Following months of anti-government rallies, Brazilians finally had a reason to celebrate last month when President Dilma Rousseff was suspended from office pending impeachment proceedings. Rousseff is accused of fudging budget figures to hide massive deficits on the eve of her re-election in 2014. Her popularity also took a hit due to economic recession and accusations of corruption involving her government and the State oil company, Petrobras.
The crisis in Brazil is just another chapter in the right-leaning political shift across Latin American countries.
Argentina, after 12 years with a leftist government, voted in a centre-right President, Mauricio Macri, last November amid cheering campaigners. Elsewhere on the continent, Venezuela's President Nicolas Maduro declared a state of emergency facing protests against severe food shortages, power cuts, hyper inflation and a shrinking economy.
Here in India, public sector banks are crumbling owing to bad loans. As the Economic Times recently reported:
Banks were nationalised in 1969 in the hopes of credit being extended to those who are in dire need of it (rather than just big businesses). Now, 47 years later, not much has changed, with big business houses continuing to depress bank balance sheet figures.
Newslaundry obtained the Reserve Bank of India's Willful Defaulters and Defaulting Borrowers List, which placed the total defaults in the banking system at ₹5 lakh crore, as of 24 December 2015. The top 10 corporate defaulters, according to the RBI's list, owe over ₹56,000 crore to financial institutions, most of which are State-owned banks and insurance companies. And, as it turned out, Vijay Mallya's saga was just the tip of the iceberg. Twenty-nine State-owned banks wrote off a total of ₹1.14 lakh crore as bad debts between financial years 2013 and 2015.
Some of the bad loans are due to bad luck: mining projects have been hit by low commodity prices. Some reflect bad judgment: lack of due-diligence led bankers to lend to infrastructure developers. "There was inadequate project evaluation of assessment of promoter or management capacity or even financial capacity," RBI governor Raghuram Rajan said about projects which got scrapped or stopped generating funds. However, some bad loans reflect cronyism: given the political nudge, bank money found its way into big businesses.
As Kingfisher Airlines and other "Non-Performing Assets" grabbed the headlines, the issue of Air India crept up -- more than ₹30,000 crore was spent in stabilizing this Government of India enterprise. While some attributed Air India's losses to high fuel costs and tough competition -- a feature common to Kingfisher Airlines -- others blamed the faulty merger between Indian Airlines and Air India back in 2007. In any case, a lot of taxpayer money went into the bottomless-pit that Air India once was but while Vijay Mallya was held culpable, those who mismanaged Air India got off scot-free. True, there's a difference between Kingfisher Airlines and Air India -- there were no reports of fraud in the public sector airline. But this doesn't alter the fact that Air India sucked up more public funds than Kingfisher did. The government's ever-lasting financial support to the beleaguered Air India was as bad a decision as that of the bankers who funded Kingfisher all the while knowing that its net worth had been wiped out.
Much of this is legal but since public money is at stake, all of it is unfair. We often forget that political and economic systems, whether capitalistic or socialistic, are only as efficient as the people heading them.
Good private-sector lending
With the passing of the bankruptcy law the BJP government -- along with the RBI governor -- has started tackling the problem of NPAs. The bankruptcy law will give banks power to foreclose on defaulting borrowers. Unlike the previous recovery procedure which was not only challenging but also time-consuming for lenders (wherein delays sometimes led to additional ad hoc funding or extension of limits), the bankruptcy law will enable early identification of financial distress and the 180-day time limit for insolvency resolution will help bankers initiate quick liquidation processes in cases where the businesses aren't viable anymore. A Banks Board Bureau has also been set up as part of the government's Indradhanush program to revamp the functioning of State-run banks. The government also wants to consolidate the State-owned banks into less than half their number.
Much has been done but much more can be done. A government which describes itself as "pro-market" should pave the way for privatization of State-owned lenders. Given how private-sector banks have experienced only a small fraction of the losses of State-backed ones, the government should aim to scrap archaic socialist-era rules.
The crisis in Brazil is just another chapter in the right-leaning political shift across Latin American countries.
Argentina, after 12 years with a leftist government, voted in a centre-right President, Mauricio Macri, last November amid cheering campaigners. Elsewhere on the continent, Venezuela's President Nicolas Maduro declared a state of emergency facing protests against severe food shortages, power cuts, hyper inflation and a shrinking economy.
Twenty-nine State-owned banks wrote off a total of ₹1.14 lakh crore as bad debts between financial years 2013 and 2015.
Here in India, public sector banks are crumbling owing to bad loans. As the Economic Times recently reported:
"Except for State Bank of India (SBI), and a few smaller ones, all listed public sector banks have gross NPAs in excess of their market capitalisation. In most cases, the quantum of bad loans is more than double the market value, while some lenders have gross NPAs as high as four or five-times of their respective market valuations."
Banks were nationalised in 1969 in the hopes of credit being extended to those who are in dire need of it (rather than just big businesses). Now, 47 years later, not much has changed, with big business houses continuing to depress bank balance sheet figures.
While Vijay Mallya was held culpable, those who mismanaged Air India got off scot-free.
Newslaundry obtained the Reserve Bank of India's Willful Defaulters and Defaulting Borrowers List, which placed the total defaults in the banking system at ₹5 lakh crore, as of 24 December 2015. The top 10 corporate defaulters, according to the RBI's list, owe over ₹56,000 crore to financial institutions, most of which are State-owned banks and insurance companies. And, as it turned out, Vijay Mallya's saga was just the tip of the iceberg. Twenty-nine State-owned banks wrote off a total of ₹1.14 lakh crore as bad debts between financial years 2013 and 2015.
We often forget that political and economic systems, whether capitalistic or socialistic, are only as efficient as the people heading them.
Some of the bad loans are due to bad luck: mining projects have been hit by low commodity prices. Some reflect bad judgment: lack of due-diligence led bankers to lend to infrastructure developers. "There was inadequate project evaluation of assessment of promoter or management capacity or even financial capacity," RBI governor Raghuram Rajan said about projects which got scrapped or stopped generating funds. However, some bad loans reflect cronyism: given the political nudge, bank money found its way into big businesses.
As Kingfisher Airlines and other "Non-Performing Assets" grabbed the headlines, the issue of Air India crept up -- more than ₹30,000 crore was spent in stabilizing this Government of India enterprise. While some attributed Air India's losses to high fuel costs and tough competition -- a feature common to Kingfisher Airlines -- others blamed the faulty merger between Indian Airlines and Air India back in 2007. In any case, a lot of taxpayer money went into the bottomless-pit that Air India once was but while Vijay Mallya was held culpable, those who mismanaged Air India got off scot-free. True, there's a difference between Kingfisher Airlines and Air India -- there were no reports of fraud in the public sector airline. But this doesn't alter the fact that Air India sucked up more public funds than Kingfisher did. The government's ever-lasting financial support to the beleaguered Air India was as bad a decision as that of the bankers who funded Kingfisher all the while knowing that its net worth had been wiped out.
A government which describes itself as "pro-market" should pave the way for privatization of State-owned lenders.
Much of this is legal but since public money is at stake, all of it is unfair. We often forget that political and economic systems, whether capitalistic or socialistic, are only as efficient as the people heading them.
Good private-sector lending
With the passing of the bankruptcy law the BJP government -- along with the RBI governor -- has started tackling the problem of NPAs. The bankruptcy law will give banks power to foreclose on defaulting borrowers. Unlike the previous recovery procedure which was not only challenging but also time-consuming for lenders (wherein delays sometimes led to additional ad hoc funding or extension of limits), the bankruptcy law will enable early identification of financial distress and the 180-day time limit for insolvency resolution will help bankers initiate quick liquidation processes in cases where the businesses aren't viable anymore. A Banks Board Bureau has also been set up as part of the government's Indradhanush program to revamp the functioning of State-run banks. The government also wants to consolidate the State-owned banks into less than half their number.
Much has been done but much more can be done. A government which describes itself as "pro-market" should pave the way for privatization of State-owned lenders. Given how private-sector banks have experienced only a small fraction of the losses of State-backed ones, the government should aim to scrap archaic socialist-era rules.