Tackling cronies requires political will; else RBI will become a paper tiger

In his New Year communication to his colleagues at the Reserve Bank of India (RBI), governor Raghuram Rajan said a few things that sounded like it emerged from a social reformer than a banker-economist.

Rajan spoke of the world’s perception about India as a “weak state” that hits only if the guilty is “small and weak”. Rajan asked his colleagues to take on the wrongdoers (in his own language, ‘connected wrongdoers’) even if they are rich and powerful.

Raghuram Rajan. PTI

Raghuram Rajan. PTI

“It has often been said that India is a weak state. Not only are we accused of not having the administrative capacity of ferreting out wrongdoing, we do not punish the wrongdoer, unless he is small and weak," Rajan said. If the RBI fails to do so, it will get reduced to a paper tiger, he warned.

“No one wants to go after the rich and well-connected wrongdoer, which means they get away with even more. If we are to have strong sustainable growth, this culture of impunity should stop.”

Rajan’s comments indeed are crucial in the context of the ongoing crisis India’s banking sector is facing on account of high chunk of stressed assets (constituting 12 percent of the total loans given by the banking system), most of which are from large corporations. More worryingly, a sizeable chunk of such bad loans are from crony promoters, who wouldn’t pay back the money to banks even if they have the ability to do so. Recently, Rajan had set a target of March 2017 for Indian banks to clean up their balance sheets by accounting for all stressed assets.

But, the unfortunate part is that the RBI, by the design of its structure and scope, is largely a paper tiger. The institution is neither independent nor does have the infrastructure to take on large defaulters. It doesn’t have the power to go after crony promoters supported by politicians. As a regulator, the RBI can only facilitate the banking industry with regulatory tools to enable the process of recovery. As the past experiences suggest, those tools are not powerful enough to get the job done.

One big example is that of Vijay Mallya, the liquor baron who promoted the now-defunct airline, Kingfisher Airlines. The airline owes more than Rs 7,000 crore (the actual amount will be more including the interest component) to a clutch of 17 banks including the country’s largest State Bank of India. The loan has been declared as an NPA (non-performing asset) by banks in 2012. Even after four years, no bank has managed to make any meaningful recovery from Mallya despite having all the powers vested with them by the RBI, including the willful defaulter tag -- once described by Rajan as a powerful weapon for banks. The question is what is the invisible force that has helped Mallya to take on 17 large banks in the country for so long? The answer should be obvious.

Theoretically, the wilful defaulter tag can be a nightmare to any promoter, since that makes him an outcast from the whole financial system with no leeway to avail funds from any other institution. Nor the promoter can be a part of any other company till the tag is lifted. But, none of this has worked in the Kingfisher case for banks to get their money back. Kingfisher is just one case. There are several others where the rich and powerful have cleverly manipulated the banking system and judicial loopholes in the system to their advantage, whereas the ‘small and weak’ typically don’t have the wherewithal to take on banks with long legal battles and hence get caught.

In that sense, the RBI is indeed a paper tiger. This is also true for other regulators such as market regulator Securities and exchange board of India (Sebi), which too lacks the infrastructure to take on large, politically connected wrongdoers.

A case in hand here is the Rs 24,000 crore Sahara-episode, where the group publicly took on the regulator. Sebi first asked the two Sahara companies to stop raising money through an order dated 24 November 2010 and Sahara moved court against this.

The Supreme Court in 2012 ordered the company to repay Rs 24,000 and also 15 percent interest on that to investors who were duped by its schemes. However, the company found some or other way to round it and finally its boss Subrata Roy has landed in jail for contempt court. The legal battle is still on. But the point is, even after three years, the Sebi has failed to recover the money from Sahara and ensure the depositors get their funds back.

To be sure, the proposed bankruptcy law, expected to get parliament clearance in the budget session, could help lenders to recover their funds to an extent from corporate defaulters (they constitute close to three quarters of the total bad loans according to the RBI data) once they are convinced that repayments are unlikely to happen.

But, the short point here is that the RBI alone cannot do much to hunt down the “inter-connected wrongdoers” unless there is a strong political will and the government throws its weight behind the banking industry to aid the process. The chances for this happening are less as long as political parties queue up for the mercy of the same corporates to fill up their coffers.

Published Date: Jan 14, 2016 05:10 pm | Updated Date: Jan 14, 2016 07:01 pm