Don't show any mercy to wilful defaulters
The fast-track process against 12 large corporate defaulters before the National Company Law Tribunal (NCLT) has not come a day too soon. The Insolvency and Bankruptcy Code, brought in by recent legislation, provides a 180-day window for companies to restructure or exit.
The deep malaise gripping banks has a lot to do with large corporate groups failing to pay back what they have borrowed, euphemistically called non-performing assets (NPAs). The spin-off effect, that banks don’t have enough money to lend, is only adding to their woes, and to ours. Indian state-owned banks need an infusion, or re-capitalisation, of around Rs 4 lakh crore to run an averagely healthy lending system.
The ‘crisis’ figures are indeed mind-boggling! The NPAs of banks had ballooned from around Rs 2.6 lakh crore in April 2014 to about Rs 7.3 lakh crore by the end of March this year. Bad loans constitute around 12 percent of total advances of state-owned banks. For some of the laggardslike Indian Overseas Bank (IOB)’s NPAs totalled Rs 35,098 crore at the end of FY17, or 22 percent of its total lending. IOB registered a net loss of Rs 647 crore in the last quarter.
In this depressing scenario, it was perhaps a good idea for the Reserve Bank of India (RBI) to focus on 12 of the worst defaulters and make an example of them – companies like Lanco Infratech, Bhushan Steel and Essar Steel each of whose defaults are in excess of Rs 40,000 crore! The 12 companies account for NPAs around Rs 2.5 lakh crore, or around 25 percent of the total NPAs afflicting the banking system. This is not just statistical data for analysts. Bad loans translate into less money for lending to small businesses and home buyers, becoming a roadblock to growth.
Brutal and quick process
Some of the banks have already moved against 7-8 of the defaulters and filed proceedings before the National Company Law Tribunal. The process is likely to be brutal and quick. An Interim Resolution Professional (IRP) is appointed for a 30-day window. IRP takes over management from the company board, and comes up with a working proposal for either restructuring or winding up of the company.
One way is deep restructuring which may include a ‘haircut’ or waiver of a part of the loan. In a case where there is no future, the NCLT may order closure and disposal of the assets. Many will fit in this category. For example, what is the raison d’etre for ABG Shipyard to continue when it has bad loans of Rs 8,700 crore and shows annual revenue of Rs 38 crore? It is better it be consigned to the dustbin as nothing can save it. That’s how capitalism should work!
As the chairman of the Insolvency & Bankruptcy Board, M S Sahoo said: the 1990s gave private businesses the freedom of entry; the 2000s gave them the freedom of competition; and now the 2010s closes the circle with the ‘freedom to exit’. There will be teething trouble and legal wrangles; however, with the Gujarat High Court dismissing the Essar challenge against the June RBI circular for selecting 12 defaulting companies for action, shows there is little stomach left for long-winded delaying tactics.
Crony capitalism
Meanwhile, those officials who have allowed these loans to pile up seem to have gone scot-free. In the case of Bhushan Steel, the CMD of Syndicate Bank, Sudhir Kumar Jain, was caught red-handed in 2014 accepting a bribe for extending a credit line to the beleaguered company. There are hundredsof such officers who for a few pennies have sent their banks to the cleaners. They are the worst culprits. They have lent favoured companies knowing these loans will never be paid back. Recovery proceedings and strict criminal action for having allowed their own banks to be looted must be pressed parallel to the insolvency cases.
There is another serious worry – that the Insolvency Code may be bent to favour some by offering a sweet restructuring deal, while arbitrarily cherry-picking few others for closure. The Gujarat High Court, in its judgement, voiced these fears saying: “It would be appropriate for RBI to see that the benefit of all its schemes is equally offered and extended to all without any discrimination.” Crony capitalism is the flavour of the season, but it should be kept out of these crucial bank recovery proceedings.
[The author can be contacted at gurbir1@gmail.com]