Rajan is right: Modi govt must question India Inc's divine right to endless loans

The Governor of the Reserve Bank of India (RBI) , Raghuram Rajan, has stirred a serious debate by suggesting that some privileged (read: politically connected) capitalists in the country practice “riskless capitalism”.

Riskless capitalism means these businessmen enjoy all the benefits during high economic growth but when there is economic slowdown, and profits are under pressure, they stop repaying the loan to banks. Since many of these big businesses fund political parties, the government-run banks are nudged to “restructure” the loans taken by these companies. Restructuring of debt essentially means postponement of loan repayment and even waiver of current interest outgo in many cases.

Often additional loans are provided by banks to defaulting companies to ensure the business doesn’t go sick and the banks’ past loans don’t go bad. This then becomes a vicious cycle. In a sense, the defaulting companies become “too big to fail”.

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[caption id=“attachment_107817” align=“alignleft” width=“380”]  RBI Governor Raghuram Rajan. Image courtesy PIB[/caption]

The RBI Governor was very candid in saying, “In India too many large borrowers insist on their divine right to stay in control of their business despite their unwillingness to put in new money. The firm, its many workers and the past loans given by banks are hostages in this game.. The promoter threatens to run the business to the ground unless the government, banks and regulator make the concessions necessary to keep the company alive”.

The capitalist even blackmails the government by saying a lot of people would become unemployed if the business is allowed to close down. So under pressure, the government comes out with bailout packages for such businesses.

Unfortunately, Rajan says, such businessmen are hailed as industry captains whereas they are actually freeloading on the taxpayers of India. Interestingly, the RBI Governor’s scathing remarks come in the wake of the controversy surrounding politically well connected infrastructure companies which are getting additional loans from public sector banks inspite of their balance-sheets being under severe stress with debt-equity ratios exceeding 6:1. When debt exceeds normal limits then the interest burden itself becomes so high that it pulls the company into an inevitable debt trap.

Normally, any debt-equity ratio above 3:1 is considered very risky by accepted accounting standards. This means if the promoter brings Rs.1000 crore as his own equity funds, the bank loans and other debt should not ideally exceed Rs 3,000 crore.

However, it is very interesting to find that many infrastructure companies engaged in building power plants, telecom networks, roads, ports and airlines invariably have debt-to-equity ratios far exceeding 3:1 . It is also not surprising that the bulk of the “restructured loans” of the banking industry is to these infrastructure companies. The promoters of many such companies today are defaulters but are politically well connected. For instance, the promoter of the worst defaulting company, Kingfisher Airlines, was not only a member of the Rajya Sabha but was also on the Parliamentary Standing Committee on Civil Aviation some years ago! Could there have been a more blatant conflict of interest?

Another politically influential businessman whose group companies are saddled with over Rs 70,000 crore of debt last week had the gumption to publicly declare that his business ventures were aligned to “national interest”. This is also not surprising because most “crony capitalists” are quick to invoke national interest while seeking bailout packages from government-run banks. The really efficient businessmen do not talk of national interest and just conduct their businesses honestly for a reasonable profit.

It must also be noted that influential businessmen, especially in the infrastructure sectors, invoke “national interest” and get sweetheart deals from only public sector banks. Other private banks don’t pander to their “national interest” appeal. Just one small piece of statistic will bear this out. While 12 percent of all public sector bank loans are under the “restructured” or “bailout” category, only 4 percent of the loans given by private banks fall in the same category. This tells us how the PSU banks were mercilessly milked, especially after the global financial crises hit Indian shores in 2008, and capital became scarce and expensive for a few years thereafter. Private banks were safe because politicians had no power to coerce them.

Raghuram Rajan had been warning about this variety of crony capitalism in the infrastructure space for some time. In the past decade, any big business house building roads, ports, telecom networks and power projects began imagining it was involved in “nation building”, and so the bulk of the risk should shift to the government’s balance-sheet! The spectrum and coal allocation scams were but symptoms of this deep-rooted malaise. It is so deep rooted that the present regime also seems to believe such debt-ridden infrastructure groups could help India rise globally. This is farthest from the truth.

In 2012, as honorary economic advisor to the Prime Minister, Raghuram Rajan issued a warning from a public platform where Dr Manmohan Singh was being felicitated that the UPA had failed to fix cronyism in the allocation of resources in the infrastructure sectors. This had partially led to the severe slowing down of growth. Rajan is merely reissuing that warning for the NDA regime.

The government must take Rajan seriously when he says that Indian promoters do not have a divine right to continue running their businesses even after they fail to pay back their loans. If they can’t repay loans on time, the only solution is they must be told to move out and let someone else run the business.

The writer is Executive Editor at Amar Ujala Group