During a recent star-studded seminar in Mumbai on the Indian Financial Code, Finance Minister Arun Jaitley said the government wished to implement a large number of recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), including a cost-benefit analysis of regulations. He said the government had set up four task forces to study the IFC. These recommendations are in tune with the government’s agenda to ease doing business in India.
As a result of erratic, unpredictable and frequently changing policies, the cost of doing business is a big problem. Compliance with costly, multiple and antiquated directives of regulatory or government agencies is a burden on enterprises; it eventually smothers economic growth.
Stakeholders are not regularly consulted on policies or regulations, and there is no formal policy review mechanism. There have been instances galore of sub-optimal policymaking, such as retrospective amendments to taxation policies and unpredictable foreign investment norms. This has resulted in loss of investor confidence, thus increasing the barriers to economic growth.Easing the burden
Consequently, the government has been trying to reduce the regulatory burden on stakeholders. One of the techniques of reducing the burden is cost-benefit analysis (internationally known as regulatory impact assessment, RIA) of proposed and existing laws. It involves a participatory approach to assess the impact of legislations and regulations on relevant stakeholders. RIA of legislations has also been recommended by the working group on business regulatory framework (WGBRF) of the Planning Commission to which CUTS acted as a knowledge partner. RIA is not limited to regulations, it is a holistic tool covering policies, laws, rules and practices in any one sector.
It is in this context that CUTS has facilitated the adoption of an RIA framework in India as part of its overall agenda of regulatory reforms. This has begun in the banking and insurance sector, followed by electricity. This article deals with the financial sectors in view of the humongous debt write-offs. One of the major areas is to look at the laws and institutions covering debt recovery in India.Recovering debts
Debt Recovery Tribunals (DRTs) were originally set up to expedite the recovery process, without being subject to lengthy procedures followed by civil courts. While studies show that the establishment of DRTs has reduced delinquency, the piling up of a huge number of cases and a significantly lower recovery rate defeats the purpose.
The same holds true for dispute redressal fora in many other areas. The amount recovered from cases decided in 2013-14 by DRTs was a mere ₹30,590 crore, which is only about 13 per cent of the total amount at stake, that is, ₹2,36,600 crore.
While the recovery is so low, commercial banks have written off loans amounting to ₹1,61,018 crore in the last five years and are trying to recover what they can. The Reserve Bank of India governor, Raghuram Rajan, wryly commented that the write-off is so high, it would have allowed 1.5 million of the poorest children to get a full university degree from top private universities in the country. The social and economic costs of the amount written off puts a big question mark on the debt recovery mechanism in India.
Low recovery under DRT could be attributed to the inadequate number of presiding officials . The law provides that DRT and DRAT (Debt Recovery Appellate Tribunal) shall consist of one presiding officer (PO) and one chairman respectively. Presently, a presiding officer handles almost 80-90 cases a day. If the PO is on leave, all the cases have to be adjourned.
Positions left vacant for long periods of time also contribute to their inefficiency. For instance, the position of PO at DRT-III, Chennai, remained unfilled from June to December 2014. The matters listed during this period at DRT-IIIwere transferred to the DRT-II, Chennai. This placed additional burden on DRT-II and resulted in delay in the recovery of debts.
An ex-ante impact assessment of the legislations which provide for mandating one PO and providing no mechanism to expeditiously fill the vacant positions could have prevented the sorry state of affairs prevailing today. There is no accountability woven into the law to ensure that vacancies are filled up well before time, and thus the files keep going around in circles.Challenges remain
To make the debt recovery swifter, the government passed the Sarfaesi Act, 2002 (also known as the Securitisation Act). This was intended to enable banks and financial institutions enforce their security interest without having to resort to courts and tribunals so that debts could be recovered speedily.
But that too does not seem to have speeded up the process. The amount recovered (including cases related to earlier years) is only 27 per cent of the total outstanding amount under the Sarfaesi mode.
While the Act seems to have all the right provisions, the challenges of implementation and accountability remain. One way to address such issues is through a comprehensive RIA of the Sarfaesi Act and putting in place an effective mechanism to deal with such problems.
It is not only the debt recovery laws which are proving to be inadequate in recovery of debts. Interim injunctions granted by courts are also making life difficult for debt recovery despite the Supreme Court’s direction prohibiting the same. This is another ubiquitous problem; whether the apex court has a mechanism to check this is the question.
Whether these issues were thought through when the laws were made is a matter of conjecture. To address all them, RIA with full stakeholder participation could be useful. It has resulted in considerable economic benefits in countries like the US, UK and Australia. The Indian government has already stressed open, transparent and accountable governance. Adopting RIA could be a huge support to its agenda.
The writer is the secretary-general of CUTS International; assistant policy analyst Jitin Asudani contributed to this article