Lack Of Lenders’ Liability Rules Will Generate More Horror Stories
By Sucheta Dalal
This will force more industrialists to negotiate settlements with banks and hasten loan recovery. As far as bankers’ problems with large industry is concerned, the Supreme Court judgement is a boon, because it is a fact that big industry used the resources (usually siphoned out of projects) to fight banks and avoid repayment. But smaller companies, struggling with what one borrower calls “bank-induced sickness”, the absence of even a semblance of lenders’ liability rules will continue to generate business horror stories. If the Securitisation Act of 2002 was challenged because it was heavily loaded in favour of lenders, the situation remains true for small borrowers even after the judgement.
The root of the problem is the Reserve Bank of India’s refusal to take responsibility for supervising the commercial activity of banks, as required under the Banking Regulation Act, 1949. That it has nominees on the boards of nationalised banks also creates a conflict of interest, which is probably why it follows a convenient policy of not addressing individual cases.
High-level sources tell me that the government and the RBI do acknowledge the suffering of small borrowers and there are plans to enlarge the scope and powers of the Banking Ombudsman to hear cases pertaining to commercial loans. But the process of moving from recognition of problems to finding solutions is very slow. The Supreme Court had recognised bankers’ potential mischief, in SLP (C) No 4077 of 1997 (Mrs Vishwalaxmi Sasidharan & Ors v/s Branch Manager, Syndicate Bank, Belgaum). Although it dismissed the borrower’s petition, the judges conceded that “If pursuant to the contract the Bank did not disburse the amount and if there was any resultant default in the payment on the account thereof, that may be a defence open to the petitioners in the suit and also furnishes right to complain of deficiency in service to seek redressal under the Consumer Protection Act.” Due to a later amendment to the Consumer Protection Act, the observation now applies only to Sec 73 of the Contract Act. The Debt Recovery Tribunals (DRTs) are also of little help. All small borrowers complain that DRTs act like a division of the bank — and with good reason. In many cases, nationalised banks not only provide the infrastructure for their functioning, but also provider accommodation to the presiding officers. This is bizarre.
While banks and the media have long hyped the tricks played by large defaulters to avoid repayment, this incestuous relationship between banks, DRTs and, to an extent, the RBI has never been properly investigated. Instead, the DRTs have become much more powerful under the Securitisation Act. The case of Topline Shoes of Baroda is an example. After some correspondence with its promoter, H M G Murthy, the former RBI governor, S Venkitaramanan, wrote an entire column on the “unintended consequences of the reform process” in a national newspaper in January 2000.
He traced the root of the problem to capital adequacy norms for banks; and the fact that reforms prescribed zero risk weightage for loans to government and 100% for loans to business. “Since banks are also asked to provide 8% risk weighed assets as capital, they shy away from credit to business in favour of credit to government”, he wrote.
He narrated the case of a “successful exporter” (Topline Shoes is not specifically named), who was long considered a good credit risk by his bankers, until his business was adversely affected in April 1994. Suddenly, two public sector bankers, otherwise happy with him, stopped all disbursements without explanation. At that time, they had disbursed only 25% of a sanctioned limit of Rs 175 lakh. The limit was supported by an asset base of Rs 800 lakh. Thanks to the banks’ action, his export orders in hand were suddenly at risk, but the banks refused to listen to any persuasion. They knew that their non-disbursal would kill his business, but they wouldn’t budge. Mr Venkitaraman concluded,
“bankers still had to do what they did”. He figures that “the problem had arisen because of RBI’s insistence of a ‘performance obligation’ on the part of banks. According to this, RBI required banks to earn a predetermined profit. This requirement went hand-in-hand with the condition that banks should lend 10% of their total loan portfolio as export loans and that too at concessional rate of interest. The two banks had already lent more than 14% as export loans. If more loans were given — although they would allow the exporter to expand business — in the short run, banks would lose, as export loans were at a concessional rate. Perversely enough, non-disbursement of a sanctioned limit would help the banks to meet commitment on profits.”
The former governor says that problem for banks arose because “they did not have a specific window for resources. They were raising funds under certificate of deposits which at that time cost 18%, while the interest rate laid down for export loans was 13%”.
In the circumstances, lending for exports at a lower interest rate hurts their bottomline at a time when they are struggling to meet the 8% capital adequacy requirement — too bad if it kills a running business. In the Topline Shoes case, one of the banks even filed cases with CBI and CID, respectively, against the company, and in both cases it was exonerated.
Five years later, Mr Murthy is still battling recovery proceedings started by Punjab National Bank, Canara Bank and Corporation Bank in 1999. One bank has even been refusing the non-discretionary One Time Settlement option open to Non-Performing Assets (NPAs) under Rs 10 crore. Meanwhile, Murthy had the cold comfort of a letter from a senior CBI official, wishing him good luck, and another from Montek Singh Ahluwalia, then member, Planning Commission, expressing sorrow at “the unfortunate developments, which must have caused you anguish and loss”. Dr Ahluwalia had brought this case to the attention of then RBI governor, but it made no difference. This is but a case study of how the system is loaded against small borrowers and even the highest offices in the country have not been moved to find a solution.