Forcing Banks to Lend to Industrialists Who Got Used to Getting Free Money Landed Them in a Mess

C P Chandrasekhar, economist and Professor at JNU, New Delhi, talks about the perils of forcing public banks to lend to highly capital-intensive and illiquid projects.

Prof. Chandrasekhar was answering questions after his fourth lecture on 29 September 2017 to commemorate 150 years of the publication of Karl Marx’s Capital, Volume I.

“Normally the banking system does not lend to highly capital-intensive projects in industry, or to infrastructure and so on, like roads and Kingfisher Airlines. Banks never used to do this before the 1990s, in fact not even before 2002-03.

The difficulty is when we you begin to use a public banking system to try and use credit both from the side of financing investments (because you want growth in new areas supposedly such as telecommunications), and simultaneously you want to make money for the budget by selling spectrum.

So what do you do? You tell banks, “You lend to the telecommunications companies to buy spectrum”, at incredible prices which we know, that so long as there is competition in the telecommunications sector, they would never be able to repay.

So in essence, banks which have short term funds which people expect to be highly liquid – because I want to go to a bank and take back my money if I need it – should not be lending to completely illiquid areas.

That should be left to the Development Finance Institutions like IDBI, IFCI, ICICI and so on, or it should be left to the bond market. But you [the government] closed down the Development Finance Institutions and are forcing the banks to do this.

And so you are caught in a situation where industrialists had got used to getting free money virtually because they didn't expect to pay them till Raghuram Rajan said, “No, you better go and get it back, and take them to the Company Law Tribunal”.

And you said that this is important because, “How do I make investment, because I don't have money, I don't use own capital, I use other people's money. And if I don't make the investment, growth will not occur”.

And Arundhati Bhattacharya (SBI Chairman) said, “Listen, I have burned my fingers. I can’t keep lending money to projects and people who don’t repay the money.”

So that's exactly the same thing when you try and use finance as an instrument to drive private investment and private consumption and housing investments as a means to growth.”