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Hard times for India's bad
borrowers
By Indrajit Basu
KOLKATA - For years, Indian banking and
institutional lenders have had a major complaint; they
were criticized for their inability to control their
burgeoning non-performing assets (bad debt lump),
currently estimated to be anywhere from US$17 billion to
$34 billion as per Ernst & Young estimates, but when
it came to recovery and reducing bad debts, they had
little power.
Despite strict laws for willful
loan defaulters, red tape in the Indian administration
undercut the statute's usefulness and made sure that
Indian lenders and financial institutions, particularly
the state-owned ones, couldn't bite but just bark.
But all that is going to change now. To expedite
recovery of loans and bring down the non-performing
asset level of the Indian banking and financial sector,
the government on July 20 introduced a new law that
promises to make it much easier to recover bad loans
from willful defaulters.
Called the
Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest Ordinance 2002, the
law has given unprecedented powers to banks, financial
institutions and asset reconstruction/securitization
companies to take over management control of a loan
defaulter or even capture its assets under police escort
if necessary.
The law does not allow an appeal
against seizure "in any court or before any authority"
and the only leeway a defaulter gets is a 60-day notice
period "to discharge in full his liabilities" before a
seizure is initiated. However, a borrower can appeal to
the lender for a reconsideration of the lender's
recovery process, but only after paying 75 percent of
its outstanding loan amount.
Another significant
feature of the new law is that it does not allow a
defaulter to escape a seizure by taking resort to the
bankruptcy administrator, called the Board for
Industrial and Financial Reconstruction (BIFR). Until
now, a defaulter often stalled recovery efforts by
filling for bankruptcy with the BIFR, which as a
rehabilitator had the power to overrule lenders'
recovery.
The new law stipulates that once a
defaulter is served a notice, no reference can be made
to the BIFR. Moreover, for defaulters who are already
under the BIFR, the new law says that if 75 percent of
lenders take a view that the BIFR will be unable to turn
a defaulter around, the lenders could pull it out of the
administrator and proceed with recovery applying the new
law.
This ordinance may have come as a godsend
for banks and financial institutions saddled with huge
bad debt lump, but corporate chieftains say that it is
too draconian. "Our concern is the definition of
default," says R S Lodha, president of the Federation of
Indian Chamber of Commerce and Industries, one of the
top industry associations in the country. "Clearly there
must be some kind of mechanism that protects those who
are genuine businesses that are facing a temporary funds
crunch but have the genuine desire to pay back. The
other concern is lack of entrepreneurship in the
country. What we need now is an environment that
facilitates investments and not a law that gives undue
leverage to a lender to go after anybody."
However, according M R Umarji, who drafted the
new law and who is a former executive director of
India's federal bank, the Reserve Bank of India, the law
just makes sure that anybody who has borrowed is liable
to repay and it empowers lenders to exercise that
recovery.
"The law does not make it compulsory
for lenders, that they must take action," said Omarji.
"The concerns are unfounded because all lenders know
that their best security is a running organization.
Therefore, before grabbing a company, a lender will take
all possible measures to ensure whether it is possible
for a borrower to turn around."
Meanwhile,
experts have already started doubting implementation and
enforcement of the new law. "India has tried several
times to set up a machinery to allow creditors to enjoy
some rights. It set up debt recovery tribunals a few
years ago, but they failed," said Edward Z Emmer,
managing director for corporate ratings at Standard
& Poor, adding, "The new ordinance may work, but it
is too early to know."
Others felt that the new
law was nothing but good old brouhaha. For instance,
according to S S Tarapore, the former deputy governor of
the Reserve Bank of India, "Theoretically, it is good.
But it all depends on whether it will be allowed to
function," adding that it could in time be watered down.
But even as the fight between borrowers and
lenders continues, the country's financial industry has
found the law comforting. "Although industry sentiment
is against this, lenders would be empowered by the
recovery of bad debts," said N Vaghul, chairman of ICICI
Bank. "At the same time, borrowers would benefit as
their assets get restructured. And this, in turn, would
contribute positively to borrowers' businesses by
turning stuck assets liquid," he added.
Banks
and financial institutions have already begun taking
advantage of the law. Many have identified their large
non-performing assets accounts, and some, such as the
Bank of Baroda, IDBI Ltd, ICICI Bank, IFCI Ltd and The
State Bank of India, are among those that have started
sending notices to their defaulters under the new law.
Some have even become aggressive. For instance,
Lord Krishna Bank has reportedly served notices to 78
defaulter companies all over the country, while the
state-owned Punjab National Bank has identified 40 such
cases for taking over management control.
"The
ordinance has brought relief to us as we can improve on
the recoveries," said S S Kohli, the chairman and
managing director of Punjab National Bank. "We plan to
take management control of some of the units that have
been defaulting," added Ashwini Puri, director, Lord
Krishna Bank.
(©2002 Asia Times Online Co, Ltd.
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