RBI Defaulters List: Spilling Banking Secrets

Ever since Newslaundry obtained the list of bank defaulters, the one question that we have discussed is: should we or should we not reveal the list of the top defaulters in India? Going through the list (an extremely long one) has been a long and rigorous task – cross checking and consolidating the individual entries of different banks and corporations has taken time. We have used that time to consider carefully the merits of putting our findings out in public.  We believe it is in public interest to do so.

It may be an obvious ‘yes’ for many, but given there has been much spoken and written about revealing the details of the large unpaid debt, weighing the pros and cons was important. Even the Reserve Bank of India governor has made his position clear on this issue.

It will be debated if it is important that the details of the enormous debt crisis facing India be disclosed. We believe it is in public interest. Here is why.

More transparency is good for governance, not bad

The context is crucial. India is sitting on an almost Rs 5 lakh crore time bomb of debt. It affects all our lives. It has huge implications on policy and governance.

Those who have followed the Right To Information (RTI) Act battle closely would recall the arguments put for and against the RTI. While now it is neither smart nor politically expedient to say that the details of expenditure of public sector and any private sector entity that is aided by the government should not be accessible to the public – there was a time when it was. In fact, it was considered obvious. The arguments were that it would hinder the working of the administration. The biggest battle was fought on file notings, since it was argued that it would inhibit bureaucrats from doing their jobs. A case was made that if policy makers knew people could see what they had noted on any file, they would not put their comments freely.

However, there were several retired bureaucrats, including E.A.S. Sarma, P.S. Appu, and J.M. Lyngdoh, who said that it would have the opposite effect. Honest and capable government officials would feel empowered and could make their observations unafraid when they knew that the file noting would be open for public scrutiny and any contrary note made by a politician or bureaucrat would be there for all to see. How a formal recommendation was arrived at or policy decision taken would be on record for any RTI applicant to scrutinize. It made governance better, not worse.

This is as true for the debt crisis India is facing. In the absence of any clear system or guidelines of lending large sums of public money to corporations, making public who availed of the largesse and under what circumstances (what was happening in the market and in the company at the time) should empower those who believe the decision was arrived at with adequate due diligence and with good reason. Especially when large credit lines were given to those already under immense pressure and often defaulting.

This is in public interest, especially with the Indian public (through taxes and savings in banks) being on the hook, courtesy defaults of over Rs 5 lakh crore.

It makes markets more efficient, not less

“Sometimes you default on your credit card payments; would you like your name to be made public, for everyone to see, without reason? If that happens, you might have concerns.” ~ Raghuram Rajan

Opaqueness and secrecy in governance or markets can never be a prescription for efficiency or fairness. Markets make resource allocation more efficient. Markets are supposed to level the playing field made bumpy by the arbitrary license raj.

Markets have a direct correlation with the amount of information available. An informed decision is a better decision for banks, customers and analysts.

Credit card holders have credit ratings. These are indicators for banks to ascertain the credit worthiness of potential credit card applicants. It is to make sure the finite credit supply available is allocated most efficiently to an infinite demand. Banks maintain and share this information with others to be more efficient; not to humiliate or spite their customer base. This makes sense, considering banks’ available credit comes from the savings of millions of citizens. Banks and entities seen to be allocating the available credit more efficiently will be rewarded by a larger and a more loyal customer base while those falling short, will be passed over. Better banks will thrive and the bad ones will not. That is how an efficient market works.

Another benefit for us all is that the disclosure of such information gives quants and others experts out there a chance to study and analyze the data. This will help groups of specialists and researchers at think tanks and universities in identifying patterns and make some sense of what is failing and why. It will lead to prescriptions and better ideas – better risk assessment of particular industry, better understanding of criterion and guidelines of credit, and also enable the study of what kind of mysterious system exists that transforms a defaulter to a ‘willful defaulter’, and be forced to come up with a better one.

Public awareness makes things better, not worse. It makes credit markets more efficient, not less. That’s why it is in public interest.

The Social Stigma Case

“The act of default happens in business. Sometimes it’s not the business’ fault; the demand is weak or prices are low, there is dumping going on, or government permissions don’t come on time… to then put the promoters’ name up without the details of why the default happened, will only lead to anxiety and a fall in business activity.” (From DNA’s report on Raghuram Rajan’s views.)

True. Failing businesses is a part of economic activity. However it must be stated emphatically that businesses failing is a very healthy part of economic activity. It gives rise to new and more efficient entrepreneurs. On the other hand, letting stumbling companies hobble along, fester and rot is what hurts entrepreneurship and the economic environment.  The Fortune 500 list of companies in the US has new entrants and exits and failures shaking it up every couple of years. Bankruptcies are routine. Here are just two lists from recent years — retail bankruptcy and biggest banckruptcies ever.

While no such Chapter 11-like bankruptcy law exists in India, the point is that the argument that failure of an enterprise made public inhibits economic activity is a flawed assumption.

Yes, not all failure to repay is willful default or criminal or ill intentioned, which is exactly why there need not be any alarm in making this list public.

Indians are forgiving people. We have, with the benefit of doubt, given enough tainted politicians a second, third and fourth chance. We are even more forgiving than the United States of America (to whom we often compare ourselves) where a Donald Trump — having declared bankruptcy twice — is running for the nomination for the Presidential candidate of the Republicans on the plank that he is great at doing business (and he’s winning).

Social stigma to businesses failing exists only in our heads.

For the sake of argument, let’s assume that in a country that is loaded with traditions, conservative-minded Indians do not appreciate questioning social customs. The judiciary could not be scrutinised or questioned. When corruption in the courts began to be exposed, attitudes changed. Brides are increasingly giving grooms the boot if they ask for dowry. From girls never ever being educated, the poorest of homes realise it is their ticket out of poverty. Regardless of the social stigma attached to wearing short skirts or shorts, young women increasingly dress as they please. And they must dress as they please even if it is said the public is not ready for such exposure. We are at the cusp of change and we must embrace all the good in it. If it has been a tradition to cover up unsavoury facts, such as shrouding the defaulters list in secrecy, it is clearly time to change.

It is in society’s interest.

The Last Word

Newslaundry was launched at a time when news media was not scrutinised by others in the news media because of the unspoken omerta that media should not critique media. It would cause needless conflict, animosity and hostility to call out each other’s indiscretions, inaccuracies and misconduct. It could be misunderstood as envy and attacking competition. We disagreed. We believe scrutinising and dissecting each other’s work will ensure that better work is acknowledged and bad work is called out. It forces everyone to work more carefully and efficiently. It is better for the media space, even if some egos will be hurt and many friends are rubbed the wrong way. It was in public interest, and so we did.

Disclosing this list of defaulters is in public interest. Newlaundry’s decision to publish the list has been taken with serious and careful consideration. This is one story that should not be added to the pile of unpublished stories that are killed for vested interests.