When the entire banking industry of a country as large as ours is paralysed to a point where it becomes necessary to empower RBI, the banking regulator, "to issue directions to any banking company(ies) to initiate an insolvency resolution process under the Insolvency and Bankruptcy Code, 2016", can we agree that further proof of a complete institutional breakdown is unnecessary. How did we ever get to this point?
Allow me my oversimplification for a just cause. Back till Indira Gandhi became quite the flavour of the new socialist deal in the 1970s, India accepted the idea that commercial considerations must drive lending decisions. This changed with bank nationalization which ushered in the age of priority sector lending and the monkey circus her minister Janardhan Poojari called 'loan melas'. Nationalisation inevitably converted lender decisions into 'political decisions' which, if you know your Indian English, means that to get a credit line, you had to arrange a pay-off. Since pay-offs aren't sensitive to commercial common sense, as many good projects got funding as bad. The bad debts mounted but that apart, even if a project was good, how do you finance a payoff? In the crudest scheme, borrowers over invoiced the project cost, siphoned out money and round tripped the cash into the hands of the lender. If they didn't build enough of a hedge into their loan requirement, they ended up under-financing their project. Sickness was implicit in this mega bank scam.
To me, the main damage the Kingfisher saga did to the country was to designate the CBI as the official witch hunter for everyone who had anything at all to do with any loan that went bad. Once we got past that point, the demonisation of the commercially defeated inevitably reached its logical culmination with the Insolvency and Bankruptcy Act of 2016. I have recorded my objection to the attitude inherent in this new law in Commercially Sustainable Bankruptcy which I may summarize as follows: (a) If you want to 'Make in India', you cannot afford to follow the medieval practice of criminaliing a bad commercial call and throwing the debtor in jail. (b) The coercive nature of India's compliance regime forces promoters to defalcate funds in the dying moments of their floundering businesses in order only to satisfy the extortion demands of state officials. Businesses will dress up balance sheets before they die. (c) Entrepreneurs are rare and precious to every economy and many advanced economies will hammer revival plans down the throats of bankers and employees to secure the continuing good health of business leaders. Societies that are suspicious of businessmen will end up with none. Bankruptcy laws in advanced economies therefore exist to protect, promote and revive businesses rather than shut them down.
Instead, India has chosen to go down a road where the inevitable impact of unsustainable business losses is its takeover by insolvency professionals who are especially incentivised to break up and sell bankrupt businesses to third parties. The system is also geared up to prosecute all those who have participated in the financing of the business in any capacity whatsoever. Bankruptcy means huge write downs for lenders without exception. Is it then a surprise that bankers are simply not willing to call a spade a spade and get on with the job of restructuring a failed business? Here is the central irony: you can shout from the pulpit that you want to Make it India, but when it comes down to dust, government acts not like a commercially savvy partner of businessmen but as the local thanedar out to lathi charge the stragglers. That's not the best attitude to have if the economy is what you care about.
Be that as it may, the government has reacted to the banking logjam by empowering RBI to tell the banks when and what decision to take. Let me not labour the point. I completely fail to see how a quicker and more certain death is a better solution to a bad sickness, especially when the doctor is incentivised not to prescribe any medicines. Is that 'acche din' or the de-industrialisation of India?
This however, is not the main source of my deep disquiet with the ordinance. Since death to debtors is the primary response of the new bankruptcy law, we now have a new dispensation where the death sentence is pronounced not by those who have the most to lose by doing their deathly duty. It is performed by the regulator who supervises these lenders. At one level, this may be a perfect case of change changing nothing. If bankers are practically public servants petrified of being accused of corruption, RBI officials too are public servants petrified of being accused of corruption. Seen thus, nothing has changed.
But that's not true. At the elemental level, we must recognize that RBI is an independent regulator thus far and no further and in truth not very far at all. Only the particularly naive will believe that demonetisation was RBI's call to make. Indeed, Delhi's chattering classes have long circulated names of the small group of bureaucrats who were privy to the demonetisation decision which we know was taken without reference to the Cabinet. Do we need to ask ourselves who will decide which industrialist gets it in the neck? Not RBI for sure. In itself this may be no problem. No allegation of corruption attaches to India's widely admired CEO, or those who support his laudable attempt to drag our economy forward. Still the fact remains that the decision to revive or shut down a business will now be taken at the PMO by those manifestly not specially trained to evaluate these choices. Even more worryingly, I doubt that huge liberal democracies have advanced themselves by dispensing with institutions, discarding a plurality of decision making and marginalising regulation as a process. For all the good that is intended to be done, this is a truly scary concentration of power, the consequences of which will be apparent only long after a succession of corporate corpses have long been burnt at the stake.
The author is Managing Partner of the Gurgaon-based corporate law firm N South. His bestselling expose' of the real world of Indian courts "Legal Confidential", released in November 2015.