22/10/2020 - Indian Economy

KEY POINTS

·       Central banks have tough jobs in the best of times but the courts consistently choose borrowers over depositors; a court warned the RBI pursuing a loan defaulter to not twist arms so hard that they break. Courts taking depositors for granted combines with COVID-19, past banking sins and suspended bankruptcy to make financial stability harder when it is most important.

·       The average Indian enterprise is small for many reasons but one of them is the availability and cost of credit. The availability of credit is more important than the cost of credit for entrepreneurs but availability will not rise and cost will not fall till our banking system has strong competition, consistent regulation, effective supervision and non-fiscal sustainability.

·       Waiving interest dues or banning bad loan recognition is economically ignorant because more than 20 per cent of Indians are depositors while less than 2 per cent are borrowers.

·       Government money for bad loan write-offs or interest payments is dysfunctional; the Rs 2 lakh crore fresh equity in the last two years for nationalised banks is 40 times the Ministry of Skills’ budget; Bhushan Steel defaulted on more nationalised bank loans than the central government allocation to primary education; and the first 12 defaulters forced into IBC by RBI had nationalised bank loans equal to four times the central government allocation to healthcare.

·       Private banks are not saints but their problems are borne by shareholders (crushing dilution by Rs 1 lakh crore fresh capital raising), management (removal) and market capitalisation calibration (differential price-to-book ratios capture important information).

·       Institutional immunity needs balancing of independence and accountability; rising citizen concern about mandates and appointments should trigger court introspection.

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