The reality is that too many large borrowers see the lender, typically a bank, as holding not a senior debt claim that overrides all other claims when the borrower gets into trouble, but a claim junior to his equity claim. In much of the globe, when a large borrower defaults, he is contrite and desperate to show that the lender should continue to trust him with management of the enterprise. In India, too many large borrowers insist on their divine right to stay in control despite their unwillingness to put in new money. The firm and its many workers, as well as past bank loans, are the hostages in this game of chicken -- the promoter threatens to run the enterprise into the ground unless the government, banks, and regulators make the concessions that are necessary to keep it alive. And if the enterprise regains health, the promoter retains all the upside, forgetting the help he got from the government or the banks – after all, banks should be happy they got some of their money back! No wonder government ministers worry about a country where we have many sick companies but no “sick” promoters.
We need a change in mindset, where the wilful or non-cooperative defaulter is not lionized as a captain of industry, but justly chastised as a freeloader on the hardworking people of this country,
What we need is a more balanced system, one that forces the large borrower to share more pain, while being a little more friendly to the small borrower. The system should shut down businesses that have no hope of creating value, while reviving and preserving those that can add value. And the system should preserve the priority of contracts, giving creditors a greater share and greater control when the enterprise is unable to pay, while requiring promoters to give up more.
Perhaps the reason we have been so willing to protect the borrower against the creditor is that the hated moneylender looms large in our collective psyche. But the large borrower today is not a helpless illiterate peasant and the lender today is typically not the sahukar but the public sector bank – in other words, we are the lender. When the large promoter defaults wilfully or does not cooperate in repayment to the public sector bank, he robs each one of us taxpayers, even while making it costlier to fund the new investment our economy needs.
The above statements are not mine. Had I made these statements , many of my friends who are supporters of free economy , aggressive capitalism, etc. would have branded me a left leaning socialist , communist , maoist and what not. Maybe some would have also called me a raving lunatic of the AAP fringe as the final insult . But these are words by our RBI governor. I am happy that he echoes the same words that people like me have been saying so long. That crony capitalism and oligarchs are ruining the economy of the country and looting the resources which justly belongs to the public.
Now another scam is being planned by putting pressure on RBI to cut the rates. This will help the large companies to reduce their interest burden and provide some relief to the NPA position only without really addressing the basic questions. It is time now for the industry captains to pay back the country the benefits they have derived from the system by new ideas and better management of the industries to compete with China in manufacturing space instead of siphoning funds. But will they do it, Can this government really turn the tide . I am not a cynic but sadly no signs have emerged that makes me trust that this government will be betterthan the previous ones. They are just counting their luck and streching it far.