Lessons from the Mallya case

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Gaurav Singla, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

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Lack of transparency weakens our public banking sector. In the age of information technology and the Excel spreadsheet, the necessary transparency is literally just a click away.

It appears that not everyone agrees on the true significance of a flamboyant tycoon decamping with debts of Rs.9,000 crore owed to India’s banks. The gentleman is no ordinary businessman at that, having earlier been embraced by the country’s political parties that had rewarded him with membership of Parliament. That such an honour could have been bestowed upon Vijay Mallya, who only inherited wealth to make a lavish display of it when the country abounds with captains of industry who actually generate it, should alert us to how political patronage works.

When the incident had been analysed in the media as an instance of crony capitalism, a maverick economist had quipped that it may be better described as “crony socialism”. Perhaps he had had in mind that it is the public sector banks that had lent so fecklessly to Mr. Mallya, and these had for decades, been showcased as a symbol of Indian socialism.

Action and reaction

Bank nationalisation in the 1960s led to schemes such as branch expansion, priority sector-lending and the takeover of private banks teetering on the brink thus rescuing thousands of small depositors. But now, four decades later, it can hardly be asserted that the performance of India’s nationalised banking sector has been sterling, with inefficiency and poor service having been highlighted, and it taken the Pradhan Mantri Jan-Dhan Yojana to rectify their failure to advance the cause of inclusion on their own. But nothing quite matches the scale of the present scam, with public banks having lent such large sums of money to a single individual with indifferent capacity and without adequate collateral.

We may argue over whether what we have on our hands now is the result of mismanagement, poor judgment or mala fide conduct, but one thing is clear. If the money is not retrieved from Mr. Mallya, the loans would have to be written-off, involving a depletion of our assets for we own the banks. And if the banks are recapitalised via the Budget, it would be us who will foot the bill for his excesses. Either way, it underlines the direct bearing upon us of the actions of public sector banks. There is no escape for us from this connection even if we migrate to the newer private ones for our personal banking, for we would continue to own the public banks.

Banks to blame

There is no question that the banks are responsible for the predicament in which they find themselves. How is it that several leading nationalised banks have separately lent such staggering sums to a dubious client struggling to establish himself in an highly competitive industry? There is reason to believe that Mr. Mallya was the beneficiary of pressure brought to bear upon the banks from the outside. And this could only have come from politicians who preside over the banking system in a governing capacity. If this is not the case, then we must worry seriously about how individual public officials can dispense such large sums of public money so freely. Are there no checks and balances in our public sector banks?

The term crony capitalism is used to describe a situation of private players being shielded from competition or vaulting over rivals due to the intervention of the ruling class. This usually takes the form of a relaxation of rules or granting of exclusive licences. The history of the United States in the 19th century is replete with examples of these. But things have improved substantially in that country, and in any case l’affaire Mallya is something worse. It is one in which the Indian public stands to lose directly. In the forms of crony capitalism considered above, the loss is indirect, usually in the form of higher prices. Even in the gigantic market intervention following the recent financial crisis in the United States, money had not been channelled to individuals.

Under the Troubled Asset Relief Program (TARP), the government had purchased assets of struggling banks with a view to ensuring that they did not collapse taking along with them the rest of the financial system. These assets were disposed of later at a profit by the government! The U.S. government had acted smartly, while in the Indian case the banks now find themselves saddled with loans made by them to an individual with negative net worth. The irony could not have been more stark. The U.S. government had intervened smartly in a society strongly committed to laissez faire. On the other hand, for a country with “socialist” written into its Constitution, our public banks have unduly favoured a hereditary businessman without a sound business plan but with lots of political cronies. Also, the banks had lent to a company that has been in the news for not having paid its employees for a noticeable period of time. Here, India’s public sector banks have acquiesced in the violation of employment rights.

Dealing with the mess

Despite Mr. Mallya’s boorish style, we must resist the temptation of a tit-for-tat response, acting always in our best interest. Things that the Government of India can do would fall in two boxes. The first concerns possible ways to deal with the absconding debtor. The second contains measures needed to ensure that public sector banks do not find themselves in a similar situation ever again. On the first, there can be no question that the retrieval of loans made to Mr. Mallya must be pursued relentlessly. There are no grounds for giving him more time to present himself or to settle for less than what he owes the banks. He is perceived as a wilful defaulter and must be given exemplary treatment. The actions taken so far by the government are pathetic to say the least. The Finance Minister, under whose watch this has taken place, has not made any definite statement. He must actually announce a plan of action detailing how he intends to bring the businessman to book.

In the Mundhra Scandal in the 1950s it had come to light that the Life Insurance Corporation of India had supported an indicted businessman by purchasing shares in his troubled companies. With advice that retains a freshness today, Feroze Gandhi had stated, “Parliament must exercise vigilance and control over the biggest and most powerful financial institution it has created, the Life Insurance Corporation of India, whose misapplication of public funds we shall scrutinize today.” Following Feroze Gandhi’s intervention, the then Finance Minister T.T. Krishnamachari had to resign and Haridas Mundhra was arrested. Actually, l’affaire Mallya represents something more sinister, for a number of publicly-owned banks were commandeered to favour a private party whose dubious reputation was common knowledge. Immediate revocation of the absconding parliamentarian’s passport would be appropriate. After all, it would be fair to say that the ease-of-doing-business, so championed by this government, must be balanced by the difficulty of evading the law.

Making the process clear

Now onto the second of the set of actions that may be taken by the government in this case. In a plea to the contrary made by the Reserve Bank of India (RBI) to the Supreme Court lies an idea with hidden potential. When handing over a list of defaulters of loans from banks, the RBI is reported to have requested that the names not be revealed. As far as the publicly-owned banks are concerned, this goes against an important principle applicable to the public sector.

It would be unfortunate if we are to allow a distinction made between “passive” and “willful” defaulters to muddy the waters. The only question here is whether full disclosure will lead to better outcomes. There is reason to believe that it will. Details of every loan sanctioned by the nationalized banking sector, including the history of the borrower, the grounds on which viability has been ascertained, the guarantors, the collateral pledged and the officials involved may be posted on the website of the bank concerned.

We also need to work towards a re-engineering of procedures. It has been suggested that fear of being scrutinized by the office of the Central Vigilance Commissioner has petrified loan officers in the public sector into inaction. It is of no use having a publicly-owned banking system that does not extend credit to sound projects on grounds of retrospective scrutiny. This can be taken care of by moving to a system of whetting loan applications through committees, thus allowing joint responsibility to come into play. Lack of transparency weakens our public banking sector. In the age of information technology and the Excel spreadsheet, the necessary transparency is literally just a click away.

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