Policy watch: The Janus-headed nature of bad debts, and it's just getting scarier

If you owe your banker a thousand pounds, you are at his mercy. If you owe your banker a million pounds, he is at your mercy.”
—John Maynard Keynes

The government’s pronouncements, as always, sound pious. New laws are introduced, even when older laws exist. It appears as if there is a resolve to tackle a problem. In reality, little changes. This is the Janus-headed nature of bad debts in India. Like Janus, the God of beginnings, a new beginning is always promised. Like Janus, almost everything is two-faced.

Consider Debt Recovery Tribunals (DRTs), which were supposed to release blocked funds of banks by taking over the assets of defaulting borrowers. Unfortunately, the numbers tell a different story (see table). The number of cases filed each year keeps increasing faster than the number of cases disposed. This is a classic way of abetting a pile-up. And, do remember, this was a tribunal which was supposed to conduct summary trials, complete hearings within three months!

What went wrong? Several factors were responsible. Many defaulters opted to appeal to the Board for Industrial & Financial Reconstruction (BIFR), and thus managed to stay all proceedings under the DRTs. Then, there was the classic case of shortage of judicial officers, and poor talent among those already there. Moreover, even many DRT officers themselves began advising promoters on how to delay the proceedings. What is worse, in July this year, the government decided to shelve its computerisation plan for the DRTs. This would have ensured applicants and defendants got hassle-free access to information. That would have helped banks, financial institutions and would have assisted recovery officers in enforcing orders.

Instead, the government came up with a new law -- Sarfesi (The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002). This allowed for immediate auctioning of collaterised or attached assets on account of non-payment of debts. Once again, promoters who had assets in far-flung areas ensured that no other bidder turned up at the auction hearings. Many of the auctions were thus frustrated.

In fact, the one recourse banks have always enjoyed is to refer any truant borrower as a “wilful defaulter”. When that is done, instead of the bank chasing the borrower, the borrower now begins chasing the bank. Why? Because once a borrower is declared a wilful defaulter, no bank is supposed to lend to him (and his associates) any more money. All of a sudden, all access to funds from all Indian banks gets blocked. Desperate, the borrower begs the bank to remove his name from the wilful defaulters’ list, and invariably goes in for either a corporate debt restructuring -- which is allowed only once in the borrowers lifetime -- or (usually) as an out-of-court settlement.
Finally, once the borrower is declared a wilful defaulter, it paves the way for the Economic Offences Wing (EOW) to move in and even attach assets, as is being done currently in the NSEL (National Spot Exchange Ltd) case.

But, then, why don’t banks adopt the “wilful defaulter” route right away? The reason is that banks do not like their books to show up non-performing assets (NPAs). Usually, this is also because the loan has been given to an individual because of pressure “from above”. The “above” could mean a more senior officer, a politician, or a minister or a senior bureaucrat -- sometimes from the finance ministry itself. Sometimes, it is the bank manager himself.

Therefore, the banker allows the borrower to apply for a bigger loan and uses the additional loan amount to pay up the interest on the older and the newer loan principal. Thus, the borrower does not default, and the loan size keeps growing bigger. This ever-greening can go on forever, till someone blows the whistle, or the “ever-greening” begins to stick out like a sore thumb.

But isn’t this corruption and collusion? Yes. Unfortunately, the RBI can only create systems to flag such borrowers. It cannot interfere directly. And the government has not made an outside regulatory body like Sebi for banks, with prosecution powers, to penalise both defaulting borrowers, and/or collusive bankers.