Bonds have to be repaid, bank loans are for free.

Last month the Federal Reserve, in the US, published the result of a stress test on large banks. 31 out of 33 banks were cleared, 2 European banks failed. This exercise showed that the Fed is vigilant against a repeat of the Lehman Brothers fiasco in 2008 that almost resulted in a global financial meltdown. A similar exercise by the Reserve Bank in India showed that gross Non Performing Assets, as bad loans are called, have grown from 5.1% to 7.6%, and could rise to 9.3% by March 2017, even as high as 11% in public sector banks. Since 2010 the government has handed Rs 677 billion to public sector banks and has promised another Rs 700 billion to recapitalize them. The RBI does not identify the banks with the highest bad loans for fear of a run on the banks, which will create and emergency for the government because these banks are government owned. Not just banks. The Comptroller and Auditor General calculated that 157 public sector companies have cumulative loans of Rs 1.1 trillion and of these 64 companies have a net worth of zero. Whose money is being wasted on these useless companies? Taxpayer money, of course. Whereas the US government made handsome profits from the Troubled Asset Relief Program, when it loaned $700 billion to troubled banks the hapless Indian taxpayer is always a loser. Who gains from the government largesse? The obscenely rich fellows, known as poromoters, who have borrowed from the banks. These fellows do not have to provide any personal guarantee for the loans they take, which was the biggest mistake of Vijay Mallya, whose debt is minuscule compared to some others, and keep a low profile or are friendly with politicians. Promoters reduce their exposure to zero by borrowing against their shares. Distress sale of shares will see a collapse in their values and taking over a business with negative net worth will yield nothing. So, the crooks win and we are the losers. Recapitalizing banks and keeping sick public sector companies alive with taxpayer money just keeps the sore festering. What is the long term solution? Privatise. Public sector companies may not have any net worth but they have large tracts of extremely valuable land, which will yield vast sums of money, and by saving on bank losses the government can spend on infrastructure projects which will lead to jobs and growth. Restructuring will be opposed by vested interests who are making vast sums of money by milking the state. The other option is to ask promoters to borrow directly from the public by selling corporate bonds. Companies used sell bonds about 20 years back, paying interest on how they were rated by rating agencies. If a company defaults on bonds its share value will collapse and it will fail. Better to borrow from the taxpayer, which need not be refunded. Cute, what?