Mr. Rajan is not the first to use the term Riskless Capitalism. Kennedy in a different context, used the term 'Riskless Capitalism to explain how a new financial policy framework is going to create universal "Security for Capitalists and consumers, workers and employers, corporates and farmers" and in that process, "it did not seek to abandon capitalism but transform it into a relatively 'riskless capitalism'". He was facing a different problem then and he felt the policies would smoothen the rough edge of capitalism. But as it appeared, the 'riskless capitalism' helps the businesses more than common tax payers. In his book, Great wars and great leaders, Ralph Raico observes,"Businesses welcomed the government intrusions which brought them guaranteed profits, a 'riskless capitalism'" in the context of government policies in the aftermath of WW-I.
Capital by nature is asymmetric and in any closed or semi-open system, capitalists tend to take greater advantage of government policies because larger the capital, the bigger is the promise of returns and greater is the influence on the flow of capital, which is controlled by banking system of the nation. In any case, the goal of the manager of capital is to reduce risks on the capital growth and by design he will prefer the risk-free growth opportunities. Or he will find avenues to pass the risk downstream, if he cannot nullify the entire risk. In our system, that creates the huge NPA, for public banking systems, which banks de-risk by increasing capital borrowing cost for small borrowers or penalizing the small borrowers. [read Business Today report SBI chasing smaller borrowers to control rising bad loans]
Mr. Rajan seem to be resonating that in his speech yesterday in Anand, Gujarat, "A large borrower, whose loan has turned bad, should not be “lionised as a captain of industry, but justly chastised as a freeloader on the hardworking people of this country,” Dr. Rajan said in cases of any stress, the promoter threatened to run an enterprise to the ground, asking the government, banks and regulators to make necessary concessions to keep it afloat. We have seen perpetually sickening of Jute industries in Bengal and how the promoters de-risked their capital at the cost of BIFR and workers there.
“We have to ask if our system of credit is healthy. Unfortunately, the answer is that it is not. The sanctity of the debt contract has been continuously eroded in recent years, not by the small borrower, but by the large borrower,” Dr. Rajan said. In scathing remarks on the misuse of the system by the large borrowers, Dr. Rajan said taxpayers and honest borrowers end up paying the price due to the excesses committed by large borrowers by way of losses to state-run banks and high pricing of loans.
“If the enterprise regains health, the promoter retains all the upside,
forgetting the help he got from the government or the banks — after all,
banks should be happy they got some of their money back!
“What I am warning against is the uneven sharing of risks and returns in
enterprise, against all contractual norms established the world over —
where promoters have a class of ‘super’ equity which retains all the
upside in good times and very little of the downside in bad times,” Dr.
Rajan said.
NPA of Indian Banks
[source Reserve Bank of India]In average India's public banks are running with more than 3% NPA [the figure for SBI is 4.42%]. Just for a comparison same ratio for Bank of America and HSBC are 0.21% and 1.77% respectively.
This article provides a nice infographics on top Borrowers in Indian banking system.
