‘Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System’ review: A hundred cuts

How did Indian banking get saddled with massive non-performing assets?

In a financial crisis, there are multiple suspects and many victims. A complicated chain of events precede the crime/crisis, often beyond the imagination of most analysts and investigators. And frequently an intelligent observer has to put together the pieces afterwards, like Vivek Kaul has done in Bad Money.

Kaul takes India’s non-performing assets (NPA) problem and deconstructs it methodically over a range of issues related to India’s banking sector. He doesn’t oversimplify the problem; he establishes historical context, using a wide range of public data as evidence, and focuses on problematic promoters and businessmen, imprudent bankers, lethargic and then hyperactive regulators, and ambivalent bureaucrats.

A rotting system

This is a story of a system which allowed a hundred cuts, until it could take no more, after which businessmen like Vijay Mallya and Nirav Modi emerged as the most prominent villains, but there were hundreds more who were just as guilty. Kaul narrates the Mallya and Modi cases in some detail to give a flavour of how complicit much of the banking and political system had to be to allow both these men and their businesses to accumulate so much bad debt with public sector banks (PSBs).

What is particularly shocking in Kaul’s narrative is how early the NPA problem had been recognised by the broader financial research community (Credit Suisse’s House of Debt series by Ashish Gupta and Prashant Kumar deserves special mention), yet how long regulators, bankers, bureaucrats and politicians sat on this knowledge without addressing it meaningfully. In a capital-starved country like India, it is staggering that the PSB system found it easier to give ₹5 crore loans to large corporate clients, but still struggles to give ₹5 lakh loans to small businesses.

Need for consumer advocacy

Bad Money raises questions regarding the effectiveness of the public sector banking system, and shows why there is a desperate need for stronger consumer advocacy and public accountability to protect depositors and taxpayers.

Ultimately, Kaul holds the paternalistic attitude of the Indian state towards banking responsible for this crisis; as long as majority government ownership in PSBs remains, he argues that all of the incentive problems leading to crony capitalism, shoddy accounting, and poor asset quality reporting will stay. The bureaucratic and political psychology that leads to this paternalism in banking is a big open question that readers will be left pondering.

Students have a particularly difficult time understanding and internalising the logic of financial crises. As someone who went to college during the global financial crisis in 2008, it was particularly disheartening to see seniors struggling to find jobs, job offers being rescinded, and youthful optimism being crushed by macroeconomic realities. The COVID-19 generation of graduates is facing a similar situation. They all have similar thoughts in the back of their head: how and why did public systems fail so spectacularly? Whose sins are we paying the price for? Bad Money may not have clear cut, easy answers to these questions, but it will present more than enough evidence for you to make up your own mind.

Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System; Vivek Kaul, HarperCollins, ₹599.

The reviewer is a Fellow at the Centre for Policy Research.