Bad Loans: A Look into Mumbai’s Broken Banking System
Warren Buffet once stated that “It has been far safer to steal large sums of money with a pen than small sums with a gun.”
This in itself epitomizes the pressing problem that continually lays at the heart of Mumbai’s weaknesses. Throughout recent years, it has been seen that the prevalence of bad bank loans have spiraled in India’s broken financial system. Ever since 1969 when PM Indira Gandhi had taken action to nationalize major private banking institutions, India and its prominent urban cities haven’t been able to maintain macroeconomic stability. From the statistical rise of willful defaulters to faulty banking practices, Mumbai and India as whole are gradually chipping their way into a great hole.
According to the Reserve Bank of India database, it was reported that aggregate lending within the Indian economy had amounted to a whooping ₹65,20,000 crore (approximately $1.03 trillion dollars) with Mumbai ranking third in aggregate loan related debt (Raina, Anil) . Of such lending, it was also reported that more than 15% of the borrowing had come from the 12 largest corporate houses (Majumdar, Sumit). The vast amount of borrowing and lending activity that India engages in expels dangerous amounts of liquidity which in turn leaves its banking system in great vulnerability and keeps it on the verge of collapsing.
This being said, many may be curious to ask why India is facing this bad debt crisis, and what exactly are the root causes behind it all. Well, based on an academic paper titled Concentration, Collusion, and Corruption in India’s Banks by Professor Sumit K Majumdar at the University of Texas Dallas, it is seen that the issue on hand is extremely complex and has many underlying causes. However, of such root causes, he stresses that the issue is mainly attributed to the idea of supervision failure. He states that state banks within Mumbai and across India have been “ lax in its audit and supervision of banks’ credit appraisal and lending processes” (Majumdar, Sumit) and that “many, if not all, of the Basel financial regulatory requirements [international banking norms] will have been breached as such loan amounts increase” (Majumdar, Sumit). In addition to this, he also mentions that big firms have the ability to borrow great amounts due to the fact that they hide facts on “possible performance declines” (Majumdar, Sumit) and “banks willingly lend them more, irrespective of project or business viability.” (Majumdar, Sumit). So now the question becomes, why would banks issue more loans when they are aware of the great amount of debt they are in and the international requirements they fail to uphold? This is exactly what S.B. Gupta manages to touch on in his op-ed about The Real Story of Fraudulent Loans. According to Gupta, it is seen that banks grant such loans due to the corrupt culture that exists in Indian society. According to his commentary, he states that that the Indian banking system is “regularly aided and abetted by bad apples within every political party” (Gupta, S.B.) to satisfy their own self interests, and this gives rise to “many high-profile bank scandals” (Gupta, S.B.). This clearly goes to show that there indeed is a major power-based flaw within Indian banking systems. Without detailed and extensive evaluation of borrowers and through the corruption that exists, we can clearly see that Indian banks are paying the price for the laxity and deception they possess in their loan issuing practices. Moreover, we can also see that such issues need immediate attention as not only will India and Mumbai’s debts increase, but the effects can also leak into the bigger picture societal problems.
Of the different societal problems, it can clearly be seen that the effects of loan default scandals and poor loaning decisions have mainly exacerbated the issue of poverty and wealth inequality that exist in Mumbai and the rest of India. Let us consider a specific example that revolves around Kingfisher Airlines loan default case which was portrayed through a Netflix documentary — Bad Boy Billionaires: India. Through the documentary, it was seen that Kingfisher Airlines had a very short lived success. As the years progressed and oil prices ran high, Kingfisher Airlines became a failing business, but the company owner Vijay Mallya, showed no sign of giving up and continuously took out large loans from state banks in Mumbai and many other cities to recapitalize the business. These loans, however, were never paid back and got lost in the operations of the airline. This in turn sparked many social protests among poor Kingfisher employees that spanned across India as they weren’t compensated for their many months of hard work. More specifically, according to an interview with a former air hostess for the airline, she had stated that “All employees of all the countries were paid, it was only the employees of India that were not paid. The problem wasn’t lack of funds, it was rather lack of repercussions” (Gray, Bad Boy Billionaires: India, 46:00–46:05). Through this, it can evidently be seen that through poor supervision and careless loan decision making, Indian banks functioned as a capital tap for willful defaulters like Vijay Mallya which brought many financial burdens to the average Indian and has contributed to widening the wealth gap. Additionally with governing bodies letting such acts slide with minimal repercussions, it can only be inferred that the problem isn’t going to stop anytime soon. This same idea of bad loans and its relations to poverty and wealth inequality is corroborated by Professor Sumit K Majumdar in his academic piece referred to above. According to his work, he draws a connection as to how the bad loan/ debt crisis has caused interest rates to rise so that borrowing occurs less. While this may not affect the rich, he states that “for the hundreds of thousands of small businesses that borrow money, for the millions of small and marginal farmers, for the millions of consumers who need to borrow money to purchase housing, transport equipment and consumer durables, the level of high interest rates has meant that the quality of life has been compromised for a generation or more” (Majumdar, Sumit). I personally tend to agree with Majumdar’s viewpoint as it can clearly be seen that the majority of the large amounts of borrowing and defaults are caused by the rich as they usually have the power and credibility for such loan grants. This, however, directly affects the rest of the population in Mumbai and across the country as after such defaults, banks raise interest rates to make the cost of borrowing much higher which prove to be unaffordable to many who need small loans.
With the bad loan/ debt crisis playing a large role in driving historic societal problems that Mumbai and India as a whole have faced for decades, it is only normal to wonder how one can restore the failing banking system. Well, as reported by Dilsher Dhillion in his article published by Business Insider India, we can see that India and its major financial capitals can establish a so-called bad bank. Through the article, a bad bank is “a corporate entity that takes up all the non-performing assets [bad loans] of a financial institution or a group of financial institutions” (Dhillion, Dilsher) and “exclusively focuses on the restructuring and liquidation of unhealthy assets” (Dhillion, Dilsher). By incorporating this process, public banks can focus on financial operations that they are good at without having to worry about recovering bad loans as that would be the function of the bad bank. While this may be a viable solution in theory, according to the views of Dr. Ashok Haldia, the idea of bad banks fails “the test of realism and pragmatism” (Haldia, Ashok). From his article for The Economic Times, he claims that “setting up a bad bank as an external entity is highly complex and costly. It requires separate organizational structures and IT systems and to overcome legal and regulatory hurdles.” (Haldia, Ashok) and that the “eventual transfer of bad loans may take 18–24 months and even more” (Haldia, Ashok). As an alternative, he proposes that state banks should engage in internal restructuring by creating a “strategic business unit (SBU)” (Haldia, Ashok) that meets requirements and focuses on “management of bad loans” (Haldia, Ashok). This being said, I strongly concur with Haldia’s opinion as given the magnitude of the problem, we need immediate action which wouldn’t be possible with the incorporation of a bad bank as it involves a lengthy process to construct. In addition to this, with this idea noted to be costly and publicly run, there is also a great risk for the governing body to lose a lot of capital on a solution that could eventually fail which would put India and Mumbai in a worse position than they originally would start at.
From the growing debt to the widening wealth gap, it can clearly be seen that the bad loan crisis that has touched Mumbai and India’s many booming cities is undoubtedly one that deserves great attention. More generally, the public banking system as a whole is in desperate need of revitalization as it gets infected by acts of leniency and corruption that is so rampant within Indian society. Moving forward, such identification and evaluation of flaws within banking systems is definitely an important issue in relation to overarching ideology of globalization. As our world has become more interconnected, we have first-hand been able to witness how economies and financial systems across nations interact. This undertaking has in turn begged many questions — How would Indian banks compare to its foreign counterparts? What type of bank systems out there might be vulnerable to processes of corruption and laxity, and which ones might be better constructed to thwart it? What role do bad loans play in growing economies and societies all around the world?
Works Cited
Reserve Bank of India — Database, www.rbi.org.in/Scripts/Statistics.aspx.
Raina, Anil. “Loan Wolves of Mumbai: Mirror Delves into the Often-Seedy World of ‘Vasooli’, Finds Many Tales of Lives Destroyed by Recovery Agents.” Mumbai Mirror, Mumbai Mirror, 2 Jan. 2020, https://mumbaimirror.indiatimes.com/mumbai/cover-story/loan-wolves-of-mumbai/articleshow/73062864.cms.
Majumdar, Sumit K.. “Concentration, collusion and corruption in India’s Banks: Roots of the bad debt crisis.” Economic and Political Weekly 51 (2016), http://164.100.47.193/fileupload/current/Concentration%20Collusion%20and%20Corruption%20in%20Indias%20Banks.pdf.
Bad Boy Billionaires: India. Directed by Dylan Mohan Gray, Minnow Films and Jigsaw Productions, 2020. Netflix. https://www.netflix.com/title/80990073
Gupta. S.B. “Opinion: Indian Banking — The Real Story of Fraudulent Loans.” Mint, 4 Sept. 2020, www.livemint.com/opinion/online-views/opinion-indian-banking-the-real-story-of-fraudulent-loans-11599129214450.html.
Dhillon , Dilsher. “What Is a Bad Bank and How Can It Fix India’s Bad Loans Problem?” Business Insider, 11 June 2018, www.businessinsider.in/what-is-a-bad-bank-and-how-can-it-fix-indias-bad-loans-problem/articleshow/64541679.cms.
Haldia , Dr. Ashok. “View: Bad Bank Not an Optimum Solution to Mounting Bad Loan Menace in India.” The Economic Times, Economic Times, 16 July 2020, https://economictimes.indiatimes.com/industry/banking/finance/banking/view-bad-bank-not-an-optimum-solution-for-menace-of-mounting-bad-loans-in-india/articleshow/76997028.cms
