Banks are letting off big debtors under the ruse of restructuring instead of using the securitisation law against them.
The size of debts rescheduled by banks and financial institutions in the country tells its own story. Our industrialists are indulged by secured creditors, led by state-owned banks. This points to successful influence-peddling being at the back of the creditors’ reluctance to read the riot act to them.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi Act), was a godsend for the harried secured creditors saddled with non-performing assets (NPAs), an American euphemism for bad debts.
It empowers them to seize the assets mortgaged by the recalcitrant borrowers, with the help of the magistrate, and go on to realise the best price for the seized assets, all without the sanction of the court.
To be sure, seizures under this law do happen but, more often than not, the borrowers turn out to be small-timers, sometimes retail loan-takers — which is like using a sledgehammer to swat a fly. It is, however, pretty apparent that the might of the new law has not been used to recover the dues owed by Kingfisher Airlines and other big-ticket defaulters to the banking system.
Confusion
Section 35 of the Sarfaesi Act gives its provisions an overriding effect over anything to the contrary contained in any other law that obviously includes the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
It is another matter that the the Odisha High Court has ruled otherwise in the Noble Aqua case, against which State Bank of India, the lender, has appealed to the Supreme Court. What perhaps has queered the pitch for the secured creditors is Section 37 of the Sarfaesi Act that goes on to say that the Act is in addition to, and not in derogation of, any other law in force.
Now this is clearly speaking with a forked tongue, blowing hot and cold at the same time. And it is this pussyfooting, willing-to-push-but-afraid-to-hurt strategy that perhaps weighed with the Odisha High Court when it said that the Sarfaesi Act has to yield to SICA, that brings all coercive proceedings against a sick industrial company to a screeching halt.
Having declared the Sarfaesi Act supreme under Section 35, the government should have refrained from inserting Section 37 that has obviously sowed the seeds of suspicion in the minds of the High Court as to the true intent of Parliament.
Therefore, there is more than a ring of truth in the pithy refrain in financial circles that if you borrow lakhs from a bank, you are in trouble, but if you borrow crores, the bank is in trouble, courtesy SICA. Indeed, it is an open secret that promoters of sick companies are anything but sick, so to speak.
If anything, the company’s sickness and its own prosperity are inversely related. This has given rise to a presumption that most sickness is brought about by the marauding ways of promoters.
To be sure, there can be genuine cases of industrial sickness due to economic factors, sending project reports and feasibility studies haywire. But in a vast majority of cases, it is difficult to sift the grain from the chaff, tell the genuine sick companies from those feigning sickness.
It is time we stopped mollycoddling sickness with automatic stay under SICA and corporate debt restructuring (CDR) schemes of the banking sector. Banks which bare their fangs to the retail borrowers should read the riot act to the big-ticket industrial borrowers as well.
Who is sick?
Industrial loans are leniently regarded vis-a-vis retail loans, on the specious ground that if the same standard of toughness were to be applied to the former, it would stymie industrial growth. Touché! This is of a piece with the argument that if we start taxing foreign institutional investors, they would flee the country in droves.
The Sarfaesi Act has also put in place a regulatory framework for asset reconstruction companies (ARC) whose mandate is to buy NPAs from the harried lenders and use their expertise in recovery.
If banks are loathe to sell their NPAs to ARCs and instead prefer to seize the assets of defaulters, they can bank upon ARCs to find suitors for the undertakings taken over.
Just as there is a healthy market and regime in place for corporate takeovers, there must also be a market and dispensation for takeover of distressed assets and undertakings.
It is wrong to encourage the notion that only the existing promoters can see a company through a bad patch. That would be mollycoddling their inefficiency.
The inexplicable preference for CDR on the part of secured creditors when they can go for the defaulters’ jugular through takeover of their assets naturally raises eyebrows.
CDR only amounts to postponing the inevitable. That is why it is perceived as sheltering NPAs. Furthermore, it always involves a huge sacrifice on the part of lenders in terms of time extended, interest lowered and shares exchanged (often worthless) for outstanding dues.
The RBI has done well to call upon the banks to insist upon promoters coughing up 15 per cent in the diminution in the value of the undertaking, or 2 per cent or the loan, whichever is higher, as a price for the rescue act.
But banks should opt for coercive proceedings under the securitisation law, rather than yield to the mirage of CDR.
(The author is a New Delhi-based chartered accountant.)
Keywords: Size of debts rescheduled, banks, financial institutions, industrialists, secured creditors, state owned banks, influence peddling, creditors’ reluctance, Sarfaesi Act
Comments:
Banks have to make available information in their annual reports on
NPAs in an intelligble form to shareholders. Also there is no mention
whether the risk management and underwriting capacities and skills are
improving and what banks are doing to hone the skills of officers in
this behalf. It was shocking to note from the media the other day
that even after restructuring KF loan bank has not begun to show KF
loans as NPA! Perhaps I may look like a Rip Van Winkle coming from
another era when I refer to some of the old actices. . Some four
decades back when the undersigned was a mortgage officer for a large
state financial entity, rare requests would come from mortgagors who
are strained seeking some concessions. ON examination of the request
and the papers, case would be approved with eprmission from head
office for redrawing terms, But that came with a price and not with an
incentive as is now being done. The balance mortage loan would attract
new and higher interest rate often wit
, But that came with a price and not with an incentive as is now being
done. The balance mortage loan would attract new and higher interest
rate often with a rate that is applicable to business loans and the
term refixed as would not cross the age of 70 of the borrower. A
supplemental mortgage deed would eb executed. The organisation’s
interestas ar eprotected, those who pay mortgage dues regularly are
not prejujdiced and the erring ones pay a oprice. Now there is
complete incentive for those who are defaulters and poor managers.
All in the name of giving undue concessions to private busienss whi9ch
are slothy. Whe nKF finally collapsews as it will sooner or alter,
many heads will roll on grounds of political accountaility and
official responsibility but at heavy cost to the public and depsitors
and shareholders. What is wsorse still is Minsiter says no airliens is
askede to shut down because they ahve not opaid salris. But what he
did not say or omitted to sasy was that in caseds a
The write-up, coming from a learned CA, is noted to have dealt with
such an important law subject, in his own style, but with a narrow and
limited focus.
The intricacies of the subject matter, it is noteworthy, have been
analysed reasonably well by the writer of the article in the blog of
indiacorplaw, Friday, April 20, 2012 Critical issues under SARFAESI
Act, 2002 ? (also, in Indian banks & NPAs – IV: SARFAESI Act and its
impact - Moneylife ... (link)) in a somewhat exhaustive a manner, as
desired, from all angles. In doing so, the possible views and
counterviews, in the light of cited court cases law have been rightly
brought out and focused on.
In view of the overreaching implications and impact of the special
enactment , in its implementation /enforcement, besides in regard to
what line of reasoning should desirably be followed by courts in
deciding related issues but with due emphasis on the larger public
interest , the view(s) based on an in-depth study and a well
considered comprehensive opinion from law cum economic experts
might be of immense help and practical guidance.
It is mainly big borrowers, particularly those with political influence that are beneficiaries of CDR. One addition reason may be that a large borrower may be considered as too-big-to-fail.But restructuring should be ruthlessly refused where default in repayment or compliance of applicable covenants is due to incompetence, negligence or bad faith on the part of its management, as may be the case of KFA.
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