Treating Defrauders With Kid Gloves: RBI benignity only for rich defaulters

Wilful defaulters – their number having risen to 16,044 over the years – collectively owed Rs 3.46-lakh crore to banks. In addition, media reports say Rs 100-crore every day is the amount that has been lost to bank frauds and scams over the past seven years. In any case, many of the wilful defaulters, and that includes the likes of Vijay Mallya, Mehul Choksi and Lalit Modi, who have fled the country, will now get a reprieve with a compromise that banks will enter with them, and many of them will get huge write-offs and will still be eligible for seeking fresh loans

A few years back, a Haryana farmer was unable to pay back Rs 6 lakh for an underground pipe that he borrowed the money for. A local court sent him to jail for two years and fined him an additional Rs 9.83 lakh.

Not only in Haryana, in recent years hundreds of farmers owing petty amounts to banks, have been put behind bars for unpaid dues across the country. If not sent to jail, banks continue to seize tractors and other movable assets before impounding cultivable lands of a large number of farmers.

Instead of coming to the rescue of these small-time defaulters, who are mostly unable to pay back the instalment because of crop failure or a price crash, the Reserve Bank of India (RBI) decided to instead throw a ‘Raksha Kavach’ (protective ring) around the rich crooks, fraudsters and wilful defaulters. Setting aside the principles of natural justice, it has allowed nationalised banks to undertake compromise settlements or technical write-offs for accounts classified as wilful defaulters. After a cooling period of 12 months, these defaulters, who have the ability pay but simply refuse to do so, can get fresh loans.

If this is a valid resolution mechanism, as the RBI says, then the question that needs to be first settled is why this resolution has been rarely applied for farmers, MSME sector, and middle class, which puts its hard earned and tax-paid money to get a home loan and car loan. Otherwise, I see no reason why goons hired by banks, non-banking financial companies (NBFCs) and the Micro-Finance Institutions (MFIs) routinely apply harsh and rough tactics to confiscate movable possessions of the defaulters. In a recent case, a car was seized by recovery agents (read goons) from a defaulter at a toll barrier. At the same time, an NBFC chief had recently apologised for the death of a pregnant daughter of a defaulting farmer in Jharkhand. She was mowed down when the recovery agents were trying to flee with a tractor for which the loan was initially taken by the farmer.

The RBI had looked the other way.

First, I am actually shocked by the controversial RBI circular that allowed banks to enter into a compromise settlement with wilful defaulters, who actually should have been cooling their heels in jail by now, and secondly, the meek clarification it issued after an uproar erupted, raising more questions than answers. It only shows that the RBI’s benevolence is preserved for the rich defaulters, who otherwise give a damn to the rules and regulations that the banking regulator prescribes. Otherwise I see no reason how and why the number of wilful defaulters continues to swell. It has risen by 41 per cent in the last two years.

Wilful defaulters – their number having risen to 16,044 over the years – collectively owed Rs 3.46-lakh crore to banks. In addition, media reports say Rs 100-crore every day is the amount that has been lost to bank frauds and scams over the past seven years. In any case, many of the wilful defaulters, and that includes the likes of Vijay Mallya, Mehul Choksi and Lalit Modi, who have fled the country, will now get a reprieve with a compromise that banks will enter with them, and many of them will get huge write-offs and will still be eligible for seeking fresh loans.

Isn’t it a system that actually sucks!

I wonder why such benevolence has never been shown by RBI towards the petty amount defaulters, including farmers. Why do small farmers have to undergo jail terms while the rich crooks in the business regularly get a bail out and hefty haircuts and therefore have nothing to lose? They continue to have birthday bashes, expensive holidays and maintain a lavish lifestyle. Thanks to the recent RBI circular literally allowing them a hefty bailout, the crooks in the trade now have nothing to fear. All they need is to be rich enough to fall in the category around which the bank throws a protective ring.

Sometimes I think that the banking system is itself the primary reason for the growing inequality. After all, if banks continue to treat borrowers who have defrauded the system with kid gloves, it only exposes the game plan that keeps the rich amassing wealth. Not because they are talented but because the banks continue to bail them out with public money. Already, banks have written off over Rs 13-lakh crore of non-performing assets (NPAs) over the past 10 years, and the discretion to the banks to work out a compromise formula for wilful defaulters will act like an icing on the cake for the Richie Rich.

While the All India Bank Officers Confederation and the All India Bank Employees Association have been critical of the RBI policy, most business media have been rather supportive. What is more intriguing is that whenever an issue that benefits the corporates crops up, a team of corporate economists will emerge from nowhere trying to defend howsoever wrong the decision may be. It happened when Oxfam International asked for imposing wealth tax to reduce obscene inequalities.

Some economists in India had then said that raising wealth tax from a minute layer of the wealthy will not be economical. It is equally baffling as to how some economists, trying to justify the RBI directive, even go to the extent of saying that while recovering a loan, a bank should not make any distinction between whether the default is wilful, fraudulent or otherwise.

If this be so, I wonder why this exception is not allowed for the middle class investors and farmers. You will see the same economists questioning the policy if the farmers and the middle class defaulters get the same privileges. It isn’t surprising, therefore, that those experts and others in the media who questioned free travel for women on the roadways buses in Karnataka saying it will cost the State government Rs 4,000 crore a year, go conspicuously quiet when the question of an expected write-off of Rs 3.46-lakh crore and that too for a class of wilful defaulters comes up. They are fine with this largesse but always question the incentives that are announced for the poor.

I thought the RBI will at least stay away from this inherent bias against the poor labharti. On the contrary, the controversial circular that provides a protective lifeline for the crooks and fraudsters of the banking system clearly shows that RBI has a lot to learn, and perhaps make a concerted effort to stop having ‘double standard’ that favours the rich with all kinds of economic favours, and decry the poor for upsetting the national balance sheet and being a moral hazard.