To understand what is at stake in the NPA story, one needs first to understand why the public sector banks lent so much money to companies which are today unable to pay it back.
India’s economic crisis that is finding expression in low-growth rates and high unemployment rates is partly due to the decline of investments, which is partly due to the fact that companies cannot get access to loans as easily as before. This is a direct consequence of the huge level of the banks’ Non Performing Assets (NPAs), which have jumped from Rs 1.2 trillion in 2012 to 9.5 trillion in 2018. Public banks represented 70 per cent of these NPAs.
Last month, after a year of reflection, the Centre announced reforms in the banking system, which are mostly about the merger of weak banks. But “reform” could actually be the wrong word if nothing else is done, because last month’s decision does not address the crux of the matter.
To understand what is at stake in the NPA story, one needs first to understand why the public sector banks lent so much money to companies which are today unable to pay it back. In the 2000s, when the UPA held office, everybody thought that double digit growth rates were there to stay. But this euphoria was not the only factor and the dubious practice did not stop in 2014.
In 2015, a 57-page report of Crédit Suisse gave a detailed account of the formidable debts accumulated by a dozen big Indian companies. Incidentally, soon after that, the RBI declared 12 Indian companies responsible for 25 per cent of the NPAs — a list that remained secret. The Crédit Suisse report showed that companies facing heavy debts continued to borrow from the banking system. The Adani group’s debt, for instance, increased by 16 per cent in 2015.
The piling up of the NPAs has to do with the relationship between the country’s rulers and the heads of the public banks. A retired bank CEO, Anjan Basu, has reportedly testified that CEOs of public banks tend to be under structural pressures as members of the Government of India ask them to lend some money to industrialists. Indeed, it is very difficult for the CEOs of public banks to say “no” to the person who has appointed them — especially if he or she expects from him/her a post-retirement sinecure.
But why do governments in India insist that loans be given to industrialists, even when their projects are not good enough to generate the money needed to repay the bank? This question has much to do with the curse of crony capitalism. As we’ve shown recently in Business and Politics in India (a book I co-edited with Atul Kohli and Kanta Murali), the nexus between businessmen and politicians is based on a classic exchange of favours: The former help the latter to get access to credit in return for funds for election campaigns.
Politics has become a very costly activity in India. According to several estimates — including those by the Centre for Media Studies and the Association for Democratic Reforms — India’s 17th general elections were the costliest ever in the history of democracies, with the parties spending $7.2 billion (more than double what was spent 10 years ago). The BJP spent between 45 and 55 per cent of this — approximately 3.6 billion dollars — while the Congress spent 15 to 20 per cent. Cash, drugs, liquor and precious metals worth nearly Rs 3,500 crore were reportedly seized by enforcement agencies in the run-up to the Lok Sabha polls — nearly three times the amount seized five years ago, with the BJP beating all records in this regard.
Political parties were able to amass money due to a scheme pushed through by the Modi government in 2016, authorising businesses and individuals to make anonymous contributions to political parties — electoral bonds. The BJP reportedly reaped 95 per cent of the contributions through such bonds which former Chief Election Commissioner S Y Qureshi, described as “legalisation of crony capitalism”.
What was this money for? Mostly advertisements. Between February 7 and March 2, Alt News scrutinised the Ad Library Report of Facebook to find out that pro-BJP and pro-central government pages represented 70 per cent of the total ad revenue made public by Facebook. Of the top 10 political advertisers, eight were related to the BJP and spent Rs 2.3 crore on Facebook ads — the Congress Party coming a poor third, behind the BJD. But many pages supported the BJP without declaring their links with the party.
The total amount of money spent on Facebook ads by the BJP and supporting pages was over Rs. 2.7 crore in one month. But even more money was to be spent in the following weeks and months. Between February 20 and April 24, 2019, the BJP spent about Rs 6 crore on political ads on Google platforms, 10 times more than the Congress. On Facebook, the BJP officially spent Rs 1.32 crore between early February and April 20. While this is higher than any other party’s expenditure, this figure still conceals some other publicity initiatives. Unofficial BJP Facebook pages, such ‘Bharat ke Mann ki Baat’, ‘Nation with NaMo’ and ‘My First Vote for Modi’ cumulatively spent Rs 4.50 crore in the same period.
A reform of the banking system worth that name would imply more than the amalgamation of weak banks: A protection of the banks’ CEOs from political interferences — which also result recurrently in campaigns of loan waivers. Such an immunisation may be achieved via a dose of privatisation (something compatible with the programme of the BJP, market-oriented on paper) as the private banks are not as badly affected by the NPAs as the public ones.
But it can also result from the enforcement of a more rigorous management autonomy under the aegis of a robust regulator. Of course, the objective would be reached more easily if politicians were not allowed to spend so much money at the time of elections. But this change would imply an even more robust regulator!
This article first appeared in the print edition on September 25, 2019 under the title “Banking on politics”. Jaffrelot is senior research fellow at CERI-Sciences Po/CNRS, Paris and professor of Indian Politics and Sociology at King’s India Institute, London.
