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Loans take everything

Bankrupt the people with non-performing loans

GreenWatch Desk Opinion 2024-02-25, 11:25pm


There is a simple, fair, economic and just method of dealing with the bad loans situation. Just bankrupt the people who aren't paying back their loans. This is, after all, what is supposed to happen anyway, so why not just do what is supposed to happen?

This newspaper worries about the increase in such bad loans. “At the centre of it all is this gross culture of impunity, of powerful entities doing whatever they wish, and our financial sector rendered helpless and powerless due to their influence. The result is quite literally thousands upon thousands of crores being stolen from our coffers.” We need to do something about this.
To take a step back. Of course, some lending will never be repaid. Everyone makes mistakes and bankers aren't immune from that. Some loans will be given to people who shouldn't have been allowed to borrow money in the first place. Others were just fine when the loan was made, but circumstances changed -- the world price of the product changed, say. Every bank knows -- or should know and those that don't shouldn't be bankers -- that maybe 5% of loans will go bad. This is normal, it's not fine, but it's expected. 
We also know how to deal with this. Loans that go bad are “called in” and the bank does its best to retrieve the money. Sell off the things bought with it, sell the business that borrowed to another owner, there are many halfway steps to do this. The ultimate one is to bankrupt the borrower. The point of which is not, so much, to actually retrieve that money. Because if things have come to that pretty pass then there probably isn't any way to get the money out of the organization just bankrupted. For that's what bankruptcy means, not being able to pay the debts.
However, there is still a reason to do this. Those people shouldn't have been allowed to borrow in the first place. Some do, some always will be able to, borrow. But we want to minimize that number who even try to borrow. The fantasists who really can't be trusted with other peoples' money. The honest who still don't know what they're doing.
And then the group that really causes the problems: Those who have the connections to be able to borrow but also the connections to not have to pay it back. They can be everything from the bank chairman's idiot nephew to those who have societal connections for other reasons. We simply do not want society's limited capital to be given to these people.
So, how do we prevent it? We will never be able to prevent it absolutely. Any banking system that is never making a mistake isn't taking enough risk. But we still want to minimize it. And the bit of the minimization that we really want to manage is to reduce the amount of those social connections, that societal position, which is used to borrow money then not pay it back.
So, the answer is to do what really is done in places with a properly functioning banking system. Yes, sure, we understand that some loans won't be paid back, just because. Because circumstances change, because of bad luck, but also because of connections. So, anyone and every organization that borrows money and doesn't pay it back, we bankrupt them. We take everything from them to repay the bank. 
For business adventures that turn out to go wrong, we should do this anyway. Free up that land, those buildings, those workers, to do something more sensible. But for those that were playing on contacts to get the money in the first place? If we actually came down, like a holy terror, on those who had abused the system in the past, then there would be far fewer who would abuse it in the future.
To entirely invent a scenario. Someone -- son of, brother in law of -- claims connections to a jute factory and borrows money to revitalize it. But then spends it on Lamborghinis or anything else really. When Lambos turn out to not have an income that would repay the debt, what do we do? The bank takes the cars, the jute factory, the nice apartments, of the borrower. Take everything. No, it probably won't get the money back. But it'll sure reduce the amount of money borrowed to waste in the future.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.