Discrimination is all-pervasive and is often suffered silently. Where there is discrimination, there is sub-optimal use of talent, an unequal allocation of resources, and misuse of responsibility. When all these combine, it is an insurmountable mess. And if this takes place in a domain that deals with large public funds, we have to sit up and review the situation seriously, as it has been allowed to drift for far too long.
Maybe there has been a deliberate attempt to let things just drift. Or maybe the system is incapable of arresting the problem. But more than the cause of the drift, it is its effect that could permanently impair the national economy. Thus, it is a tall order for anyone to stem the drift. In this scenario, it is refreshing to see a person of Raghuram Rajan’s stature speak his mind. The youngest to adorn the mantle of governorship at the Reserve Bank of India, Dr. Rajan is widely acclaimed for predicting the 2008 global financial meltdown. And he commands quite a following and respect in the global financial community. It is also refreshing to see that when he expresses his view, he does it without mincing words.
The plain-speaking in his New Year message to the employees of RBI therefore did not come as a surprise. He hit the nail on the head when he articulated his thoughts on the system in India today. “It has often been said that India is a weak state,” he said. “Not only are we accused of not having the administrative capacity of ferreting out wrongdoing, we do not punish the wrong-doer, unless he is small and weak. This belief feeds on itself… No one wants to go after the rich and well-connected wrong-doers, which means they get away with even more. If we are to have a strong sustainable growth, this culture of impunity should stop.”
Lest he be misunderstood, he quickly clarified: “This does not mean being against the rich or business, as some would like to portray, but being against wrongdoing.”
This is perhaps the first time that a person who holds such an important office in the monetary management sphere has spoken openly of punishing the wrongdoings of the big ones in business. “Defaulting promoters have no ‘divine right’ to remain in charge of their companies,” he stressed.
Treatment of borrowers
Banks have the habit of throwing good money after bad money, and letting the recalcitrant promoters freely run their enterprises. Financial shenanigans of defaulting owners are covered up in a system that easily breeds collusion among various ‘interest groups’. Can a common borrower (one who takes retail loans) have the luxury of defaulting on a single Equated Monthly Installment (EMI) let alone not paying his/her debt? He or she would be bombarded with telephone calls. A common citizen needs to submit several documents of proof to be eligible for a bank loan. With stricter Know Your Customer (KYC) norms, things have become much tougher for ordinary citizens to access bank funds. Often, big borrowers are given a royal treatment by the banking system. Banks go out of their way to accommodate the borrowers’ failures. Retail borrowers don’t have the benefit of such overwhelming courtesy. This difference in the treatment of borrowers of different loan sizes has been prevalent for a long time, creating a new class system within the banking sphere.
Today, the banking industry is sitting on a mountain of non-performing assets (NPA). Dr. Rajan has been pushing hard for the debt-laden banks to clean up their books. He does not hesitate to call a spade a spade. With so many inter-connections taking place within the financial services sphere, it is becoming much more difficult for any defaulting retail borrower to hoodwink the system and keep accessing funds from organised sources. The Credit Information Bureau (India) Limited. is effectively playing the watchdog role to ensure that defaulting retail borrowers don’t have access to fresh funds from the system.
Why can’t the same yardstick apply to big borrowers? Often, subsidies are a subject of huge discussion among thinkers, economists, policy planners and the industry alike. If subsidies are bad for the economy, as has been suggested time and again, what about the accommodation of defaulting big borrowers? In effect, the piled-up NPA has been a big constraint for banks to pass on the RBI-induced rate reductions. Why is the transmission not happening?
The reasons are not far to seek. Banks are using up the rate cuts to shore up their profits, rather than passing on the benefits to retail borrowers. Not surprisingly, the RBI Governor has emphasised the need for cracking down on rule breakers so as to avoid a bigger catastrophe down the years. PSU banks especially deal largely with public funds (deposits from the general public and capital infusion from the government). And these cannot be allowed to be squandered away by recalcitrant clients, however big they are. Dr. Rajan deserves praise for taking the bull by its horns.
Banks have the habit of throwing good money after bad money, and letting the recalcitrant promoters freely run their enterprises