Sucheta Dalal :Lenders Act Tough Defaulters Cough Up (2 December 2002)
Sucheta Dalal

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Lenders Act Tough, Defaulters Cough Up (2 December 2002)  

After the flurry of court cases that attacked its ordinance, Union finance minister Jaswant Singh swept the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Bill, 2002 (Securitisation bill) through Parliament with just a brief two-day debate.

A series of recent scams that have drained the exchequer and the monumental non-performing assets (NPAs) of Rs 1,10,000 crore run up by the corporate sector probably constrained even our politicians from questioning the need for tougher loan recovery laws. There were indeed several questions asked about lenders’ accountability and liability, transparency of the takeover process and the need to address genuine difficulties by occasional borrowers. But even Kapil Sibal, a lawyer for the defaulter Mardia Chemicals, backed off after asking a few uncomfortable questions.

To Jaswant Singh’s credit, he neatly anticipated and deflected potential criticism. He announced a one-time settlement for defaulters who had borrowed upto Rs 10 crore from public sector banks (PSBs), he agreed to frame a Fair Practice Code in consultation with the central bank and promised to extend the recovery legislation to finance companies and cooperative banks. He is also reported to have said that the “Debt Recovery Tribunals (DRTs) could waive the condition of depositing 75 per cent of the amount due by borrowers under certain conditions”, but it is not clear how effectively that would work.

Within a couple of days after the Bill was passed, ICICI sprang into action. It took over one of the units of Mardia Chemicals and delivered a sharp rap to the company that had challenged the Securitisation ordinance in court. Is this bold start the beginning of a trend that would lead to large recovery of funds or is it just a flash in the pan? The task is undoubtedly monumental.

According to numbers provided by the finance minister to Parliament, 25 PSBs have issued notices to recover Rs 3,260 crore worth of NPAs as have financial institutions (FIs) for recovering another Rs 3,600 crore. Together they add up to a paltry Rs 6,860 crore, as compared to the colossal NPA figure of Rs 1,10,000 crore.

The FM also told Parliament that the previous experiment with a one-time settlement for borrowers of upto Rs 5 crore had only met with “moderate” success. That effort had seen nine businessmen accounting for 19 per cent of all borrowers and Rs 3,000 crore in borrowings, approach banks for a settlement. It is not clear how much was recovered through such settlements, but anecdotal evidence suggests that it was a pittance. Going by that experience, it is safe to say that the settlement offered to borrowers of upto Rs 10 crore, too, will only be moderately successful. So where will the biggest chunk of recoveries come from?

One estimate says that over 35 to 40 per cent of all NPAs are due to defaults of public sector undertakings. Recovering money or assets from them can be most tricky, as was clear by the furore created by the Maharashtra government when the Industrial Development Bank of India (IDBI), armed with orders from the Debt Recovery Tribunal, attempted to invoke State guarantees and seize assets of certain politically powerful sugar cooperatives.

More importantly, the total NPA number does not even include the outstanding borrowings of over Rs 21,000 crore by the steel companies of just three groups — Jindal (Sajjan Jindal), Essar Steel and Ispat (Mittal brothers), which the government plans to restructure, yet another time. Or the Rs 14,000 crore borrowed by the public sector Steel Authority of India Ltd from banks and institutions and the Rs 6,000 crore plus sunk into Enron’s Dabhol Power Company that is lying closed for over a year.

Interestingly, various estimates, especially those by defaulters who have been served recovery notices by the lending institutions, anticipate that the average recovery would not be more than 15 per cent of the declared NPAs. That is because a substantial chunk of the NPA figure comprises outstanding interest and only the principal can be realistically recovered. Even here, it is only the land that will be truly valuable and it is safe to expect that other assets will be stripped bare by the companies before the 60-day notice period is over. Additionally, although the lenders are now statutorily empowered, the borrower can still exploit discord and competition between banks and FIs.

The head of one lending institution who I spoke to vehemently denies the low recovery estimate because seizure of assets after serving a notice, he says, was only going to be the last recovery option. The bigger effort would be to encourage industrialists to run their business well and repay lenders. Lending institutions would launch a four-pronged recovery effort. The first option would be a negotiated settlement; and even a chronic defaulter who begins to repay and is serious about turning around the company profitably will be given another chance, he says. Second, some deserving cases will be restructured with interest reduction and extension of the repayment period. Third, a basket of defaulting companies will be transferred to Asset Reconstruction Companies, which will then find various ways to recover funds and share part of the proceeds with the institutions. The last resort will be an asset seizure and sale, which will be subject to a buyer agreeing to pay the right price.

In fact, the Securitisation ordinance itself had notched up some successes. Defaulters such as Parasrampuria, the Ispat and Lloyds groups, Ganesh Benzoplast and Kesar Enterprises all began to make small payments after a long period of zero repayment. Parasrampuria, in fact, had fought a pitched battle with its lenders, sometimes leading to ugly allegations and counter allegations. Although the amount is too tiny to crow about, one banker says, “many industrialists have forgotten how to take out their cheque books and sign checks for us; that they are making a small payment is itself a beginning”.

Term-lending institutions have also set up coordination committees to iron out differences between them and banks (which provide working capital). But clearly, one cannot expect miracles from this legislation. However, with tough recovery laws combined with lenders’ liability rules and a fair practices code, one can hope that banks and institutions will become far more flexible about fresh lending, especially to smaller and medium enterprises and start-ups. These are the fastest growing segments of Indian business and encouraging them will be necessary to spur growth and generate employment opportunities.

-- Sucheta Dalal