Creditors need better safeguards

Asset quality in the banking system has deteriorated significantly due to, among other things, slow growth, elevated interest rates, currency depreciation and inadequate credit appraisal.

Saddled by stressed assets, banks have pulled back from the market, which has resulted in a precipitous drop in credit availability. Credit growth last year fell to less than 15 per cent from a peak of more than 30 per cent just a few years ago.

According to the Reserve Bank’s Financial Stability Report published in December, the ratio of stressed assets (gross nonperforming loans plus standard restructured advances) to total loans on banks’ balance sheets now stands at 10.2 per cent.

Stalled projects have begun to move, thanks to the Cabinet Committee on Investments set up last year. This should help ameliorate the situation and reduce pressure on the banking system. However, the question of how to fund these projects still remains.

Despite significant efforts by the government, the corporate bond market remains underdeveloped at a paltry 1.5 per cent of GDP. With nowhere else to go, many corporates are turning to non-banking finance companies (NBFCs). Well-capitalised, responsible and systemically important NBFCs can play a pivotal role in attracting foreign investment, spreading risk and providing liquidity and depth to the debt markets — all vital to growth.

Unfortunately, NBFCs are not given a level playing field. Banks, asset reconstruction companies and housing finance firms have access to the Debt Recovery Tribunal and Sarfaesi (the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest), which were set up to streamline the recovery process. NBFCs cannot avail of this alternative structure and have to rely on the overburdened court system.

One solution is arbitration. The selection of the arbitrator needs to be systematised and appeals should only be entertained when abundant evidence of bias is presented.

Second, cases filed against promoters and companies have to be made available online. Unknown to potential lenders, cases are filed in the district courts in any State against potential borrowers. It is very easy to imagine a situation where a loan is given against a property and the lender later finds out that injunctions have been filed preventing the sale of the property, with winding up proceedings against the borrower. Information sharing among creditors needs to improve.

Today, creditors are required to provide and can obtain information of defaulting borrowers from Cibil (Credit Information Bureau Limited). While Cibil is useful, it only reports defaults when accounts have been delayed 90 days or more. The new credit repository (Central Repository of Information on Large Credits, Crilc) set up by the RBI earlier this year requires creditors to report delinquencies of more than 30 days (in some cases of obvious stress reporting needs to be done for lesser delays). This is a welcome development.

However, it doesn’t address the issue of historical delinquency, which is crucial in assessing credit quality. Currently, banks are required to share credit information with each other on request. They are not mandatorily required to share credit information with NBFCs and hence seldom do so. Even with the development of the Crilc, all creditors should be statutorily required to, on request of a current or potential financier, share the borrower’s track record.

Today, wilful defaulters enjoy immunity given the anachronistic systems. We need an upgrade.

The writer is co-founder and joint MD of DMI Finance

COMMENT NOW