Lessons from the Mallya case

t appears that not everyone agrees on the true significance of a flamboyant

tycoon decamping with > debts of Rs.9,000 crore owed to Indias
banks . The gentleman is no ordinary businessman at that, having earlier
been embraced by the countrys political parties that had rewarded him
with >membership of Parliament . That such an honour could have
been bestowed upon Vijay Mallya, who only inherited wealth to make a
lavish display of it when the country abounds with captains of industry who
actually generate it, should alert us to how political patronage works.
When the incident had been analysed in the media as an instance of crony
capitalism, a maverick economist had quipped that it may be better described
as crony socialism. Perhaps he had had in mind that it is the public sector

banks that had lent so fecklessly to Mr. Mallya, and these had for decades,
been showcased as a symbol of Indian socialism.
Action and reaction
Bank nationalisation in the 1960s led to schemes such as branch expansion,
priority sector-lending and the takeover of private banks teetering on the brink
thus rescuing thousands of small depositors. But now, four decades later, it
can hardly be asserted that the performance of Indias nationalised banking
sector has been sterling, with inefficiency and poor service having been
highlighted, and it taken the Pradhan Mantri Jan-Dhan Yojana to rectify their
failure to advance the cause of inclusion on their own. But nothing quite
matches the scale of the present scam, with public banks having lent such
large sums of money to a single individual with indifferent capacity and
without adequate collateral.
We may argue over whether what we have on our hands now is the result of
mismanagement, poor judgment or mala fide conduct, but one thing is clear.
If the money is not retrieved from Mr. Mallya, the loans would have to be
written-off, involving a depletion of our assets for we own the banks. And if
the banks are recapitalised via the Budget, it would be us who will foot the
bill for his excesses. Either way, it underlines the direct bearing upon us of the
actions of public sector banks. There is no escape for us from this connection
even if we migrate to the newer private ones for our personal banking, for we
would continue to own the public banks.

Banks to blame
There is no question that the banks are responsible for the predicament in
which they find themselves. How is it that several leading nationalised banks

have separately lent such staggering sums to a dubious client struggling to

establish himself in an highly competitive industry? There is reason to believe
that Mr. Mallya was the beneficiary of pressure brought to bear upon the
banks from the outside. And this could only have come from politicians who
preside over the banking system in a governing capacity. If this is not the
case, then we must worry seriously about how individual public officials can
dispense such large sums of public money so freely. Are there no checks and
balances in our public sector banks?
The term crony capitalism is used to describe a situation of private players
being shielded from competition or vaulting over rivals due to the
intervention of the ruling class. This usually takes the form of a relaxation of
rules or granting of exclusive licences. The history of the United States in the
19th century is replete with examples of these. But things have improved
substantially in that country, and in any case laffaire Mallya is something
worse. It is one in which the Indian public stands to lose directly. In the forms
of crony capitalism considered above, the loss is indirect, usually in the form
of higher prices. Even in the gigantic market intervention following the recent
financial crisis in the United States, money had not been channelled to
individuals.
Under the Troubled Asset Relief Program (TARP), the government had
purchased assets of struggling banks with a view to ensuring that they did not
collapse taking along with them the rest of the financial system. These assets
were disposed of later at a profit by the government! The U.S. government
had acted smartly, while in the Indian case the banks now find themselves
saddled with loans made by them to an individual with negative net worth.
The irony could not have been more stark. The U.S. government had
intervened smartly in a society strongly committed to laissez faire. On the
other hand, for a country with socialist written into its Constitution, our
public banks have unduly favoured a hereditary businessman without a sound
business plan but with lots of political cronies. Also, the banks had lent to a
company that has been in the news for not having paid its employees for a

noticeable period of time. Here, Indias public sector banks have acquiesced
in the violation of employment rights.