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Friday, Feb 22, 2002

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Opinion - Non-Performing Assets
Money & Banking - Non-Performing Assets

Attachment of assets: Rusting value

P. K. Joy

STATISTICS show that assets of over Rs 4 lakh crore, offered as securities against bank loans have been attached by courts, and are getting destroyed and to nobody's advantage. The number of loans in default is rising. The value of these attached assets is also rising. This is a problem that needs the urgent attention of the Reserve Bank of India, the Board for Industrial and Financial Reconstruction (BIFR), the debt recovery tribunals (DRTs), judges of civil courts adjudicating bank suits, the various State government panels studying the problems of sick units and the proposed Assets Reconstruction Company.

When borrowers default on their payments, banks are forced to recall loans and file suits either before the DRTs or in civil courts to recover the rest of their money. This is the when the destruction of securities begins. As of March 31, 2001, suits filed by public and private sector banks and financial loans to recover secured loans to Indian industrialists and businessmen amounted to approximately Rs 2,75,000 crore. Thus, the value of the borrowers' assets charged to lenders as collateral, with the margins usually at 25-40 per cent, is Rs 4 lakh crore.

The assets charged as securities include such fixed assets as machinery, buildings and land; and current assets comprising work-in-progress (WiP), stock and receivable bills. Of these, machinery, stock and receivables constitute the lion's share.

Immediately after filing suit, the lenders invariably attach the assets and get court orders issued to the effect that the borrowers are forbidden from moving, transferring, selling, and/or in any manner alienating the assets. Simultaneously, orders are also issued to the borrowers' customers and clients that outstanding bills should not be paid to the borrowers, but deposited with the court or paid to the lending bank. The lending banks/institutions then freeze the borrowers' accounts and stop releasing funds.

With the filing of the suit and attachment of assets, most borrowers' business operations come to a halt, especially with no funds available to defray expenses and continue operations. Soon after the machines are shut off and shutters downed, the employees look towards extracting what they can from the entrepreneur and eventually desert him. Thereafter, the attached assets are susceptible to extensive damage and loss.

Fate of fixed assets

Banks and institutions that attach a borrower's assets seldom do anything to protect them from damage. In most cases, the borrowers are left with no money to either service, maintain or protect the attached assets by providing adequate watch and ward. If the assets are located in far-flung areas, as in the case of engineering companies that operate on an all-India basis, the problem becomes further complicated. Also, as word of the attachment and of the contractor's alienation from his assets spreads, creditors and unlawful elements collaborate to plunder the assets.

From the heavy machinery customarily kept in open areas, the small and removable parts are stolen and the rest left facing nature's fury. Even factory sheds can fall to pieces. The borrower can only watch helplessly. Until the suits are resolved, the banks will neither maintain the assets nor sell them.

Unless the suit is settled or the BIFR revives the unit, the attachment of the borrower's property prevents its movement or hiring for gainful purposes.

The closure of a suit, including appeals, generally takes about eight years. By the end of that period the machinery and sheds would have little resale value. The attached machinery lying at customer's project sites are generally dumped in scrap yards. When the case is closed, the remaining assets, in most cases, would be freehold land. The court may auction the land. At these auctions, locals generally form a cartel to keep off bidders from other places and underbid for the property and share the booty. This way banks recover only a bare minimum. Even this recovery is not smooth because unsecured local creditors, who remain unpaid, are known to take forcible possession of the land charged to banks.

Fate of current assets

Banks and institutions that obtain attachments know that this more or less closes the prospects of realising or recovering the money locked up in the borrowers' current assets. Yet, they resort to attachment action, probably to comply with internal rules and guidelines.

Work-in-progress (WiP), wherein considerable sums are often tied, cannot be converted into saleable or billable products after a unit stops operation. Even in construction contracts, once the borrower-contractor's assets are attached, work comes to a stop because project owners seldom give any credit or pay the contractor any money unless immediate pressure is brought on them for an acceptable joint measurement of the WiP and a quantum meruit settlement before another agency is asked to take up and complete the suspended work.

While banks or institutions are not known to take any initiative in this direction, a contractor brought to his knees and without the financial resources will not have the strength to press for any such action. So, the project owner would give the helpless contractor the contractual notice of either "risk purchase" or "termination" and get the work completed through other agencies. He may even slap a claim for reimbursement of the extra cost incurred on risk purchase.

The attached receivables are generally taken as ownerless money. Debtors seldom pay any attention to them. When court notices are received, most debtors simply inform the court that they do not owe the borrower any money and that is practically sufficient for the courts to discharged these parties from paying the bills they hold. Banks and institutions, particularly in the public sector, do not take any initiative to follow up and collect the attached receivables.

At the same time, debtors do not pay any attention to the alienated drawers of the bills. The lender and the borrower are thus deprived of the attached payments. Attached stocks of materials meet the same fate as the attached fixed assets.

Immediate attention

Courts generally take long to close cases. So, instead of waiting for the courts to pronounce decisions, banks and institutions that obtain attachments of borrowers' assets must initiate the right steps to protect these assets from loss and destruction and dispose of them quickly. If a defaulting unit cannot be revived quickly, the early sale of fixed assets would help both parties.

The attached current assets should be liquidated by active follow up by enlisting the cooperation of the borrower. Pending the closure of the suit, and funds realised the assets can be deposited in a separate account for appropriation after the suit is decided.

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