Rachna Singh

The Nirav Modi fraud, the Baron Kingfisher scam and the most recent entanglement of the Punjab & Maharashtra Co-operative Bank have made headlines and captured the imaginations of the media and the Indian masses. What it has also done is to highlight the complex problem of banks’ non-performing assets (NPAs). March 2018 saw Indian banks falter under the impact of bad debts of over Rs10 lakh crore, much of which was on the books of PSB (Public Sector Banks). March 2019 saw a small reduction, but it’s clear the bad loan giant was going nowhere. So, the question that begs for 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” succinctly answers these questions through an in-depth and incisive analysis of the whys and hows of the NPA crisis.

The book is divided into two parts. The first part traces the growth and development of the Indian banking system characterized by excessive government control, while the second deals with the current crisis. The author believes that government-instigated policies such as “loan melas”, priority sector loans and lending targets for agriculture and the small-scale sector, etc. have created a system in which due diligence has become a barrier. The policy of “social banking” has given way to crony capitalism.

Kaul uses Minsky’s financial stability hypothesis to logically explain how the strong economic growth of the early 2000s made people believe the good times were here to stay. This has led companies and industrialists to plan new projects and to seek loans from banks to finance the projects. It also prompted bankers to forgo caution and lend generously. The upward economic trajectory hit a roadblock when the 2008 financial crisis erupted. Delayed approvals and policy changes have led to stalled projects and company defaults, especially in the infrastructure, power and metals sectors.

The Indian banking system was clearly heading towards what Minsky calls the “Ponzi” phase where the borrower repays old loans with new loans. However, the banking largesse continued unhindered. Kaul deplores the fact that neither the government, nor the regulator, nor the banks have made a correction of course or even recognized the existence of bad debts. The government did not want to be the “provider” of bad news or end loans that were apparently helping the economy. Bankers wanted to present a healthy balance sheet free of bad debts and did not hesitate to restructure loans or disburse new loans to pay off old loans. This game of “in perpetuity” or “extend and pretend” loans has also delighted gritted corporate borrowers to be labeled as defaults. The regulator has also looked the other way. Kaul, with brutal honesty, points out that everyone involved was kicking the box.

However, the 2015 “Asset Quality Review” by RBI Governor Raghuram Rajan brought bad loans out of obscurity and forced banks to provision them. Rajan also created a Central Large Credit Information Repository (CRILC) to share loan data that would prevent unscrupulous corporate borrowers from messing with the system. The cancellation of all restructuring plans in 2018 tied the bankers even more. The Indian Bankruptcy Code (IBC) and Quick Corrective Actions (PCA) have made the loan mess somewhat better. The government recapitalization and the merger of weak banks with strong banks kept the system afloat and depositors’ confidence in PSBs intact. But as Kaul says repeatedly in his book, there is no free lunch. Banks have been recapitalized with taxpayer money. Money loaned to corporate borrowers and written off from the books of banks could have been put to better use and was in fact good money which had turned bad. According to the author, the only solution to the bad loans problem is to dilute the government’s stake in PSBs to 33%. The author also recommends another review of the asset quality of the Indian financial system, including in its framework NBFCS, mutual funds and banks.

Despite its somewhat intimidating and niche subject matter, the book connects effortlessly with both an economics expert as well as an untrained reader in economics. The conversational tone of a story stripped of economic jargon and condescension, the breaking down of a complex subject into simple subunits, a bit of masala on the fraud perpetrated by Nirav Modi and Vijay Mallya, interesting quotes from surveys economics and the speeches of various RBI Governors make the book interesting, thought-provoking and compelling.