As of September 30, 2017, the total bad loans of Indian public sector banks stood at Rs 6,89,806 crore. A bad loan is a loan which hasn’t been repaid for a period of 90 days or more.
Nirav Modi’s fraud, as of today, will add another $2 billion (around Rs 13,000 crore assuming $1=Rs 65) to the overall bad loans of the public sector banks, assuming that the banks are unable to recover any amount. This doesn’t seem to be the case given that the government has moved quickly and attached many assets of Nirav Modi.
Long story short, Nirav Modi’s fraud isn’t going to add much to the overall bad loans of public sector banks. A percentage or two more, isn’t going to change the situation, which is grave, much. Given this, we have been wondering, why has Nirav Modi got Indians so worked up.
Over the last few days, everyone we have interacted with, from Kaali Peeli drivers, to other cab drivers, to guest house attendants, to journalism school students and faculty, to people who edit the different publications that we write for and even the guy who collects trash in the building where we live, have had a thing or two to say about Nirav Modi.
But Nirav Modi’s fraud of around Rs 13,000 crore is small change when compared to the bad loans of public sector banks of Rs 6,89,806 crore. Why haven’t we seen anyone talk about the overall bad loans of public sector banks, up until now? The defaults on corporate loans make up for around 69% of overall bad loans of public sector banks. Why hasn’t this disturbed people enough, up until now?
Or to put it simply, why have people now started talking about the fact that when they default an EMI on a retail loan, the bank comes after them with great speed and purpose, whereas businessmen like Nirav Modi are allowed to commit a huge fraud, and leave the country comfortably.
Why are businessmen defaulting on loans treated differently by banks than individuals defaulting on etail loans?
Why are there only sick companies and no sick businessmen?
What is it that explains this dichotomy? As Nobel Prize winning economist Jean Tirole writes in Economics for the Common Good: “Psychologists have identified our tendency to attach more importance to people whose faces we know than to other anonymous people.”
Take the case of the distressing picture of a three-year-old Syrian child, who was found dead on a Turkish beach in 2015. This forced Europe to pay attention to the refugees coming in from Syria.
As Tirole writes: “It had much more impact on Europeans’ awareness than the statistics about thousands of migrants who had already drowned in the Mediterranean.”
Or as Joseph Stalin, the Soviet dictator, once said: “The death of one man is a tragedy. The death of million men is a statistic.”
This phenomenon works in advertising as well. As Tirole writes: “An advertising campaign against drunk driving has a more powerful effect when it shows a passenger flying through a windshield than when it announces the annual number of victims (a statistic that provides, however, far more information about the consequences of drunk driving).”
As far as India goes, let’s take the case of the Bhopal Gas Tragedy which happened in December 1984. A bulk of English speaking and reading India woke up to the tragedy only once the India Today magazine put the picture of an unknown child being buried, in the aftermath of the tragedy, on its cover.
An issue really becomes an issue in the minds of people, once they can visualise it in terms of an individual. A good example of this in the Indian case is that of the anti-gutka campaign that was run a few years back, and which featured an individual named Mukesh Harane, who died of oral cancer in October 2009.
He was addicted to gutka. After his death he became the face of the anti-tobacco message which was delivered to the people of this country through an audio-visual clip (shown regularly in cinema halls) as well as a print campaign. It showed Mukesh talking about the ill-effects of eating gutka, with a feeding pipe going into his nose.
It was a fairly disturbing video, but it really drove home, the ill-effects of chewing gutka.
Along similar lines, like Mukesh Harane, Nirav Modi has become the poster boy for corporate India looting the public sector banks, over the years. And given this, while the Rs 6,89,806 crore of bad loans did not make much of an impression in the minds of people (in fact very people would even be aware of the largeness of this number), Nirav Modi’s Rs 13,000 crore fraud, clearly has.
And nothing works better on the government than public pressure. The government has reacted quickly and seized the assets of Nirav Modi. It is also trying to push in long due reforms. Today’s edition of The Times of India reports that the government is planning a new regulator, called National Financial Reporting Authority(NFRA), to regulate the chartered accountants and auditors.
It will take away the review and disciplinary functions the Institute of Chartered Accountants of India (ICAI). This is something which has been long due and only the Nirav Modi fraud has pushed the government towards considering this reform, seriously. The ICAI is a part of the deep state that runs India, and clearly needs to be reined in.
Further, banks have been directed to check for the possibility of fraud on all bad loans of Rs 50 crore or more. Many corporate defaults run into hundreds if not thousands of crore. The question is where did all this money that was raised to fund projects, go? Over the years, there has been a lot of talk about corporates overstating the cost of projects, borrowing a larger amount and then tunnelling money out of the project.
This is something that should have been investigated as soon as the defaults had started to happen. But, again, nothing was done on this front. Now thanks to Nirav Modi, this exercise has been initiated.
Above all this, the Nirav Modi fraud, raised enough stink, leading to the mass media writing, reporting and discussing about the mess that prevails in India’s public sector banks. A large section of the population came to know about the mess, only because of the Nirav Modi fraud. This wasn’t happening earlier. And this is very important in a democracy.
This has also led to analysts asking the government, as to why does it need to own 21 public sector banks. Or for that matter, should public sector banks be lending to corporates at all? Some sort of debate has been initiated on this front.
And for all this, in a very screwed up sort of way, we need to thank Nirav Modi.
The icing on the cake will be, if we are able to get Nirav Modi back to India, and the law of the land is allowed to catch up with him.
The column was originally published in Equitymaster on February 28, 2018.