Has Raghuram Rajan accidentally predicted the grisly race to the bottom of the Indian banking system? Will India face a home-grown recession because of the lack of regulation and laxity by the mandarins in the finance ministry? By now, most of the systemic flaws have been identified, by the RBI governor no less. What’s perplexing is why the finance ministry has done nothing about it. “The quantum of bad loans in the Indian banking system may not have peaked yet,” Reserve Bank of India (RBI) governor Raghuram Rajan had presciently warned on 12th May, echoing the vociferous concerns of analysts and bankers.
Rajan’s comment ten days ago had come close on the heels of rating companies Crisil Rating Ltd and Moody’s Investors Service warning of more short-term distress for the Indian banking system. Today it seems like Rajan’s prediction has been proved right after all. Bad debts have come in like a wrecking ball and hit the normally robust Indian banking system hard. Over the past few <g data-gr-id="23">years</g> Indian banks have sought to recast loans which look like they will enter the bad debts column. The way they have done this is reminiscent of the shady tactics used in the 2008 crisis.
Indian banks have regularly been taking haircuts: the difference between the market value of an asset used as loan collateral and the amount of the loan. What’s worse they have been extending repayment periods to make their books look better; some may even be cooking their books to keep bad debts off the account books. Loans of companies such as Deccan Chronicle, Kingfisher Airlines, Essar Steel, amounting to a whopping Rs 30,000 crore have gone bad. So while the owners of Deccan Chronicle floated the Deccan Chargers; while Vijay Mallya was shooting the latest edition of his swimsuit calendar; while Essar Steel’s parent companies were busy sponsoring the ‘Think <g data-gr-id="26">fest</g>’; it was the Indian banking system which was suffering silently.
One must also juxtapose this reality with the fact that India is a country where farmers commit suicide unable to repay their loans while the rich get away with ‘murder’. As philosopher George Santayana once famously quipped, “Those who do not learn history are doomed to repeat it.” India would do best to avoid a repeat of 2008.