FOR decades, personal connections have provided a well-trodden path to success in Indian business. State-owned banks provided cheap financing for firms whose success often rested on winning official approvals. If a venture soured, the taxpayer frequently ended up being left to shoulder losses. There are plenty of gifted businesspeople in India. But cronyism, not competition, has been the surest route to riches, even after the partial dismantling of the “licence raj” nearly three decades ago.

A new era of Indian capitalism may be dawning. For the first time a large number of struggling tycoons face the prospect of having their businesses seized from them. The fate of 12 troubled large concerns is due to be settled within weeks; another 28 cases are set to be resolved by September. Between them, these firms account for about 40% of loans that banks themselves think are unlikely to be repaid. For enforcing a bankruptcy system that is usually skirted by those with connections, the government of Narendra Modi deserves much credit. Yet the job is far from done.

Consider first the system that is under assault. Industries such as power generation, mining, telecoms and infrastructure require large chunks of capital and lots of interactions with the government. That attracted plenty of entrepreneurs whose core competence was using their connections with officials, in order both to win the necessary permits and to secure financing from state-owned lenders. Many tycoons could count on ministers to put in a word with a recalcitrant banker. Some held political office themselves. If things went awry, bankers would frequently extend repayment periods indefinitely, if only to preserve their own blushes. Overburdened courts were unequal to the task of enforcing contracts.

The unscrupulous among the tycoons went further still. Some are thought to have padded cost estimates so that they got bigger bank loans than required, meaning that they could secure assets without putting any of their own money in. Whether a business was profitable was not always material, since it could enrich owners in other ways—by awarding lucrative contracts to firms controlled by family members, say.

This system is under a three-pronged assault. The first is a reformed bankruptcy code that makes the seizure of businesses easier (see article). A new set of dedicated courts, backed by a cadre of insolvency professionals, is on hand to help banks seize assets and sell them to fresh owners. To focus the minds of both bankers and borrowers, if no deal can be cut within nine months—a jiffy by Indian legal standards—the firm is shut down and its equipment sold for scrap. This is the point in the process now being reached by the first dozen defaulters.

The second threat to the tycoons is the grievous state of the state-owned banks. Their losses have ballooned. The authorities, tired of recurring bail-outs, are forcing them to recognise which loans are unlikely to be repaid, and to initiate insolvency proceedings in double-quick time. Though their governance remains parlous, at least these banks are no longer able to hide the extent of their problems.

Third, most tycoons have lost influence in Delhi, as politicians from Mr Modi down realise the toxicity of being seen to be in cahoots with “bollygarchs”. Some of India’s grandest businessmen complain that they can no longer get in to meet the prime minister, who much prefers wooing foreign bosses instead. To increase transparency, some state assets are now auctioned online.

To ensure permanent change will require deeper reforms, however. If wholesale ministerial corruption is reportedly much reduced, there is still little clarity over how political parties are financed. They will spend something like $5bn between now and federal elections expected in spring 2019, little of which will be publicly accounted for. To loosen the political-crony nexus further, it would help to end the system whereby parties can raise funds through anonymous donations.

Making India less bureaucratic would also be a boon. A certain brand of tycoon has thrived because getting things done often requires sharp elbows and sharper business practices. Magnates who are politically astute will still have an edge if knowing how to dodge a price cap imposed on a ministerial whim, for example, is a surer guide to success than knowing how to run a factory. Such shenanigans have not stopped.

Rich pickings

Reforming the state-owned banks is the most important task of all. Their balance-sheets are where you find 70% of loans and nearly 100% of problems. Ensuring banks make commercial decisions can only realistically be achieved by privatising at least some of them. Privatised banks would also be free to pay salaries to attract talented staff. The bosses at state-owned banks currently earn under $50,000 a year, a pittance even by Indian executive standards—and it shows.

A decent financial system is the best defence against cronyism. Sadly, this kind of reform still seems to be anathema to Mr Modi. He has made a start on tackling the tycoons. But if he is to entrench a revolution in Indian capitalism, he must do more.