened on the watch of Manmohan Singh, P. Chidambaram and Raghuram Rajan, with the RBI (as the bank regulator), playing mute and passive spectator to the spectacular meltdown of the banking sector.
At the core of this was an asymmetric relationship between Indian corporates and their lenders, and a culture that consisted of a casual system of restructuring and evergreening of loans – with borrowers and government-owned banks gaming the taxpayers with loan defaults that had no consequence. Loans were sanctioned at the direction of people in Delhi, borrowers often siphoned it or treated it as a source of cheap money. Loan defaults simply meant a few meetings with your favourite Finance Ministry bureaucrat or politicians. And bingo! The problem disappeared into the hazy world of restructured debt.
Here are other sharp perspectives on wilful defaulters:
The Narendra Modi government has taken this problem on in his inimitable style — head on — and completely, studiously avoided the short-cut temptation to restructure. Arguments to take the short cut are myriad, including the one that restructuring loans means restarting the economy.
But PM Modi has chosen to walk the slower but surer path of resetting and rebuilding the bank sector using the Insolvency and Bankruptcy Code (IBC). The relationship between corporate India (especially the big guys) and Indian banks has been altered permanently.
Borrower obligations are replacing the unaccountable and lax borrowing culture of the top corporates. Recent changes in the IBC, excluding defaulting promoters from bidding for their own assets, is another sign to corporate India that the rules have changed, and accountability is the operating mantra.
Credit will now flow to those who build and manage viable businesses, and not those who are politically connected. If you default, your creditors can take your business over and sell it, regardless of how big and powerful you are.
That is part of the transforming of India that was overdue.
Rajeev Chandrasekhar is NDA Member of Parliament