Bad Money: Inside the NPA Mess and How It Threatens the Indian Banking System

“If you owe your bank a hundred pounds, you have a problem. But, if you owe your bank a million pounds, it has.”

Vivek kaul starts his latest book, Bad Money, with this great quote by the famous economist John Maynard Keynes. As he writes, The Economist magazine also came up with their own version of Keynes’ words, adding “If you owe your bank a billion pounds everybody has a problem” to it. This along with legendary Waseem Barelvi’s shayari made me fall in love with this book as soon as I started reading it.

The book, as the name suggests, deals with the problem of NPAs in the Indian banking system, in general, and Public Sector Banks, in specific. It is divided into two parts. First covers the history of banking system in India and how the government ended up owning the banks. Second copes with the recent past and the present scenario.

 But first, one needs to understand what NPAs are. Non Performing Assets (or NPAs) are simply the loans which have not been repaid for a period of 90 days or more. People deposit their money in the banks, banks in turn lend that money to those in need. So, it is but obvious that if the banks do not get the money they have lent, they won’t be able to pay their depositors. And hence, it affects all of us. Although, the banks which have accumulated large amount of bad loans, are often merged with healthier banks by the RBI, thus the depositors don’t usually feel the pain. So, is it really important to read about it? Yes, indeed!

Kaul writes in this book that economists have a pretty bad record in predicting a global economic crisis, since they don’t take into account the stability of financial institutions like banks. Therefore, banks play a huge role in the economics of the country. He also points out the inefficiency of the banking system in India, primarily because of government owning a major part of it. And this is where the problem starts. After the financial crisis of 2008, government forced the banks to go easy on lending, in hope that people would borrow more, spend more, and keep the economy on the track. But, soon loans were getting defaulted, especially by the corporates, because of whole host of reasons. This created the bad loan problem in banks. In the first few years, RBI practiced ‘Regulatory forbearance’, or to put it simply, looked away from the problem by not recognizing bad loans as bad loans. It was only after 2014, when Raghuram Rajan became the governor of RBI, that an asset quality review was implemented and banks were forced to recognize the bad loans.Later, the task was made a lot easier by the introduction of Insolvency and Bankruptcy Code. This resulted in the bad loan rate of PSBs going up, and government forced to regularly invest in these banks. Kaul writes, “Between 2011-12 and 2018-19, it invested Rs 2,91,504 crore to keep these banks afloat… It plans to spend another Rs 70,000 crore in 2019-20….All this money… could have easily gone somewhere else. Also, who is paying for this mess? The taxpayers…” The interesting thing is, the government still went for easy lending after the recent slowdown and in the Covid-19 relief package. So, we will continue to pay for it.

I have followed kaul’s writings for over a year now, and the thing I like about him is the eye-openers he gives every now and then. And this book is filled with a lot of those. Many of us might give the credit of banking crisis to the large defaulters like Nirav Modi or Vijay Mallya, but Kaul, in a recent interview said that he pities them [emphasis added]. Not that he thinks what they did was right, but the fact that they are not even big defaulters. The largest defaulter of Indian banks is the owner of Bhushan Steels, Brij Bhushan Singhal, with a default of 56,000 crores. Now, what is the 11,000 crore default of Modi in front of this? But even the google doesn’t seem to know much about him.

Also, the research Kaul puts in his book is incredible. As Shruti Rajgopalan writes, “[It is] peppered with insights from Thomas Schelling to Genghis Khan”. He also uses a lot of stats to prove his point.

To conclude, this book is a must read for anyone who is willing to get into the details of the Indian banking system. Vivek Kaul’s lucid writing style makes complex and boring topics as this, look easy and engaging. It also offers some important tips to the depositors like most of us, who believes in the PSBs too much, to safely invest our beloved money, so that we don’t repeat the same mistakes committed by the depositors of PMC bank. Over and above this, for the crisis, Kaul tries to provide simple explanations, but not simplistic ones. What is the difference? You need to spend a few hundred bucks to know that.

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