Pandemonium by Tamal Bandyopadhyay is one of the exhaustive and expert commentary on current state of the Banking sector in India.
The Bandyopadhyay is a reputable journalist and has a long tenure of financial reporting. He is drawing on his rich experience, interviews with the whoes-who of the Indian banking, and financial leadership. In addition he is adding in-depth analysis of the financial facts and figures. He is well known for learning from self-curiosity and direct experiences with experts and banking and financial leaders of India.
Historically banking, specific communities led banking, were established by families in India and elsewhere in the world. To consider an example central bank concept was centralised in designation Jagat Seth of 18th century Bengal province. This was a family based – community network providing the functions of a central bank. Central banker functional roles handed down through generations and recognised by the ruler of the day.
Such banker families or community leaders would also sometime fallout with the ruler and plot into politics of the day. Some would try to influence the state to the severe extents. This would extend to even betrayal and downfall of the current ruler. This is in spite of the ruler’s ancestor may have been the sponsor of promoting earlier generations of the banker family to the powerful role.
Over period of time, this crucial function of a nation state came to be institutionalised into Central Banks. This restricted scope of the institution within economic domain and brought all within common goal of national prosperity ,growth and stability. This ensured wider participation and representation from across the nation state. It also relieved financial power out of clutches of certain communities and families. With more democratic brainstorming and exchange of views from wider section of the population, better policies and safeguards come out naturally in this participative institution.
As I read through the book, its a mixed feeling that the Reserve Bank of India and its leaders over the years have faced some really tough situations. They evolved realistic balance in economic policies, some tough calls and economic tools to meet the objectives. On the one hand, for a nascent developing nation, there were unique challenges coming into present from the post-colonial phase. These were fitted into a vision for the future generations.
Bandyopadhyay has made briefings on current banking topics of interest. “Governorspeak” is one of the attractive sections . This has notes from interviewees – all ex-RBI governors – C.R. Rangarajan, Y.V.Reddy, D.Subbarao, Raghuram Rajan. They are undoubtedly authentic, knowledgable, experienced and led with steady hand in guiding the Indian economy with combined experience going back to recent 3 decades.
One of the hot news items of 2016 was the government bringing in an insolvency code. We can clearly make out from the book that the conviction of Raghuram Rajan was crucial for initiating asset quality review(AQR) mechanism. Further he was also proactive on following up into AQR findings, empowering existing NCLT. Furthermore, he led on rollout of the Insolvency and Bankruptcy code of 2016.
To give an example of its benefits, Bhushan Steel was one of the top 12 NPA companies recommended by RBI under Insolvency and Bankruptcy code . Eventually Tata Steel went through the IBC procedures and got a controlling stake into the merged entity with Tata Steel. They also returned the fraction of Bhushan Steel NPAs value back to the lending banks as agreed in the tribunal. Bhushan steel had one cousin entity Bhushan Power and Steel also in this NPA list. Jindal – JSW steel took over this entity via IBC route and paid back fraction of NPAs as per IBC procedures.
The government setup Development finance institutions(DFIs) in post independence era to provide medium and long-term credit to manufacturing and infrastructure sectors. Feature of these projects is the long gestation time and return on capital takes long duration, atlease few years time. However, the major conflict of interest for regular banks, NBFCs or even mutual funds to get into such projects is risking their core capital. Because the returns expected are much faster for individual or smaller corpus enterprises having accounts or investments.
As banking reform gathered pace in 90s, role of DFIs was ramped down. In recent years with growing NPAs, flow of long and medium term credit is choked and affects corporate investment.
Few of the latest national budget announcements are aligned with points made in this book such as reviving DFIs, Bad Bank thought process and real estate sector . The boost to real estate sector also helped large employee base to retain their jobs. More sales of housing and corporate real estate stock triggered more home , mortgage and corporate loans. Thus helping Banks to grow their loan books. Also it is good for economy revival. We have here a book here very much aligned to the current evolutions in economic policy making. In some ways its also showing light for the near future.
Its insightful to see the confluence of the theoretical economics from some of brightest minds faced with real challenges of national economy. In conclusion, they have taken some firm futuristic decisions trying to bring complex problems into control. RBI has really been active in recent years to manage instances of fraud, bank collapses, bloated bad loans, trying to get correct picture or numbers from concerned banks and Non performing assets(NPAs) on bank balance sheets.