If Union finance minister Arun Jaitley’s criticism of industrialist Vijay Mallya is any indication, India is in the middle of a major regime change in the relationship between the government, state-controlled banks and industry.
Mr Jaitley said that Mallya had brought not just himself but also India’s entrepreneurs a “terrible name”. He said that Mallya should settle his debts fast, and could not be segregating private wealth from business interests.
That’s a tough statement to make in an economy in which companies, rather than individuals that control them, are technically the loan defaulters. But it shows the mood in North Block in the face of a public outcry on wealthy promoters ignoring liabilities.
A few days ago, Mr Jaitley remarked that “every penny” due from Mallya would be returned. The minister’s words are a significant amplification of what RBI governor Raghuram Rajan said last January, when he indirectly taunted Mallya by mentioning borrowers who flaunted birthday bashes.
Mr Jaitley also dismissed talk of any rift between him and Dr Rajan, which suggests that there is teamwork at play to reform the banking system. The RBI turned the heat on banks prior to the Budget by ordering increased financial provisions in cases of strategic debt restructuring (SDR) of bad loans. The government has already initiated overhauls in a dozen cases involving Rs 1,00,000 crore.
Facing a tough stance from banks, promoters of steel companies are offering to bring in strategic investors and dilute their own stakes. Under SDR plans, managements are replaced by investors on a rescue mission — which can sometimes result in a loss of face or more for promoters. Steel loans alone add up to Rs 2,00,000 crore.
The loan overhaul plans would seem like unleashing a wave of pressures on companies, but it seems the government is rolling out a good-cop-bad-cop approach that also helps positive change. Steel secretary Aruna Sundararajan said this week that her ministry and the finance ministry were working on a package for the steel sector — and that included bringing in international investors.
Overall, the signals are one of a system in which the men are separated from boys. After all, a huge amount of the loan backlog resulted from big bets on infrastructure companies even as financial markets were leading the world economy into its worst crisis in decades. The current approach of the RBI-North Block team seems to be a balanced one. But the kid gloves are clearly off.