Banks seem to be bent upon continuing to mollycoddle defaulting promoters. A high-powered group of bankers has decided to call upon corporates seeking loan restructuring, to heighten the stakes of the defaulting promoters to 25 per cent of the reduction in the value of security. The moves are in accordance with the the recommendations of the Mahapatra committee.

This might at best constitute a marginal toughening of stance, and might not chasten the promoters who deem it their birthright to be bailed out, though it often spells disaster for the nation’s banking system inasmuch as such mindless magnanimity practically means throwing good money after bad.

The new insistence on unconditional personal guarantee as another precondition for the banks pitching in with a fresh dose of assistance would not be worth the paper it is typed on in a crunch situation and hence might not have the expected chastening, much less disciplining, effect either.

Mollycoddling defaulters

Despite knowing corporate loan restructuring hides considerable bad debts of the commercial banks in the country, there is considerable reluctance to read the riot act to the defaulters. Instead, the accent is on rehabilitation with implications of pampering defaulting promoters and giving a leg-up to bad debts.

Underpinning such bending of rules is the view that exigencies of commercial ventures do not warrant rigid and unyielding rules.

While this may be true to some extent, experience shows that banks are in no position to gaze at the crystal ball and say when the never ending temporary crises would be over for the borrower.

It cannot be the lot of the banks to wait in perpetuity for the tide to turn. Instead, it must be for the corporates to set their house in order and arrange for funds. Good money at concessional terms cannot be constantly thrown after bad money.

The defaulters must be made to feel the heat of the pressure mounted by new lenders in terms of heightened securities and guarantees demanded as well as interest charged.

This would have a salutary effect for the banking system, in particular, and the country in general.

As it is, there is considerable reluctance on the part of banks, especially in the public sector, to use the relatively newly minted tools for the bankers — seizure of security under the Securitisation Act, 2002.

Political and other connections are reportedly playing a no mean role in this self-abnegation. Banks run the risk of going sick themselves in their mindless efforts at rescuing the defaulters.

This is the well-known ‘contagion risk’ with its grim and frightening implications that now stares the country’s financial system in the face, and the RBI is quite unconcerned about it.

Disgorgement proceeding

Banks were itching for action in the area of Sick Industrial Companies (Special Provisions) Act, 1985 (the SICA) that brought untold miseries to creditors, with concomitant indulgence to defaulters.

It should not be the lot of the creditors to speculate upon the genuineness of the reason for default — whether it is economic or contrived through systematic squirrelling away of funds.

In the case of sick companies, the Board for Industrial and Financial Reconstruction (BIFR) often speculated in favour of the defaulters, so much so that the promoters of sick companies laughed all their way to the bank. Promoters bloat even as the companies go sick is a recurring joke in financial circles.

Till the repugnant law is scrapped by the Companies Bill, 2011, banks should at least use the strong powers the Securitisation Act has given to them, and read the riot act to defaulters so that there is no perverse premium on defaults, especially of the feigned variety.

Selling bad debts to asset reconstruction companies may not bring maximum recovery to the harried bankers. They must assert themselves and chart their own course of action. Asset reconstruction companies (ARC) may, by all means, participate in the auction triggered by the coercive proceedings set in motion by the banks.

There is no reason why banks should outsource their recoveries to ARCs, who invariably take away a good chunk of the outstanding as recompense for their efforts and risks.

It is a trifle curious that successive committees, while seeking to make life easier for defaulters, have not thought anything of strengthening the disgorgement proceedings contained both in our company law and SICA.

There has hardly been any disgorgement proceeding successfully launched at company promoters, guilty of systematic misuse of public money.

It is time quick and efficacious proceedings are launched against promoters of defaulting companies who must be called upon to disgorge the ill-gotten funds as a precondition for further assistance.

This might sound a tall order but not impossible to act upon, if there is the will. Only recently has Vijay Mallya been persuaded to sell off his personal assets so as to clear up the huge dues that Kingfisher Airlines owes to banks.

The liquor baron did what he should have done long ago. Yet, he often counters his detractors by saying that how he lives is his personal affair. But the public is not convinced, and perhaps for good reasons.

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

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