The Hindu Business Line : Provisioning sans publicity

A defaulter should be tamed, but any undue publicity of his deviousness, far from shaming him, would have the opposite result of emboldening him further.

S. Murlidharan

In its latest quarterly review of its credit policy, the Reserve Bank of India (RBI) has asked banks to provide more than hitherto for the possible bad debts engendered by loans to the real-estate sector. It is true that certain sectors are more hazardous than others as far as financial exposures are concerned, thus necessitating greater precautions on the part of the lenders.

Such precautions can take the form of more intense scrutiny of the loan application, may be with a larger processing fee, and thorough scrutiny of the claims of huge land bank in the applicant’s possession. Even the rate of interest can be higher, given the fact that the bank needs to provide for more towards possible bad debts.

Time was when banks were exempted from showing explicitly and transparently the provision made for bad debts, which were allowed to be hidden in the balance sheet.

Though this practice was decried on the ground that it went against transparency, by the very nature of a bank’s business such open disclosure could be inimical to its interests as it encourages the notion that when there are so many delinquents, the bank can always put up with one more.

Publicise actual default

Going to town with provisioning norms sends the wrong signals — defaults are inherent in lending to the given sector and are likely to be condoned. It is not for a moment suggested that banks should not make provision for bad debts even though it would be more desirable in everyone’s interests if the banks tightened their belts while lending so as to be able to mark men for boys and went after the big-ticket defaulters with the same alacrity they display with small-time ones.

After all, the securitisation law empowers banks and financial institutions to take over assets without the leave of the court in case of defaults.

The point is, provisioning must be done sans publicity. A student who knows that the minimum attendance norm would be relaxed at the end of the semester is likely to absent himself with singular nonchalance unless of course he realises that learning in a class is far easier than learning through self-study.

It is true that the RBI, in its capacity as the regulator and watchdog, keeps a hawkish eye on various sectors that are more prone toward defaults and it must alert the banks to this danger but alerting the banks in full public view could be as counter-productive as a class teacher warning from her podium that a given pupil is given to violence. A defaulter, be it a student or big-ticket borrower, should be tamed — any undue publicity of his deviousness, far from shaming him, would have the opposite result of emboldening him further.

If anything, what should be publicised is the actual default and not the potential or proclivity toward default. There is no reason why the RBI should not take it upon itself the task of exposing the black sheep by bringing out advertisements in newspapers and in other media with names of defaulters and the extent of defaults. Resident welfare associations have found this stratagem rewarding — members pay up their dues for fear of adverse publicity. It is not suggested that all big-ticket borrowers would be so cloyingly sentimental and cough up their dues to the banking system fearing adverse publicity but image-conscious ones can be counted upon to do so.

At any rate, provisioning is fatalistic, done in the philosophical realisation that certain borrowers behave the way they do and little can be done about them. To be sure, it is a well-settled law that the unilateral act of write-off or provisioning does not constitute letting off of the defaulter but then in the world of business signals and symbols are as important as the legal position, if not more.

(The author is a Delhi-based chartered accountant.)

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