Sucheta Dalal :When Banks And Borrowers Collude (24 June 2002)
Sucheta Dalal

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When Banks And Borrowers Collude (24 June 2002)  

For several years now, we have heard Indian banks and financial institutions whine incessantly about the slow legal system preventing them from going after defaulters. The bad loan numbers are truly colossal. A few months ago, law minister Arun Jaitley put things in perspective saying, the “government had a total budget of Rs 4 lakh crore, out of which Rs 1,10,000 crore was pending in the debt recovery tribunals (DRTs); which is almost 25 per cent of the total budget”. A bank chairman, in his recent article, blamed high non-performing assets on willful default, mismanagement and lack of planning. He said, “public money obtained from banks has been systematically siphoned away from our industries”.

Well, maybe it is time to examine the seriousness with which lending institutions chase these willful defaulters to recover their money; and how much of it is not recovered because of the corrupt nexus between banks and borrowers.

Since the government passed the Recovery of Debts due to Banks and Financial Institutions Act in 1993, DRTs have been struggling to do an effective job because of various constraints. But this column is not about the genuine infrastructure and staffing problems which handicap DRTs. It is an inside account of DRT operations in Mumbai (the same situation exists at other DRTs) and how the unholy nexus between bankers and defaulters is killing the new recovery system even before it takes off.

Since July 19, 1999, the Bombay High Court ceased to have jurisdiction over all recovery suits and proceedings pending before it and they stood transferred to the DRTs. Approximately 4,000 matters were pending before the court at that time for recovery of amounts exceeding Rs 10 lakh each, and they are presumed to have been transferred to the DRTs. Lending banks and institutions had to follow a simple procedure to get the DRT system to start handling their cases. They apply for the court appointed receiver to be discharged and have the case transferred to a receiver under the DRT. Otherwise, the matters simply languish while banks continue to spend money for the security and insurance of the seized assets while their value declines steadily.

Three presiding officers head the DRT in Mumbai and it has a panel of receivers. It is not as though the DRTs work perfectly. They operate out of barely functional facilities; the presiding officers, who are from the subordinate judiciary, have little experience of handling matters involving several hundred crores of rupees and often fail to follow summary procedures for recovery, even in cases which have been languishing in various courts for several years. Yet, the delay in recovery is largely at the lender’s end.

Since banks have always claimed that they are extremely keen on recovering bad loans, it is pertinent to find out how many out of the 4,000-odd cases pending with the Bombay High Court have actually been handed over to DRT receivers. The Mumbai DRT has three presiding officers and a panel of seven receivers. Yet, they are handling a paltry 150 cases. Of these, the receivers do not have physical transfer of assets in a 100-odd cases and barely 50 are being actively pursued. Only ten cases have actually reached their logical end with recovery proceedings completed.

The reluctance to pursue bad loans becomes obvious at the very stage of having court receivers discharged. My sources say that barring ICICI Ltd, no other bank or institution is serious about loan recovery (despite IDBI’s recently aggressive stance, it is rated as the most lackadaisical in pursuing bad loans — however it could well be that top management is unaware of the deliberate delays). Often, the officials from lending institutions who deal with the DRTs and its receivers are either uninformed about facts or do not have the authority to take decisions; so they waste a lot of time carrying messages back and forth from their bosses. The problems of one leading institution start with its compensation system. Its disinterested lawyers say that their low level of interest is directly in proportion to the money they get and its timely payment.

Some examples would illustrate various delaying tactics.

— The direct nexus: A railway wagon manufacturing company borrowed Rs 7 crore from a recently listed nationalised bank, which has now ballooned to over Rs 45 crore. The promoters’ own residential property, worth several crores at a posh Mumbai location, is pledged with this bank. But the receivers have only been allowed to recover Rs 50 lakh by selling movable assets. The bank’s lawyers have been stopped from proceeding with the DRT to sell fixed assets because the chairman would rather settle for a paltry Rs 5 crore.

— Fake tenancies: A forging company, which had borrowed over Rs 700 crore in the 1990s, has created a series of fake tenancies to stall recovery proceedings. In many cases, borrowers simply continue to use the assets without any payments. Lenders have not even moved to discharge the court receiver. Isn’t this a case of collusion?

— Theft of assets: A discredited former sub-inspector is a DRT receiver in Karnataka. He also runs a security service. Recently, his people were caught stealing from a property in his charge. He has not been replaced. In other cases, industrialists are known to strip everything from furniture to bulbs and electrical fittings when courts move to claim assets.

— Bad handling: Another Karnataka-based company was to produce 10,000 tpa of polynosic fibre. It bought a Rs 6 crore second-hand plant, which it claimed was five years old but turned out to be of 1942 vintage. The plant did not work for a single day. Fortunately, even its scrap was extremely valuable. It had platinum spinnerets worth Rs 4 crore which have been transported to safety to a State Bank locker in Bangalore. Strangely, the lenders are in no hurry to recover their money even though the company has 212 acres of land and other assets.

— Engineering labour unrest: A former cricketer’s Sholapur-based textile company owes over Rs 220 crore to 13 banks. It instigated a workers’ agitation and moved the labour court to sabotage recovery proceedings. The DRT has ordered lenders to move the labour court to vacate proceedings; but they are in no hurry to comply.

These examples have several hundred others in the same category — many of them are being written off by aggressive institutional heads. It is probably time to review these delays and put in checks to improve accountability on the part of lending institutions

-- Sucheta Dalal