High-profile boss of failed airline Kingfisher, Vijay Mallya, being labelled a wilful defaulter is a departure from the norm for Indian banking. Big businesses go down the drain, dragging with them into the abyss beyond the sewage treatment plant thousands of crores worth of bank loans, but the promoters-cum-managers of these failed businesses continue to strut the stage as kings of good times.
India’s citizenry shoulders the burden of the loans that get eventually written off, in their double capacity as depositors and taxpayers. At the same time, small businesses struggle to get a loan from any bank; and, when they do manage to get one, have to mortgage their personal assets to secure a loan for the company, vitiating the principle of limited liability. One reason why entrepreneurship is stunted in India is that limted liability is a piece of polite fiction. Someone has to risk his family’s future to secure a loan for an enterprise he starts. This, of course, is ridiculous.
At risk should be the risk capital invested in the enterprise, that is, the equity. There should be no personal liability beyond this. But this just does not work in the case of small enterprises. But for high-flying multi-coloured birds that then dive into the deep end, their plumage only gets brighter after the experience. This must change, for the larger good.
Banking must change from wink-and-nod games in patronage to serious assessment of business viability, risk and credit need, swift identification of bad loans and their immediate resolution to recover whatever can be recovered. Throwing good money after bad because someone higher up in the food chain told the banker to do that must stop.
The banker’s poor judgement must be tolerated if honest, penalised if mala fide; and display of good judgement rewarded handsomely. A debt market must function to bring diversity to risk assessment and assumption. These are the sorts of changes that the business of mediating hard-earned savings to creating new value has to undergo in India. It is a long journey. May it begin with at least small step against wilful defaulters.