The scandal over fugitive billionaire Nirav Modi flying away to an unknown destination leaving behind unpaid loans of $1.8 billion has brought the festering bad loan crisis in the Indian banking system to a boil.
Public sector banks in India are sitting on a massive pile of bad loans aggregating to about $210 billion. This has crippled lending as banks are in no position to advance credit and large corporate houses, many of whom are in the dock for unpaid loans, are in no position to borrow.
Result: Private investment is down in India and this is preventing the economy from moving into a higher growth trajectory.
But much before the problem of unpaid loans degenerated into a political slugfest between the ruling BJP and the principal Opposition party, the Congress, the Narendra Modi government and the Reserve Bank of India had begun the process of cleaning up
the mess by passing the Insolvency and Bankruptcy Code
(IBC) in May 2016, which shifted the balance of power from the borrowers to the creditors and mandated a resolution of individual cases within 180 days (270 days if 75 per cent of lenders agree to extend the timeline) failing which the assets of the defaulting debtor would be liquidated.
Big fish in the dock
In India, unscrupulous businessmen have often defaulted on loans from public sector banks, misused or siphoned them out and then got friendly politicians to write them off... only to start the process all over again. But the Modi government and RBI signalled the end of business as usual by not only passing a stringent law to bring defaulters to book but also directing lenders to pull the plug on the so-called dirty dozen, 12 large companies that account for a fourth of all bad loans.
At one go, the promoter families of large companies such as Essar Steel, Bhushan Steel, Binani Cement, among others, lost control of their crown jewels, which was handed over to a resolution professional, setting in motion the process of either selling these companies to the highest bidder or liquidating them piecemeal.
Recently, the RBI added another 28 large companies, which account for 40 per cent of outstanding loans, to the list. Now, more big companies such as Essar Projects, Orchid Pharma, Ruchi Soya Industries, Nagarjuna Oil Refinery and Visa Steel are also on the block.
The days of politically connected industrialists skimming off public money to enrich themselves at the cost of society are now decisively over.