The myth of Sisyphus

The futile labour of Indian taxpayers

The Greek mythological tale in which Sisyphus forever pushes a huge rock up a hill only to see it rolling down every time characterises what Indian taxpayers have undergone for several decades. Public sector banks (PSBs) have often been induced into lending to dubious private sector borrowers. Thereafter, PSBs repair their balance sheets painstakingly with taxpayer capital for the cycle to start all over again. Taxpayers have also paid for government-owned institutions to be set up time and again to foster long-maturity lending and resolve the overhang caused by mega-sized debt defaults. This article discusses long-term lending by PSBs and other government-owned institutions leading to repeated taxpayer support for recapitalisation.

The following amounts reflect a sample of funding support provided by the central government to PSBs. Around Rs 20,000 crore was transferred in 2015-16, Rs 90,000 crore in 2017-18, Rs 1 trillion in 2018-19, and Rs 70,000 crore in 2019-20 (Source: Union Budget documents). Further details are available in my working paper titled “Insolvency and Bankruptcy Code (IBC) and Long-term Lending in India” dated January 2022. (https://csep.org/working-paper/insolvency-and-bankruptcy-code-ibc-and-long-term-bulk-lending-in-india/).

These amounts provided over the last few years to recapitalise PSBs are comparable to those disbursed annually under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNERGA). For example, in 2021-22, as of February 19, 2022, about 317.3 crore person-days were logged under MGNREGA (Source: Ministry of Rural Development). Assuming an average one person-day disbursement of Rs 260 (the daily payment varies among states from Rs 200 to Rs 315), this expenditure amounts to about Rs 82,500 crore. Even in fiscal year 2021-22, during which Covid-19 caused high levels of unemployment, the amount spent on MGNREGA in the entire country would be comparable to amounts provided annually to PSBs between 2017 and 2020.  

The central government has been setting up development finance institutions (DFIs) to promote long-term lending since independence. The “Bombay Plan” of 1944-1945 was authored by private sector stalwarts, including J R D Tata, G D Birla, Lala Shri Ram, Kasturbhai Lalbhai and John Mathew, among others. This Plan suggested, among other recommendations, that the Indian government needed to take the lead in promoting economic development. Accordingly, to provide long-term funds for large scale projects, the Ministry of Finance set up the Industrial Finance Corporation of India (IFCI) in 1948 and the Industrial Credit and Investment Corporation of India (ICICI) in 1955. In 1964, the Industrial Development Bank of India (IDBI) was established by an Act of Parliament and set up as a statutory company. Over time, IFCI became a non-deposit taking non-bank finance company (NBFC) and ICICI and IDBI have reversed merged themselves into commercial banks. These institutions are no longer focussed on long-term, large volume lending for development or other projects. Gradually, over time, PSBs have stepped into that role. However, given the slow process of liquidation or resolution of non-performing assets, PSBs needed to be repeatedly recapitalised by taxpayers.

Illustration: Binay Sinha

Incomprehensibly, the government has continued to set up fresh DFIs. For instance, in January 2006, the India Infrastructure Finance Company Limited (IIFCL) was established with initial capital of Rs 10,000 crore. The stated intention was for IIFCL to “provide long-term financial assistance to viable infrastructure projects.” Less than a decade later, the central government set up the National Infrastructure Investment Fund (NIIF). IIFCL and NIIF do not have the capital base or risk appetite to provide long-term funding for significant projects as evidenced from their loan books. To that extent this responsibility continues to devolve on PSBs.

The Insolvency and Bankruptcy Code (IBC), which was passed by Parliament in 2016, raised hopes that the earlier relatively ineffective Sick Industrial Companies (Special Provisions), or SICA, and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Acts would be a thing of the past. In practice, the delays that beset the implementation of the IBC currently are often due to the less than proactive approach taken by Committees of Creditors (CoCs) as also lengthy delays in judgments handed down by the National Company Law Tribunals (NCLTs), National Company Law Appellate Tribunals (NCLATs) and the Supreme Court. This is mostly because the NCLTs and NCLATs are few in number and there are too many vacancies on their benches and the judges are relatively junior and inexperienced. Additionally, the Reserve Bank of India (RBI) circular issued in February 2018, which was aimed at reducing the time taken for dispute resolution between creditors and borrowers, was struck down on April 2, 2019, by an inexplicable judgment of the Supreme Court. An internal study by the RBI has been reported to record that in the six months that the RBI’s February 2018 circular was in operation, borrower defaults had decreased.

In 2021, the government set up a new DFI called the National Bank for Financing Infrastructure and Development (NaBFID) with a reported initial paid-up capital of Rs 20,000 crore and the National Asset Reconstruction Company Limited (NARCL). These two institutions are meant to foster long-term lending and help in resolving/liquidating non-performing assets (NPAs), respectively. If NPAs are transferred at face value to NARCL, that could make PSBs less careful in their lending practices. If discounts are high, that would make things easier for the NARCL. It is unclear why the NaBFID is expected to succeed given the conversion of similar institutions into banks or NBFCs. Clearly, there are no financial engineering solutions to irresponsible/coerced lending combined with extended delays in Indian courts in bankruptcy cases. What is needed is for the central government to pay greater attention to filling vacancies in NCLTs and NCLATs and to raise the sanctioned strength of both with the focussed objective of reducing litigation time.  

According to Greek legend, Sisyphus was punished for trying to cheat death. Albert Camus had commented that the Gods were wise to punish Sisyphus in this way since “an eternity of futile labour is a hideous punishment”. Indian taxpayers have not committed any such crime and it is high time that they are relieved of this hideous punishment of repeatedly recapitalising PSBs.

j.bhagwati@gmail.com. The author is a former Indian Ambassador, World Bank Treasury specialist and currently Distinguished Fellow at the Centre for Social and Economic Progress