India can’t rely only on RBI to regulate the credit market; there have to be clean lines of responsibility as to who regulates which sector
Someone said, “Every crisis should be seen as an opportunity.” Narendra Modi is lucky that, in the middle of multiple problems on the economic and political fronts the government has been facing, the coronavirus crisis has taken everyone’s concern away from all other problems. Everyone is focussed on avoiding infection, and if infected, isolating to avoid further consequences.
Even so, someone in the government should be considering the long-run issues which the government faces. The collapse of Yes Bank has told us that—following on the collapse of bank and non-bank credit, and the logjam on the IBC proceedings—the Indian economy has to face up to an urgent, drastic and far-reaching restructuring of banking and credit institutions in India. The time is past when India could afford crony capitalism, inefficient socialism and corrupt private sector behaviour and judicial delays that have cost up to 2-3 percentage points of GDP growth each year over the past several years.
I had a ringside seat when British financial markets were regulated in a thorough way. The City of London had been a cosy club of broker houses and private banks. Big Bang exposed it to competition, both domestic and foreign. It was then argued that self regulation of each sector—insurance, banking, asset management—was best. But, that proved to be wrong as financial innovation made the previously drawn boundaries between sectors obsolete. So, a comprehensive financial regulatory structure was set up. After 2008, there was further reform. The Bank of England is supplemented by the Financial Conduct Authority, Prudential Regulation Authority.
It took the British economy 10 years to get it right. India needs to set up a Commission to propose a comprehensive structure to regulate banks, non-banking lenders, insurance and stock braking. Whatever is left of the old structure should be subsumed or renewed. It is important to take the government out as a player and umpire. PSU banks have shown that if you don’t have stock market discipline (since the government picks up your bad debts), you are bound to misallocate credit (to cronies of political parties), fail to do due diligence (as the Vijay Mallya example showed) and, of course, behave like an informal cartel of nationalised banks. The government ought to divest its share in the PSU banks.
Private banks have also shown bad behaviour. Yes Bank was behaving in a way which should have attracted some regulator’s attention. But, neither internal controls nor external regulators stopped misbehaviour until it crashed. At one stage, I received in the post a gigantic, leather-bound edition of the Bhagavad Gita as a gift from Yes Bank. It was hideous, useless, and, no doubt, expensive to produce. It, no doubt, came from the bank’s expenditure. Neither the internal management controls nor external regulators stopped it. I am sure many more such profligate items ate up the profits such as the rumoured purchase of a painting by Priyanka Vadra for Rs 2 crore!
The failure of IL&FS told us that the non-banking credit market is also in need of regulations. Real estate companies such as Amrapali have been rebuked by the courts. In these matters, the victims are not other banks or companies, but individuals.
Financial transactions costs of doing business in India must be one of the highest in the world. The government did pass the IBC, and it was expected that creditors would be able to recover their dues from borrowers. What we have noticed that debtors have used every trick in the book to thwart the orders of the specialist court and imposed costs on the creditors. The entire effort to clean up NPA mess has been frustrated by clever debtors.
Thus, India cannot rely on just RBI to regulate the credit market. There have to be clean lines of responsibility as to who regulates which sector. The judicial arm has to be made part of the reform strategy. It is the ordinary tax payer—direct plus indirect tax payer—who bears the burden of the badly regulated credit market. Indian tax payers are not organised for political lobbying. The government often throws money at any problem which exposes a weakness such as farmers debts.
It would be helpful to the economy if someone organised a Tax Payers’ Association that could sue the government for its failure to protect their interest. The government (of all parties) happily throws money at each problem—farmers distress, inability to repay debt, drought or too much rainfall. It is time tax payers asked some tough questions.
The Indian economy has become much more like a developed economy than it was even 20 years ago. The current drop in GDP growth rate is due to the uneven supply of credit at exorbitant prices. It is no longer a bullock cart where the government can use physical controls. It needs someone who can reach out to the agencies exposed to the credit risk. India’s economy will generate prosperity only if it lets private sector play a fuller, grown-up and responsible role in the way the economy generates growth. But, the reform of financial markets is urgent.