I found the following news article interesting and thought it’s a good news from the Reserve Bank of India. India needs to crack down on all kinds of money laundering mafias in the country walking around like gentlemen. They have crippled India’s growth and taken away mountains of opportunities from the rank and file class practically turning them into slaves. Bank managers and brokers are no less responsible for this. It is high time the government chases such willful defaulters & company and serves them justice. Well done Reserve Bank of India thanks to the Governor Raghuram Rajan. Keep up the good work. Good write-up by R Jagannathan.
This, however, is not the end of the game. The only solution to all this, as explained by Srila Prabhupada, is a society based on Varnashram system, where the administrators are qualified enough to handle the mercantile class and the brahminical class (intelligent class) is bold enough to selflessly point out faults even with the administrators. In a society where everything is based on greed and ignorance there is a very little hope for peace and prosperity. Srila Prabhupada says in Bhagavad Gita 14.17:
“Since the present civilization is not very congenial to the living entities, Krishna consciousness is recommended. Through Krishna consciousness, society will develop the mode of goodness. When the mode of goodness is developed, people will see things as they are. In the mode of ignorance, people are just like animals and cannot see things clearly. In the mode of ignorance, for example, they do not see that by killing one animal they are taking the chance of being killed by the same animal in the next life. Because people have no education in actual knowledge, they become irresponsible. To stop this irresponsibility, education for developing the mode of goodness of the people in general must be there. When they are actually educated in the mode of goodness, they will become sober, in full knowledge of things as they are. Then people will be happy and prosperous. Even if the majority of the people aren’t happy and prosperous, if a certain percentage of the population develops Krishna consciousness and becomes situated in the mode of goodness, then there is the possibility for peace and prosperity all over the world.’
“Otherwise, if the world is devoted to the modes of passion and ignorance, there can be no peace or prosperity. In the mode of passion, people become greedy, and their hankering for sense enjoyment has no limit. One can see that even if one has enough money and adequate arrangements for sense gratification, there is neither happiness nor peace of mind. That is not possible, because one is situated in the mode of passion. If one wants happiness at all, his money will not help him; he has to elevate himself to the mode of goodness by practicing Krishna consciousness. When one is engaged in the mode of passion, not only is he mentally unhappy, but his profession and occupation are also very troublesome. He has to devise so many plans and schemes to acquire enough money to maintain his status quo. This is all miserable. In the mode of ignorance, people become mad. Being distressed by their circumstances, they take shelter of intoxication, and thus they sink further into ignorance. Their future in life is very dark.”
The Reserve Bank of India’s (RBI’s) decision to allow banks to tar entire business groups as “wilful” defaulters in case even one firm in the group defaults on loans is a game-changer for Indian capitalism. Apart from putting the fear of god in recalcitrant promoters, government, bankers and India Inc will be forced to rethink the way they chummed up in the past.
New laws, on bankruptcy and recovery of debts, will have to be enacted. Bankers will find that they can no longer hide behind their public sector façade to do deals on behalf of the powerful. Politicians who think they can swing loans to their pals will find it tougher to do so.
The central bank’s decision, seen in the context of the broader moves towards greater transparency in public action that results in significant – and often unwarranted – private benefits to the rich and powerful, will over the next few years lead to a cleaner, meaner and more robust capitalism where merit, not connections, will be rewarded by the markets.
RBI Governor Raghuram Rajan is thus about to end the free lunch offered to crony capitalists under the garb of socialist principles.
To be sure, the RBI’s move to extend the ambit of the term “wilful” default – possibly prompted by Vijay Mallya’s Kingfisher default – is draconian. The new norms say that guarantors of loans can also be declared wilful defaulters, and individuals on boards of companies declared defaulters will find their sins following them to other boards where there may be no defaults. These boards will thus have to send such directors packing to protect themselves. Group companies that offer guarantees that they do not honour will also be called defaulters.
However, as is always the case, draconian measures are necessitated whenever ordinary measures don’t work and when other institutions – like bank boards, the executive, the legislature, and the courts – fail to do their jobs.
Under a proactive Governor, the RBI has had to step in to protect the banking system and depositors’ money because there is no sensible bankruptcy law, because the courts give endless stays on debt recovery processes, because public sector bank boards are not asserting themselves enough and questioning loans to dubious parties, and because government is mucking around with bank autonomy and top level appointments.
The new wilful defaulter guidelines, which will apply only prospectively, are thus a useful antidote to the problem of crony promoters treating public money as their own. In essence, the RBI is striking at the root of crony capitalism.
The four pillars on which Indian capitalism has been built are the following:
#1: The business group. Unlike the west, where conglomerates are dying, India Inc has built itself around large business groups – Tatas, Birlas, Mafatlals, Ambanis, and so on. The concept of group provides banks with a false sense of security on the assumption – flawed, no doubt – that a large group is somehow more bankable than a single company.
The RBI has undercut this comfort factor by putting groups at the centre of the firing line on loan guarantees. In future, group companies will think thrice before guaranteeing the loans of fellow groupies, and independent directors will start acting “independent” for fear of attracting the defaulter tag which could dog them everywhere.
Indian conglomerate thinking will undergo a transformation as groups are forced to choose between genuinely profitable business plans and marginal or dubious ones. In the coming years we will see India Inc divesting businesses and sharpening focus to be on the right side of lenders.
#2: Very little skin in the game. India Inc has had a cavalier attitude towards loan repayment because it has very little of its own capital at stake in almost any business. Thanks to political connections and plain corruption, most Indian capitalists have built empires out of thin air with minimal equity contributions. They did this in several ways: one was by inflating capital costs so that their share of equity is actually funded through the excess loans given by banks for projects. This excess is then siphoned off (through contracts for plant and machinery) and comes back as their share of equity – or even used for personal purposes.
If a project succeeds, promoter wealth grows. They can then either take it out for personal use or float another company using primary capital from the successful company and then generating the balance by skimming money from overinvoicing imports or underinvoicing exports. Or other such ruses. If the project fails, they don’t lose any of their own money. They are happy to let banks carry the can.
The RBI has now ensured that banks will not lend to multiple projects with little promoter contribution, and promoters themselves will find their ability to let a small amount of capital go a long way circumscribed.
#3: Private losses, public rescue. The fact that nationalised banks funded most of Indian private businesses in the past ensured that India Inc got away scot-free even when they failed to pay up and landed banks in a mess. In the sixties and seventies, entire industries in textiles and jute went sick and got taken over by public sector corporations which racked up losses paid for by taxpayers. Banks which funded the losses were also recapitalised by the government in order to keep up the good work. This system of endlessly bankrolling bad investments meant that the tab for bad (or malafide) business decisions was picked up by the taxpayer – and businessmen faced no social or economic consequences of business failure.
The RBI norms on defaulters will come to haunt promoters who left their old companies sick and think they can start new ones without guilt.
#4: Weak regulation. When the stock markets were opened up after 1991, thousands of promoters raised money from investors for industries that were the flavour of the season: plantation companies, leasing companies, etc. Many of these promoters just raised money and vanished – as the market regulator, Sebi, was too weak to keep track. Now the regulator is stronger, but determined promoters have found ways to cock a snook at the regulator. A case in point: Subrata Roy evaded Sebi for years, and even the Supreme Court humoured him for 18 months before sending him to prison in March 2014. Now he has to sell parts of his businesses to get out. Many Ponzi schemes – PACL and Saradha being only the latest – emerged in the interstices between two regulators and made hay.
The RBI norms will dent this kind of crookery too for the definition of defaulter has been extended to borrowers who use bank money for purposes they were not intended. Many fly-by-night operators used money siphoned off from regular enterprises to start dubious companies from where money can end up in promoters’ pockets. Now, companies will be wary about lending money to sister companies from which they ultimately plan to vanish.
The above four legs on which Indian capitalism was built is being dealt a body blow – both by recent court action (cancellation of 2G and coal allocations, etc) and the RBI’s own new rules of willful default.
Indian capitalists will henceforth have to stick to the straight-and-narrow. And yes, they will have to bring more of their own money to start a legitimate business. The free lunch is over.