Rajan begins clean up of banking sector
With the State Bank of India sending a show-cause notice to Kingfisher Airlines asking why it should not be declared a wilful defaulter—the tiny United Bank of India sent the first such notice—it looks as if India is finally moving on cleaning its Augean stables. In the meanwhile, RBI declared that even companies standing guarantee for wilful defaulters were liable to be called wilful defaulters. While this tag means the entities can no longer borrow money from banks, Sebi has said it is working on the possibility of banning the raising of capital in the markets by such entities also. In other words, being labelled a wilful defaulter pretty much means the end of the road for such entities and their promoters. That Indian banks should be contemplating such drastic actions speaks volumes for the work RBI Governor Raghuram Rajan has put in, right from the time he forced banks to start reporting troubled loans faster and to disseminate this information to all banks, to prevent firms from gaming the system, from going to one bank after the other rejected their loan requests. The credit, of course, also has to go to the Modi government since remedies like the wilful defaulter tags were always available, it is just they were rarely used. Quite clearly, the government has given out enough signals, directly or indirectly, to tell bank managers that no one is sacrosanct.
This is important for two reasons. One, though the increased level of asset sales by troubled loan firms has been encouraging, the sales have largely been to firms that are themselves debt-laden. In the event, it is natural to assume the banks were not really consulted in these purchases. The act of branding firms/individuals as wilful defaulters suggests that banks are now up to legitimately exercising their rights. Two, this is important from the point of view of India Inc’s ability to fund new projects. As the Credit Suisse report—House of Debt—first pointed out, many of India’s top corporates are simply too leveraged to either raise fresh debt or equity to fund new projects, assuming delays such as those pertaining to the environment did not exist. This is a beginning, and it will be a while before banks will be able to declare firms as wilful defaulters and then seize their assets and auction them off to firms that are relatively better off in financial terms. But a definite beginning has been made and represents an important part of the reforms the Modi government has been able to get started with its first 100 days.