How Not to Fix the Banking Sector
The King of Good Times has taken flight!
VJ Mallya’s dramatic March 2016 exit from India to London, the global hub of tax evasion and offshore funds and money laundering, generated plenty of headlines. However, behind the scenes there is a deeper unease about the Indian banking sector. There is a growing awareness that his dramatic departure signalled a set of deeper underlying problems. This malaise was signaled by the announcement of another departure, that of the head of the Reserve Bank of India Raguram Rajan, whose tenure will end on September 4th, to the profound unease of many financial pundits. He left after the shortest tenure of any RBI governor since 1992, after political attacks on him led by the BJPs Subramanian Swamy.
This is perhaps unsurprising, since Rajan was well known for his strong views on what was needed in order to set the Indian banking sector back on track: The large corporate houses were to be made to pay back their bad loans, since this was what was truly holding back the growth rate in India. This earned him praise from international bodies like the IMF. This was a policy to be pursued even if this meant a fire-sale of assets for the corporates that were in debt, leading many commentators to believe that this was why he was pushed out.
This move leaves many uneasy questions unanswered, such as How will such huge unpaid debts affect the Indian banking system? and How much of the Indian banking systems loans are secured with things as flimsy as the value of a brand? It also raises more fundamental questions like - how and why was this allowed to happen in the first place?