NPAs are everybody's problem

Bad Money is a focused saga of the banking system in India that includes the creation and evolution of the public sector banks
When I was a fearless 20-something, sometimes broke, research scholar, I went ahead and bought an under- construction flat. I took on a home loan that covered 85 per cent of the cost of the flat and a personal loan that covered the remaining 15 per cent that was used for the down payment. After paying the EMIs, I would have barely enough to pay my share of the rent of a 500 square foot apartment shared by three or sometimes four friends and eat three square meals a day. I had started walking longer distances instead of taking autos, I stopped going to the Café Coffee Day and shopping, unless for essentials. I sold the apartment soon enough at double the price.

In recent years, whenever I have taken a loan, bogged down by the paper work, my thoughts always go back to those days and I always wonder how someone like me, with no guarantors, on a stipend (not even a salary) and no credit history ended up getting a loan back then.

Vivek Kaul’s Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System provides the answer and I am wiser years after having taken the loans. Those were the years, 2005-06, when the bad loans (or non-performing assets, NPA) rate was below 5 per cent so the banks had “decided to go easy on their lending” and the growth rate of lending was highest around this time.

Last year, a friend lost her job and defaulted on the EMIs of her car loan and after the fifth month of default, two employees of the bank came and took her car away. She asked me, “How is it that Vijay Mallya and Nirav Modi get away but people like us can’t?” I had jokingly replied, “Well you could get away too if you absconded to another country with the car.” Last week, I asked her to read Mr Kaul’s book in which he lucidly explains why, “if you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has,” as John Maynard Keynes had remarked and modified by The Economist  as “If you owe your bank a billion pounds everybody has a problem.” She read the book and called to thank me for suggesting it.

As evident from the examples above, Mr Kaul’s book, if read with the attention it deserves, helps everyone, not just economics and finance students and practitioners, to understand how developments in the banking sector and the various cycles of lending, NPAs and regulations have implications for everyone. The decisions taken over time slowly and steadily weave an invisible mesh of mess that gets noticed only when someone like a Mallya or a (Nirav) Modi gets trapped in that web and catches the imagination of the nation. How does this mesh get woven? That is what Mr Kaul traces and explains in his book.

Bad Money  is a focused saga of the banking system in India that includes the creation and evolution of the public sector banks, nationalisation and privatisation, regulations by the Reserve Bank of India such as the Insolvency and Bankruptcy Code, 2016, and how politics, too, played out along the way. It goes back and forth like a “Tarantino movie”, as the author puts it, goes into the back stories, the sub-plots and the numbers that substantiate the stories.

The problem with the book lies in its strengths. The book is focused, so it may not seem appealing to readers who look for more broad-based books on the economy and the financial system. Once they pick up the book, however, they will find that it does take an overall view of the financial system while keeping the banking system at the centre. The book also contains a lot of numbers and graphs that may act as speed breakers in an otherwise fast-paced book, though this data adds to the authenticity of the analysis.

The book is also a one-stop shop for anyone looking for references on the Indian banking system. One can only marvel at the number of books, monographs, articles, and documents from various websites that have been referred to. Anyone researching related topics need not look elsewhere and may be able to add only a “delta approaching zero” to what Mr Kaul has written. This book organises the messy material and presents the “long and short” of it in a readable, understandable and relatable manner.

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