Defaulters must be made to feel the heat of the pressure mounted by new
lenders in terms of heightened securities and guarantees demanded as well as
interest charged.
January 1, 2013:
Banks
seem to be bent upon continuing to mollycoddle defaulting promoters. A
high-powered group of bankers has decided to call upon corporates seeking loan
restructuring, to heighten the stakes of the defaulting promoters to 25 per
cent of the reduction in the value of security. The moves are in accordance
with the the recommendations of the Mahapatra committee.
This
might at best constitute a marginal toughening of stance, and might not chasten
the promoters who deem it their birthright to be bailed out, though it often
spells disaster for the nation’s banking system inasmuch as such mindless
magnanimity practically means throwing good money after bad.
The
new insistence on unconditional personal guarantee as another precondition for
the banks pitching in with a fresh dose of assistance would not be worth the
paper it is typed on in a crunch situation and hence might not have the
expected chastening, much less disciplining, effect either.
Mollycoddling
defaulters
Despite
knowing corporate loan restructuring hides considerable bad debts of the
commercial banks in the country, there is considerable reluctance to read the
riot act to the defaulters. Instead, the accent is on rehabilitation with
implications of pampering defaulting promoters and giving a leg-up to bad
debts.
Underpinning
such bending of rules is the view that exigencies of commercial ventures do not
warrant rigid and unyielding rules.
While
this may be true to some extent, experience shows that banks are in no position
to gaze at the crystal ball and say when the never ending temporary crises
would be over for the borrower.
It
cannot be the lot of the banks to wait in perpetuity for the tide to turn.
Instead, it must be for the corporates to set their house in order and arrange
for funds. Good money at concessional terms cannot be constantly thrown after
bad money.
The
defaulters must be made to feel the heat of the pressure mounted by new lenders
in terms of heightened securities and guarantees demanded as well as interest
charged.
This
would have a salutary effect for the banking system, in particular, and the
country in general.
As
it is, there is considerable reluctance on the part of banks, especially in the
public sector, to use the relatively newly minted tools for the bankers —
seizure of security under the Securitisation Act, 2002.
Political
and other connections are reportedly playing a no mean role in this
self-abnegation. Banks run the risk of going sick themselves in their mindless
efforts at rescuing the defaulters.
This
is the well-known ‘contagion risk’ with its grim and frightening implications
that now stares the country’s financial system in the face, and the RBI is
quite unconcerned about it.
Disgorgement
proceeding
Banks
were itching for action in the area of Sick Industrial Companies (Special
Provisions) Act, 1985 (the SICA) that brought untold miseries to creditors,
with concomitant indulgence to defaulters.
It
should not be the lot of the creditors to speculate upon the genuineness of the
reason for default — whether it is economic or contrived through systematic
squirrelling away of funds.
In
the case of sick companies, the Board for Industrial and Financial
Reconstruction (BIFR) often speculated in favour of the defaulters, so much so
that the promoters of sick companies laughed all their way to the bank.
Promoters bloat even as the companies go sick is a recurring joke in financial
circles.
Till
the repugnant law is scrapped by the Companies Bill, 2011, banks should at
least use the strong powers the Securitisation Act has given to them, and read
the riot act to defaulters so that there is no perverse premium on defaults,
especially of the feigned variety.
Selling
bad debts to asset reconstruction companies may not bring maximum recovery to
the harried bankers. They must assert themselves and chart their own course of
action. Asset reconstruction companies (ARC) may, by all means, participate in
the auction triggered by the coercive proceedings set in motion by the banks.
There
is no reason why banks should outsource their recoveries to ARCs, who
invariably take away a good chunk of the outstanding as recompense for their
efforts and risks.
It
is a trifle curious that successive committees, while seeking to make life
easier for defaulters, have not thought anything of strengthening the
disgorgement proceedings contained both in our company law and SICA.
There
has hardly been any disgorgement proceeding successfully launched at company
promoters, guilty of systematic misuse of public money.
It
is time quick and efficacious proceedings are launched against promoters of
defaulting companies who must be called upon to disgorge the ill-gotten funds
as a precondition for further assistance.
This
might sound a tall order but not impossible to act upon, if there is the will.
Only recently has Vijay Mallya been persuaded to sell off his personal assets
so as to clear up the huge dues that Kingfisher Airlines owes to banks.
The
liquor baron did what he should have done long ago. Yet, he often counters his
detractors by saying that how he lives is his personal affair. But the public
is not convinced, and perhaps for good reasons.
http://www.thehindubusinessline.com/opinion/columns/s-murlidharan/crack-down-on-promoters-of-defaulting-cos/article4262407.ece
