The Indian banking system is beleaguered by a mounting pile of troubled loans. The proportion of bad debts, where the borrower is not making interest payments or not repaying any principal, has surged to such horrifying levels that the banks are creaking under the strain. Several financial storms have rumbled on in the financial system, a third of which is on crutches. The perverse behaviour of promoters of ailing businesses has led to a situation where precious money of taxpayers has to be to be used to clean the poison that has leached the financial system.

The question is ~ why should ordinary people bear the burden of the fat cats? These freeloaders are remorselessly winnowing scarce bank capital. The government has to dress up balance sheets of banks to make them apparently healthy so that they can lend again. Ironically, instead of being chastised, the wayward borrowers are lauded as captains of the industry. Most borrowers seem to have a deep aversion to repaying bank loans. In several cases, they have adequate assets and capital to redeem the debt but avoid doing it. Things have turned so bad that whether it is an individual or institution, getting back any money at all is a reason for celebration.

We have seen several business leaders splurging on lavish extravaganzas and misdirecting capital into expensive vanity projects, but reneging on loan promises. The reason why we have been trying to protect the borrower against the creditor so far is that the cruel moneylender has always loomed large in our collective psyche. The scene now is totally different. Large borrowers are not like helpless illiterate villagers and the lender today is not the sahukar or predatory lender who charged stratospheric interest rates. Loans are now offered by banks and are quite affordable. Added to this is the government subsidy.

A distinction can be made between unscrupulous debtors who invested unwisely or selfishly and general debtors ~ the latter group may have genuinely tried to use their loans sensibly but cannot make repayments, either because of the economic downturn, or because they had no choice in taking on such debt, such as by having to pay for essential medical care. A willful default takes place when a loan isn’t repaid even though resources are available, or if the money lent is used for purposes other than the designated purpose, or if a property secured for a loan is sold off without the bank’s knowledge or approval. One wouldn’t like to resurrect the “genuine “versus “wilful” trope, but blanket, no-questions-asked writeoffs can be hardly useful for solving such complex problems.

Borrowers turn into wilful defaulters by exploiting weak governance structures. When borrowers become insolvent, their loans are added to an existing mountain of debt. Each time that happens, banks have to make heavy write-downs, sloughing the dud loans like rotten potatoes and wiping off profits, thus weakening their balance sheets. The net result is that most banks are suffering from consequences of bad lending and have become averse to any kind of lending-related risk. Instead of taming the loan dodgers the government is hounding bankers for so-called wrong credit decisions. The entire financial sector is wary of lending.

Most big defaulters are well-connected tycoons and have the money to employ legal eagles who can play the judicial system ~ it is here the law flounders. India has some of the most draconian laws in books; they are ineffective against powerful dodgers. We keep producing new laws when the existing ones are adequate and just need more teeth to obtain results. Noble Prize winning French economist Jean Tirole writes in his book Economics for the Common Good: “The state often fails. There are many reasons for these failures. Regulatory capture is one of them. We are well aware of the friendships and mutual support that create complicity between a public body and those who are supposed to be regulating it.”

Repayment ethics have been deeply ingrained in Indian culture, but have become foul words on account of the perverse behaviour of borrowers. The sanctity of repayment and its moral obligation has been instilled since the time of Manu ~ no matter how deceitfully the debt was contrived and how cruel were the costs. Manu listed 18 main categories of law for the king to decide on. Of those, wrote Manu, “The first is non-payment of debts.” He held: “By whatever means, a creditor may be able to obtain possession of his property, even by those means may he force the debtor and make him pay.”  What about disputes and debt recovery?

Manu specified the punishments to be handed out in case of the 18 types of disputes arising from loan repayment. When a creditor sued the debtor for recovery of money, it was the duty of the king to ensure that the creditor got his money back. Manu permitted the king to employ all means, fair or foul, to recover the dues, which included killing the debtor’s wife, children and cattle or obstructing his movements. Manu emphasized that a defaulter could not absolve himself of his debt burden even by death. The great statesman Chanakya believed that sons should pay with interest the debt of a deceased person or co-debtors or sureties.

Was a spouse responsible for the debts incurred by a person to whom they were married? Yes and no. A wife was exempted from the debt burden of her husband if she had not consented to his borrowings. However, for the debt incurred by a wife, her husband was liable for repayment. Crony politicians are equally guilty of undermining the stability of banks. They have used public banks as political milch cows and stacked the decks with populist sops. Banks became spigots for burnishing election credentials and have been forced to shovel huge loans to the buddies of politicians.

The nexus of politicians and creative business schemers has stoked a forest fire that spread quickly, singeing many in the financial sector. In every business venture, the equity holders take the risks. In India lenders take the risks while the promoters have much less skin in the game and are essentially playing with other people’s money.The cozy nexus between tycoons, few bank executives and politicians has held back a much needed  shake-up of a moribund, scandal-prone sector.  Scams are a product of greed and immorality. However, abuse of the financial system has been made possible because of the system’s weaknesses.

In an age which heralds technology as the silver bullet, we should not overlook the most important source of competitive advantage ~ the people. Compliance and controls are dependent on people running them. A process is only as good as the people managing it. The most agile auditors will also have to struggle to stop managers who are determined to hide their dirty laundry from view. In several cases the bankers have themselves fudged the accounts and contributed to the malaise. The turmoil has prompted calls for improvising risk management models, which seem to have created an illusory sense of security.

However, models and machines cannot act as a surrogate for human expertise. Money management is no more a genteel world. In a prophetic warning, way back in 1913, John Maynard Keynes wrote in Indian Currency and Finance: “In a country so dangerous for banking as India, (it) should be conducted on the safest possible principles.” Our departure from the time-honored metrics has come at a heavy cost. The government has already decided to set up a bad bank to spin off stressed loans to experts who can focus on recovery. However, a bad bank is not a magic wand that will resolve the issues of India’s soured loans.

Finance is a wild animal and made up of so much human drama and passions that it needs the most sophisticated minds to read and leaven the nuances that shape its contours. The biggest misconception about banking is that people think one should have a degree in business or finance to do well in this industry. Banking is a generalist profession dealing with diverse industries. An educational background in economics or finance may help one understand banking concepts in the beginning. But in the long run it is the person with the right mix of personal qualities and leadership skills who will rise above the rest.

These include the ability to learn quickly and continuously, openness to new challenges, a disciplined professionalism, an outgoing and inquisitive nature, an analytical and systematic mind, negotiating savvy and personal integrity. Any achieving banker will soon find himself thrust out of a comfortably known field into an unfamiliar one. He must be open to challenges. He must learn the ropes by himself before he can guide others. A banker must master and micromanage details.

A banker knows the surface of many disciplines but depths of none; he should be ready to unlearn certain theoretical assumptions if his life experience warrants him to do so.  India’s financial community has a lot on its plate: demographic changes, structural changes, and operational changes. It is now all playing out. The most important thing at this juncture is financial stability. It has become extremely difficult to assess which parts of the loan book could develop into default hotspots. We need a new generation of bankers with vigilant eyes and firefighting abilities to ensure robust and resilient financial health of the system. This alone can keep the economy continually perked up.

(The writer is the author of Village Diary of a Heretic Banker. He can be reached at [email protected])