Banking Article, Banking Finance 2020, Banking Finance March 2020

Political Funding in the Age of Crony Capitalism: An Experience from Indian Banking Sector


The opening up of doors of Indian economy in 1991 paved way for capitalism in India. The change proved to be masterstroke in the coming years as it placed India in a path of higher growth trajectory and India became one of the fastest growing nations in the world. The mixing of Capitalism with politics led to the development of Crony capitalism. The paradigm shift to capitalism made the industrialists the centerpiece in the decision making process of the country. Growing importance of the moneyed interest groups in the country not only influenced the economy but also surreptitiously influenced the political culture of the country. The political parties are relentlessly trying to strike a balance between capitalism and socialism by making pro-poor agendas in election manifestos, but when elected to form Governments, got entangled in the cobwebs of crony capitalism. The invisible hands of the industrialists are not only exerting influence on the policies taken by the Government but also playing a role of kingmaker in the general elections of the country. Growing influence of industrialists in Government is meant to ease the mobility of public funds from banks. The public sector banks which are under the control of Government of India are channeling the public money collected in the form of deposits from general public to the industrialists of the country.  These public sector banks are like sitting lame ducks which have no other option but to fund these industrialists on the directions of the politicians elected to run the Government. The aggressive lending practices of 2004 proved started to backfire with the advent of Global depression of 2008 which jolted the performance of corporate sector, thereby increasing non-priority sector NPA (comprising of big industrial loans) of public sector banks from 2009 onwards.

Table I: Priority and Non-Priority sector NPAs of PSBs in India

                    (Amount in billion as on March 31)

Years Priority Sector Non-Priority Sector Public Sector Total Amount
Amount Percentage Amount Percentage Amount Percentage
2003 168.86 47.10 184.02 51.33 10.87 2.06 528.07
2004 167.05 47.74 178.95 51.14 6.10 1.22 501.49
2005 153.36 46.75 170.62 52.01 5.92 1.24 476.22
2006 149.22 51.78 132.27 45.90 8.55 2.07 413.70
2007 225.19 57.96 156.03 40.16 7.32 1.88 388.54
2008 248.74 61.48 150.07 37.10 5.74 1.42 404.56
2009 242.01 53.75 205.28 45.59 2.97 0.66 450.26
2010 304.96 50.89 291.14 48.58 3.14 0.52 599.24
2011 401.86 53.82 342.35 45.85 2.43 0.32 746.64
2012 557.80 47.57 588.26 50.17 26.56 2.27 1172.62
2013 672.76 40.91 960.31 58.39 11.55 0.70 1644.61
2014 798.99 35.16 1472.35 64.79 1.30 0.06 2272.64
2015 966.11 34.69 1815.98 65.21 2.59 0.09 2784.68
2016 1258.09 23.30 4141.48 76.70 34.82 0.64 5399.57
2017 1609.42 23.50 5237.91 76.50 154.66 2.26 6847.32
2018 1875.11 20.94 7080.90 79.06 173.88 1.94 8956.07
Source: Department of Banking Supervision,RBI.
Note: Data is for inclusive of Domestic & Global Operations of Banks

Graph I: Percentage of Priority and Non-priority sector NPAs of Public sector banks in India

From 2006 to 2008 NPA in Non-priority sector started declining and NPA in Priority Sector spiked at an over whelming rate (Graph I). Boom in the world economy coupled with aggressive lending to the industrial sector by the Public sector banks contributed to such steep decline in Non-priority sector NPAs. The ‘Global Financial crisis’ in 2008 is the beginning of difficulty in debt servicing by corporate. Non-priority sector NPA started increasing from 2009 onwards and the position of NPA in priority sector stood at Rs.557.80 billion and NPA in non-priority sector stood at Rs. 588.26 billion of total NPA of Rs.1172.62 billion on 2012. In percentage terms also NPA in priority sector and non-priority sector was 47.57% and 50.17% of total NPA (Table I).  This was the inception of distress in the Indian banking industry and the distress continues till today and NPA in non-priority sector in 2018 stood at Rs.7080.90 billion , 79.06% of total NPA of banking industry (Table I).

However the shift of power in the Union Government in 2014 has changed nothing because as instead of direct funding to corporate sector practiced by the previous government, the new government has directed the public sector banks to write off bad corporate loans from the books. This change was visible from 2008 onwards but from 2014-15 it was practiced in a rampant manner. The exponential write off of bad corporate loans by PSBs over the last 10 years except 2008-09, shows that the Government is guided by Crony Capitalistic policies.

Table II: Loans written off during 2007-08 to 2013-14 (Rs. in crores)

2007-08   8019
2008-09   7461
2009-10 11185
2010-11 17794
2011-12 15551
2012-13 27231
2013-14 34409
TOTAL 121650

Table III: Loans written off during 2007-08 to 2013-14 (Rs. in crores)

2014-15 49018
2015-16 57585
2016-17 81683
2017-18 84272#
TOTAL 272558

Source: Indiastat Database

  Note: # Upto 31st December, 2017.

From 2014-15 to 31st December, 2017, Rs. 272558 crores of corporate loans have been written off by PSBs, which is more than double the loan written off from 2007-08 to 2013-14, Rs.121650 crores.  The total loan written off in 2017-18 as the ICRA report published in The Indian Express article is Rs.144093 crores. The stark contrast in writing off loans during the two periods indicates that from 2007-08 to 2013-14 the problem of bad loans was infectious but from 2014-15 it has become acute and epidemic. So writing off in a rampant manner was adopted to hide the reality.

Proposed FRDI Bill, 2017

To deal with the above menace in the banking sector The Financial Resolution and Deposit Insurance Bill, 2017 was proposed to be passed in the winter session of the Parliament in 2017 but withdrawn by Government on 19th July, 2018 amid severe backlash from all corners of the country due to its controversial ‘bail-in’ clause. The ‘bail-in’ clause means the bank deposits which are bank liabilities will stand to be cancelled if banks enter into deep financial trouble. Passing of this bill will lead to paradigm shift in the meaning of survival of banks, from safety of depositors’ money to restoration of capital of banks. Moreover failing banks will be recovered through depositors’ money rather than bailing out by Government. Thus the proposed FRDI Bill can be used as an instrument for maintaining capital adequacy of banks during distressed times of public sector banks as of now caused due to snowballing NPAs in corporate sector. This in turn will provide an open window for bad corporate to willfully default in their loans and reducing their accountability for misusing of public fund. Further the common man will have to bear the burden of such default as it is the common mans’ money which will get wiped off if bank defaults under the proposed new regime.

Political funding by Corporate Houses

Giving of favors to corporate by successive Governments knowingly or unknowingly lies in the fact that huge chunk of funding of the political parties comes from the corporate houses. Nowadays in every big election of the country, huge crores are spent by political parties during the campaign to show the strength and power of the parties and their leaders. Corporate houses with a view to run their business in a smooth manner and to have a stable Government provide lion share of political funding via electoral trusts just to remain apolitical. As per Rights to Information Act (RTI Act) political parties are required to disclose donations received above Rs.20000 or more to the Election Commission and Income Tax Authorities. Hence a large part of donations remain undisclosed. Even though these disclosures forms tip of the iceberg of political donations but still has enough venom to stir the minds of readers.  ADR or Association of Democratic Reforms ( a  NGO formed by a group of Professors from IIM, Ahemadabad) studied the political donations received by big national political parties and published a report on 30th May, 2018.The following table indicates the amount of donations above Rs.20000 received by political parties in the year 2016-17.

Table VI: Number and amount of donation (above Rs.20000) declared by National Parties for the Financial Year 2016-17

National Parties Number of Donations Amount (Rs. in crores)
BJP 1194 532.27
INC 599 41.9
NCP 22 6.34
CPM 200 5.25
AITC 12 2.15
CPI 96 1.44

Source: ADR Report, 30th May 2018

The total donations (donations above Rs.20000) received by national parties in the year 2016-17 is Rs.589.38 crores from 2123 donations  of which donations to BJP alone amounted to Rs.532.27 crores from 1197 donations, comprising of almost 90.31% of the donations received by national political parties.

Table VII: Amount of donation (above Rs.20000) declared by National Parties for the Financial Year 2015-16 and 2016-17 and Growth in funding over the 2015-16

National Parties 2015-16

Amount (Rs. in crores)


Amount (Rs. in crores)

Growth in funding over 2015-16*
BJP 76.85 532.27 593%
INC 20.42 41.9 105%
NCP 0.71 6.34 793%
CPM 1.81 5.25 190%
AITC 0.65 2.15 231%
CPI 1.58 1.44 (9)%

Source: ADR Report, 30th May 2018

* Computed

The donations received by BJP in the year 2016-17 rose by 593% over the previous year 2015-16. NCP registered maximum increase of 793%. Donations to AITC increased by 231%, INC and CPM registered an increase of 105% and 190% respectively. Only CPI registered a decline in donation by 9%.

Moreover it is seen that of the total donations received by National parties, corporate accounted for 708 donations amounting to Rs.563.24 crores (95.56% of total donations). The breakup of donations received by two largest national parties is as follows:

Table VIII: The break up of donations received by BJP and INC

Total Donations Corporate Sector Individual Sector
No.of Donors Total Donations Percentage wise (%)* No.of Donors Total Donations Percentage wise (%)*
BJP Rs.532.27 cr 531 Rs.515.43 cr 96.84 663 Rs.16.82 cr 3.16
INC Rs.41.90 cr 98 Rs.36.06 cr 86.06 501 Rs.5.84 cr 13.94

Source: ADR Report, 30th May,2018

* Computed

 Further in the budget of 2017-18, the Union Government came with a new and an innovative instrument of political funding, popularly known as ‘Electoral bond scheme’. The electoral bond is a bearer bond in the nature of a promissory note issued by selected branches of SBI in multiple of Rs.1000, Rs.10,000, Rs.1,00,000, Rs.10,00,000 and Rs.1,00,00,000 for a period of 10 days in the month of January, April, July and October but in the year of Lok sabha election an additional 30 days will be specified by Central Government.  The bond has tenure of 15 days and whatever money received through sale of these bonds will be credited to account of registered political party which has polled one percent of the vote in the state or national election. This scheme not only bypassed the existing RTI Act but also paved way for large scale anonymous donations via electoral bonds as the identity of the donors and recipients remained undisclosed. This will pave way for greater corporate donations and reduce transparency in disclosing the source of political funding. The biggest beneficiary of the electoral bond scheme is the ruling BJP party as it bagged 94.5% of the bonds amounting to around Rs.210 crore of the total 222 crore bonds issued in March, 2018. The total voluntary contribution to BJP stands at Rs.989 crores in 2017-18. The known donations as per RTI Act amount to Rs.437 crore. The coming years will prove that whether the electoral bonds will bring more opaqueness or more transparency in the electoral funding scheme as claimed by the ruling Union government.

The absolute figures for BJP are quite large compared to INC. The figures indicate that corporate houses are favoring BJP more than INC as to have a stable Government which will ease the doing of business and also the policies and reforms brought in by BJP are more in favor of corporate sector. Since 2014 the policies like Make in India, Digital India were made to give much expected fillip to corporate sector. The historical move of Demonetization proved to be a blessing in disguise for Digital India move by Government. Further adoption of Goods and Service Tax also proved to be a boon for business sector. Thus the moves were all meant to assist the corporate sector.  The erstwhile Government also provided benefits to the corporate houses by allowing PSBs to follow aggressive lending to corporate and restructuring of bad loans given to corporate houses. But  engineering of big scams like ‘2-G Spectrum scam’, ‘Mining scam’, ‘Coalgate scam’ etc  cancelled the licenses given for mining and telecom spectrum by Supreme Court of India. These cancellations of licenses caused huge losses for the business houses forcing them to withdraw their support to the Government. The scams brought downfall to the previous Government and swayed faith of corporate houses from previous Government.  Hence both the successive Governments worked pro-corporate but the established ‘big scam’ tag became the USP(unique selling proposition) for the preceding Government which brought its downfall and made unpopular among corporate houses.

Cracking the Zeal for Political funding

The reason for relentless funding spree of business houses to political parties is to ease the flow of funds from public sector banks to business houses.  Public sector banks which are under full control of Government of India are bound to work under the direction of Government of India. The business houses by playing the role of kingmaker from back stages through funding of political parties gets access to the huge pool of public funds lying with PSBs. Thus from planning level at the Government till the executing level at the banks a well oiled machinery is set up to channelize the funds to corporate houses directly or indirectly. The situation remains win-win for all the parties during the upswing in the economy but with the economy experiencing recession the economy goes into doldrums and the banking sector also faces the brunt of slowing economy coupled with dwindling performance of the corporate sector. The emergence of the conman like Vijay Mallya and Nirav Modi further aggravates the problem and exposes the frailties of economy imbibed by the fangs of crony capitalism practiced by successive Governments. Further the fraudsters also make great escapes from the country without being intercepted by the security agencies and reaching safe havens which are beyond the jurisdictional limits of our country.


Thus it is evident that Capitalism is good but becoming too much capitalistic paves way Crony capitalism which is detrimental to the welfare of the economy and country at large. Today business houses are the most privileged section of the society as they are the most benefitted stakeholders from the policies framed by the successive Government. However this fact is focused upon not to mala fide the honest businessman of the country or the Government but to but to ignite the consciousness of the political parties who are getting skewed in their vision by framing economic policies which are benefitting only India Inc. but not the whole India . Moreover the industrialists should be part of decision making but the elected people’s representatives who will frame the Government should have to be impartial in their decision making. Crony capitalism will also increase the income-wealth disparity in the country and widen the divide between rich and poor sections of the society.  India being an agrarian economy, the focus of the Governments should be to develop the living standard of farmers along with the development of industries and technology. Moreover giving farm loan waivers will only reap political dividends but will not be a permanent solution to the perennial problem of farmers. The unbiased decision making process need to develop by checking the pervasive natures of the corporate houses by the elected representatives of the country in order to establish good governance culture and robust economic growth and development in the country.

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