How to Deal With Willful Defaulters

Mon, 21 Mar Pre-Open

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Willful Defaulters are a hot topic of debate these days. The Vijay Mallaya episode has brought this issue to forefront. The crack down on such people is inevitable. Pressure is on the government to deal with this issue with an iron fist. We too, believe that the e should be no leniency shown to willful defaulters.

Such a crackdown, coupled with banks cleaning up their books, will go a long way in boosting India's credibility as an economy. However, the question now arises, has a witch hunt begun? As per an article in the Business Standard, this could be the case. Any senior PSU bank official is now a suspect, if he has cleared a loan to a troubled corporate.

It is true that the banks have brought this upon themselves. Their credit appraisal process has been disastrous. But what is the best way to deal with this situation? Should the government go after these corporates aggressively? Or should past issues be ignored and only prospective changed be enforced? We have no doubt which side of this debate we are on. However, let us examine both arguments.

On one side there are folks (ourselves included) who believe that crony capitalism is a cancer and must be eradicated. A short term hit to growth can be tolerated in the cleanup process. As the demand for credit is at historic lows anyway, this is the perfect time to clean up.

The other side urges more caution. They worry about what will happen to growth. If large corporates stop putting up new projects, then private investment could freeze up. This will result in no job growth and hence mass unemployment. In such a crackdown, even honest entrepreneurs and bankers will think a hundred times before going ahead with even a viable project.

We believe the time has indeed arrived to end India's crony capitalist system. This transition to a 'real' capitalist economy will be difficult. No country has managed it easily, just look at China. It will be especially tough in those sectors where crony capitalism rules: commodities, infrastructure, real estate, etc. But it must be done. However, a system must be put in place where existing viable project continue to receive support from the banking system.

At the same time, the government must ensure that honest entrepreneurs are never targeted. In addition, Start Up India must now become the government's primary focus. It cannot be allowed to degenerate in to a slogan. These small entrepreneurs will be India's next generation of innovators and job creators. They must be supported at every step of the way.

This is the way forward we believe. Unfortunately, the Modi government hasn't come out with a clear plan yet. It still seems to be reeling under the sheer scale of the problem. They are aware that Vijay Mallaya is just the tip of the iceberg. We are not sure what the government's decision will be, now that the full magnitude of the crisis has come out into the open. But we remain hopeful. We are sure of one thing though. The crony capitalist era of India's economy, is permanently behind us. And that is a very good thing.