Failure is simply an opportunity to begin again, this time more intelligently – said legendary Henry Ford decades back. However, when it comes to the banking crisis in India — that is the ‘failure’ to run the financial institutions effectively, Henry Ford’s theory seems to fail by itself. Because, there was hardly any lesson learnt from past blunders.
It is an easy guess today. The genesis of the problem of the banking crisis in India — like the one faced by Yes Bank — lies in the fact that bulk of the loans given during Congress-led UPA regime between 2004 and 2014 were only as a part of the reckless lending policy without assessing the ‘bankability’ of the projects.
Founder and promoter of Yes Bank, Rana Kapoor, now arrested by Enforcement Directorate, once compared YES Bank shares with diamonds; today the irony is these diamonds are now found at the price of dust. Like most banks’ crises in India, the Yes Bank problem also was of being a ‘non-performing asset’ — in other words — loans given to it have either gone bad or where repayments have been delayed abnormally.
It is alleged that with regard DHFL, the Yes Bank did not initiate action to recover the loans and ED now suspects that Rs 600 crore kickback was in play. The entire issues become complex as it is alleged that Congress general secretary Priyanka Gandhi Vadra was paid Rs 2 crore by Rana Kapoor for a painting. BJP’s in charge for IT, Amit Malviya, tweeted: “Every financial crime in India has deep link with the Gandhis. (Vijay) Mallya used to send flight upgrade tickets to Sonia Gandhi. Had access to MMS (Manmohan Singh) and PC (Chidambaram). Is absconding. Rahul (Gandhi) inaugurated Nirav Modi’s bridal jewellery collection, he defaulted. Rana Kapoor of Yes Bank bought Priyanka Vadra’s paintings...”. There was no direct denial about the painting story. Congress spokesman Abhishekh Singhvi said Priyanka Gandhi Vadra had sold an MF Hussain painting of her father Rajiv Gandhi to Rana Kapoor for Rs 2 crore, and the entire amount was disclosed in her income tax return of 2010.
Well, the crisis in Yes Bank and other banks did not happen in a day or two. In effect, what was highlighted by the Modi government’s first Finance Minister Arun Jaitley, by a process of restructuring the Non Performing Assets (NPAs), the Manmohan Singh regime has always tried to ‘evergreen’ the loans and the real health of the banks was swept under the carpet.
Thus, slowly but certainly the capacity to fund became weaker for the banks. In the words of a real estate player in Hyderabad, “I knew right from beginning things were not going in the right direction. My worst fear was that faster than the imagination, the real estate houses and other companies could survive, but the banks financing them would go bankrupt”. Today that has come true!
Banks have been in trouble during UPA regimes because political interference to approve loans to ‘connected’ borrowers was taken more as a norm rather than exception.
The Hyderabad businessman trying to analyse things objectively says perhaps things started way back in 1991 when economy was first liberalised and suddenly entrepreneurship became the order of the day. Money started flowing in sectors like cement, steel etc.
“This trend got a booster in 2003-04 due to global factors. But the Congress returned to power in 2004. Suddenly banks were given instructions to fund infrastructure and real estate sectors to fund left, right and centre,” he says.
These resulted in a situation when each construction companies and other players tried to grow “beyond the size of their shoes”. And there was a favourable political encouragement! The developments related to Priyanka Gandhi and DHFL row vis-a-vis Rana Kapoor can be understood from this perspective.
Malady and Diagnosis
In 2017, the BJP had claimed that there were letters and emails which would go to strengthen the basic argument that a bailout package was given to Kingfisher Airlines at the behest of the then Prime Minister Dr Manmohan Singh.
“Not only that, only on the former Prime Minister’s insistence, the Income Tax Department went soft on Vijay Mallya, and his accounts were also unfrozen,” BJP spokesman Sambit Patra had alleged then.
The malady in the Indian banking sector has hit public sector banks and those operating at the cooperative in the past; and now the trouble has afflicted a key private player – the Yes Bank. During UPA regime, the United Western Bank Limited faced the problem.
The RBI data shows that at least four cooperative banks faced harsher withdrawal restriction between January and September in 2019 itself. They were - Kolkata Mahila Cooperative Bank and United Cooperative Bank from West Bengal, Hindu Cooperative Bank from Punjab and the PMC Bank.
Experts say some of the ailments like Non-Performing Assets (NPAs) are usual with banks and can happen anywhere in the world. But what is important to note is that under the Congress-led regime, rarely did NPAs arise due to “legitimate business cycle reasons”. Instead, they say, most NPAs have been created from the moment the loans were sanctioned.
Simply put, banks hardly had hopes of loan recovery because they were not guided by business reasons. In the UPA regime, it became part of a system. The ‘babudom’ later called it a mix of infrastructure adventurism and political interference.
After 2014, as the malady came to light, diagnosis of the ailment had begun, and some corrective measures were taken. The Modi government understood the importance of the challenge, and thus the Insolvency and Bankruptcy Code (IBC) to deal with NPAs was pushed. This was aimed at fixing the wide-ranging issues of ‘bad loan’ problems.
In order to call a spade a spade, Finance Minister Nirmala Sitharaman did some plain speaking with regard Yes Bank crisis and flayed Chidambaram. “Today if I have problems restoring good health of IDBI, I am giving you good examples of how self-appointed competent doctors had handled United Western Bank merger with IDBI,” she said on March 6, 2020, adding that IDBI went down because of UWB.
“That was the treatment offered by those who speak today,” Ms Sitharaman said without - however - naming P Chidambaram. “So-called self-appointed competent doctors were in charge when United Western Bank was almost on the verge of collapse in 2006 and was forcefully merged with IDBI,” she said. In fact, IDBI later ran into rough weather.
In the words of a BJP leader – who is in the know of things vis-a-vis crisis in the banking sectors --- the Modi government has been keen to ensure that the Reserve Bank of India should gradually withdraw the ‘cover’ it provides for politically motivated lending or funding decisions. Well, the chances are that in order to implement such a stringent regime, the overall banking scenario could be seen in poor light. However, the long term impact would be positive.
In fact, as these issues and other finer facets of the Indian banking system is analysed closely it is to be noted that the UPA-I – notably with Chidambaram as the Finance Minister- had some of the best of times in steering country’s economy. The Vajpayee government went out of office in 2004, leaving behind an 8 per cent plus growth rate. Moreover, around fiscal 2003-04, there was a general boom period for the global economy. Most economies were marching towards days of glories and economies started showing a high growth rate.
As a result, there were certain benefits, the demand was high, and exports too were on the upswing. In other words, both internal and external conditions were conducive for high growth. But once the global recession set in and there were pressures internally, the UPA regime undertook a journey on a rather misguided road map. Experts would say there were two basic fault lines - the banking system was allowed to go in for reckless lending pushing the banks towards risk zones, and there was also huge compromise on fiscal discipline.
The ‘Jugadu economics and politics of nepotism and corruption’ had slowly become the order of the day. The result was other harsher results in the economy. As a classic example, one can cite the obvious instances when the Inflation rates jumped to double digits. Look at the figures: Average inflation during 1999-2004 was --- 4.1%, 2004-09 -- 5.8% and these spiked to 10.4 per cent between 2009 and 2014. But lately, under the Modi Government, the inflation rates were checked to be around 4 and 4.7%.
To pursue the argument further, one ought to maintain that the UPA-1 dispensation with Chidambaram as the Finance Minister ought to be blamed for some of the unreasonable exuberance (in banks) stretches back to even before the 2008 global crisis. The gross NPAs from infrastructure had increased from what was seen as a controllable 4.66 per cent of advances by end of March 2009 to 17.4 per cent. The wholesome amount on this by the end of March 2013 had shot up to Rs 1.36 lakh crore.
“There can be no denying that in both 2G telecom spectrum and in coal linkages to power projects there were unreasonable allocations of public resources (from banks) to private parties,” a source said adding the UPA dispensation often threw in bank money for private infrastructure projects in a pattern that such funding was provided to the public sector.
This was the era when ‘deal makers’ became the order of the day and nation experienced politicians such as Amar Singh and Ahmed Patel playing their games and apparently started influencing the government or the financial institutions’ decisions as well. There were other instances of whimsical decisions during the UPA regime. A few of them related to bank funding to power projects.
Finally, what needs to be underlined is that NPAs with regards banks is a serious menace and drastic problems would require a few drastic measures too. Providing a pain killer or spraying anti-mosquito deterrent is not enough as the malady is chronic and it is like an epidemic.
(The writer is a Delhi based journalist)