Author: Kaul, Vivek
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‘If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has.’
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Defaults on loans made to industry (also referred to as corporate defaults) made up for nearly three-fourths of the overall loan defaults.
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The idea was to not recognize bad loans as bad loans, but simply kick the can down the road for someone else to deal with.
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Meanwhile, as all of this was happening, the banking regulator, the Reserve Bank of India (RBI), simply looked the other way. This changed in mid-2015, when Raghuram Rajan, the RBI governor between September 2013 and September 2016, launched an Asset Quality Review of banks and, in the process, forced them to recognize bad loans as bad loans.
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This changed in mid-2015, when Raghuram Rajan, the RBI governor between September
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Urjit Patel, Rajan’s successor as the RBI governor, put out a circular on 12 February 2018, which quashed all the schemes banks were using to restructure bad loans, and this forced them to recognize more bad loans.
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As the bad loans of PSBs accumulated and losses mounted, the government had to constantly invest more money in these banks to keep them going.
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All this money, which is going into the banks could have easily gone somewhere else. Also, who is
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All this money, which is going into the banks could have easily gone somewhere else. Also, who is paying for this mess? The taxpayer and the investors of the Life Insurance Corporation (LIC) of India
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Banks have jacked up interest rates to levels which they wouldn’t have if they were not facing this massive problem of bad loans.
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The history essentially explains government control over PSBs and how it has ended up hurting these banks over the long term.
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India’s banking history also explains why depositors continue to have faith in PSBs, despite the high number of bad loans these banks have on their books.
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In fact, by March 2018, the total bad loans of PSBs were at Rs 8,95,601 crore. This formed 86.4 per cent of the bad loans of the Indian banking system, which stood at Rs 10,36,187 crore.
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As a proportion of the total bad loans of PSBs, Modi’s fraud and default amounted just 1.4 per cent.
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The newspaper could finally put a human face to the entire bad loan crisis that PSBs were facing. Nirav Modi was a businessman who bought and sold diamonds, and who hobnobbed with the likes of former Miss World and international film actor Priyanka Chopra. At the end of the day, the media likes to build heroes and, given half an opportunity, to pull them down.
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Interestingly, psychologists even have a term for such a situation; they call it the identified life. Nirav Modi became an identified life when it came to the problem of bad loans being faced by PSBs in India.
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The sick girl dying is an identified life whereas the people dying in hospitals are ‘merely’ statistical lives because we do not know who they are and, hence, we don’t relate to them or care about them.