At last, banking in a real sense even if it is shylockian

By MC Govardhana Rangan

During all these years of mounting bad loans, conversations of bankers centred around one thing: promoters.

The fundamental belief was that the enterprise was the promoters’ first and only love. Since he gave birth to the firm, he knew the best about it. Undoubtedly. If the project ran into rough weather, it was not because of him, but factors that were beyond his control. And always.


Bringing the firm back to health is only possible by the same fellow who ran it aground despite knowing it so well, and irrespective of whether he had equity to invest. Mismanagement hardly found a place. Even if banks suspected mismanagement, it was swept under the carpet for the sake of convenience. By now, it has become a convention.

In case of a default, the first reaction of lenders is how to evade reporting it and recover without acknowledging that there is trouble. It is rather well known in the retail mortgage market that as soon as you default, the lender knocks on your door and within months the roof over your head is gone. That’s probably one reason why people move mountains to ensure they don’t miss repayments.

When it comes to corporates, especially the big ones, there were a plethora of schemes, with the blessings of the Reserve Bank of India though, to turn a Nelson’s eye to basic banking principles. These schemes like the Corporate Debt Restructuring even gave a privileged treatment to defaulters like extension of loan tenure, lower interest rate, promoting bad behaviour while punishing the good.

It was a classic case of what John Maynard Keynes described: “If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has.” These practices were peddled as “humane banking”.

It is good to be kind, no doubt. But what of the men who entrusted their hard- earned money with banks. Did banks bother half as much about how they would return the money to depositors as they sympathised with failed promoters? That rarely crossed the minds, thanks to a banking system that is three-fourths owned by the government. Money would be funnelled in to ensure that banks did not go belly up. There is the tax payer to stump up money to back the inefficient.

The RBI, after driving banks to take big defaulters to bankruptcy courts for a quick and meaningful resolution, on Monday killed all the restructuring plans like CDR, SDR, S4A that was used by the unscrupulous to game the system and breed unprofessional banking.

If the bids for bankrupt firms in the National Company Law Tribunal is any indication, banks have to bump up their provisioning substantially. Given the capital that banks own, many would be insolvent and that should lead to a run on the bank. Thanks to government ownership few talk about it.

The writing is on the wall.

RBI coming up with the Asset Quality Review in 2015, the enactment of the Insolvency and Bankruptcy Code the next year, empowering of the regulator to order banks to take bankrupt companies to the NCLT last year, and restraining promoters from bidding for their companies have a pattern showing what the administration wanted of banks: run a bank on business principles rather than being a ward of the administration.

The supreme principle is to protect the depositors’ money and not shed tears for a crumbling business empire, even if it means admission of error on the banker’s part. If a borrower is thrown out of a business because his risk did not pay off, the damage is limited to him. But if the trust of the depositor is broken, the damage for the whole system is lasting.

It does not matter if banks are portrayed as Shylocks for showing the doors to failed entrepreneurs. It is better than sucking out fee income from peddling unsuitable financial products to unsuspecting salaried men.

In all this bedlam, HDFC Bank run by Aditya Puri is an oasis. Many years ago when this reporter asked on what principle he ran the bank amid constant changes, Puri admitting to many challenges said, “One thing hasn’t changed, and will never change. If I give you money, you have to give it back.’’ Not a bad principle, after all.