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Big borrowers are mainly responsible for major loan defaults

By Anjan Roy. Dated: 9/22/2017 1:03:21 AM

RBI has to see that they can't get away through bankruptcy rules

The Reserve Bank of India governor recently referred to the issue of resolving the public sector banks mountain of non-performing debts which are threatening their functioning. A good deal of progress has been made in setting in place the institutional framework for resolving the problem of bad debts. However, even in the midst of the new processes, there is a lot of scope for fine tuning for taking advantage of the system which needs to be plugged.
Three major institutional arrangements have been made which should work for speedier handling of bad debts. The main worry and stumbling block was the legal proceedings which took unduly long and thus defeated the entire intention of resolution of stressed assets. Since the court cases used to take lengthy processes and the courts were overburdened, the institution of the Insolvency and Bankruptcy Board of India (IBBI) provides the way forward. The system has a bite in the Insolvency and Bankruptcy Code as the implementing authority has come into action.
It should now be possible to tackle the bad debts and handle the physical assets of a company running defaults far more easily. The IBBI has stipulated fixed time bound action milestones for stressed assets. These have to be resolved within a period of 180 days, or at most by another 90 days, after which bankruptcy proceedings would compulsorily be started. This is presumed to be a threat to the promoters as at the end of the process, the promoter could lose control as assets would be auctioned off.
Secondly, a major difference has now been made by giving powers to the Reserve Bank to direct banks having stressed assets to mandatorily initiate action against the companies in default. Until now, banks have been rather lukewarm to taking action against the defaulters for some reason or other. Now, once the RBI is giving directions to start action, there is no escape from taking the required legal actions. This was typically a moral hazard because the banks were largely government owned; the bad loans were treated as no one's headache.
Additionally, through the creation of the platform, Joint Lenders Forum, the RBI has roped in all the principal lenders to a defaulting company. Thus roping in all, the escape routes have also been largely plugged as all the lenders will have to, at the same, time start action against defaulters. So then, by tying up all the loose ends, we have a reasonably secure mechanism to get at the defaulters and the stressed assets.
But there lies the rub as well. As it has been the butt of the joke among borrowers, if you are drawing small sums from the banks, it is your turn for sleepless nights. But if you are borrowing big, the turn for sleepless nights is on the banks. And when the banks are government owned, it is comfortingly good sleep for giver and taker both.
Now even with the entire mechanism and its working, crafty defaulters could still find nice ways of shaving off their dues and still avoid bankruptcy and loss of control. This is how such machinations could be perfectly legal and above board even within the present system of the Insolvency code or bankruptcy board.
Imagine a big borrower having drawn Rs1000 crore goes on default on the ground that the company is no longer profitable and has run into problems. Any amount of valid and perfectly reasonable arguments could put to prove such a case. Under the present provisions if such a company goes into bankruptcy process and it ends up in auction of the assets of the company, the promoters could still organise to bid for it and even win it. There is no provision for excluding the existing owners from bidding for the stressed assets at even half the amount of liabilities. This would be as if you are forcing a corporate debt restructuring (CDR) under duress to the banks. This process can be repeated several times.
In fact, if anything, this has been the mode for amassing money by a former businessman who has now become a famous politician. US President Donald Trump is reputed to have gone bankrupt several times and he had come out of these better off. Global bankruptcy proceedings allow such auctions and have often resulted in similar results as well.
The question is, even if the defaulter has the wherewithal to participate in bidding and seek to take over at a lower price, why should not that money be paid back to the banks in the first instance. Only after he has exhausted all options, a defaulting promoter could be allowed to re-bid.
Going by the RBI statistics, no less than 85% of the bad debts are due to large borrowers, that is, those who have borrowed more than Rs 5000 crore. If this handful of big borrowers is dragged into the net, most of the apparently insurmountable problem of non-performing assets of public sector banks could be resolved. However, in haste for somehow resolving these, none of the really big defaulters should be let off the hook. They should be caught whenever they are wilful defaulters. Of course, there will be those as well as who have defaulted because of bad investment decisions or changing business conditions.
—(IPA Service)