Why banks and FIs are not using the brahmastra?

The SARRAEST Act 2002, enables 75 percent or more of secured creditors to recover dues in a systematic way, but they hardly use this tool.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Act, 2002 [SARFAESI] Act, 2002 is a landmark legislation and potent tool in the hands of the harried creditors, but ironically, being used sparingly by them.  

It enables 75% or more of secured creditors (in terms of outstanding),namely, banks and financial institutions to take possession, without the leave of the Court, of the mortgage undertaking(s) of the borrower after serving a sixty day notice of the intention to do so when the loans and interest thereon are classified as non-performing assets (NPA) as per the RBI norms.  

In the face of mounting NPAs besetting our financial institutions, it is a trifle curious that they are not going for the jugular of the borrowers many of whom are willful defaulters.  True, our epics tell us brahmastra must be used only as a last resort but then our lenders indulge financial indiscipline and defaults almost masochistically.  

The Sick Industrial Companies (Special Provisions) Act, 1985 (the SICA) provided sanctuary for both crooks and genuine defaulters, with the BIFR at its wits’ end in telling between the two so much so that anyone approaching it invariably could keep the baying secured creditors at bay, thanks to the invidious provision in that law that conferred an automatic stay on coercive proceedings against the assets of the sick company. 

Small wonder crooks wore sickness on their sleeves. What is surprising is while the SICA made the secured creditors helpless, banks have been courting trouble to the point of self-flagellation by voluntarily agreeing to reschedule debts in the name of Corporate Debt Restructuring (CDR), a euphemism for molly-coddling financial indiscipline and defaults. 

In a milieu where Corporate Social Responsibility (CSR) is the buzzword, CDR is an anachronism.  The reason why CDR and not CSR rules the roost is not far to seek----crony capitalism and the politician-industrialists nexus.  

The pepper spraying MP from Andhra Pradesh, Rajagopal’s group companies led by LANCO, a Hyderabad-based listed company reportedly owes the Indian financial system a whopping Rs 35,000 crore (Rs 350 billion).

The defunct Kingfisher Airline’s flamboyant promoter Vijay Mallya has money to buy cricketers for his IPL team, but none to pay banks whom his company reportedly owes upwards of Rs 5,000 crore (Rs 50 billion)

Lest NPAs sink our banks and financial system, some energetic measures are called for.  The plausible reasons for them not going for the defaulting borrowers’ jugulars are:

* Poor project appraisal at the time of grant of loan

* Padding up the cost of capital assets with its implications of gold-plating and over invoicing and the concomitant kickbacks

* Absence of takers for undertakings on the block in an economy that has been sluggish for quite sometime now

They may apprehend that they may be stuck with stock of undertakings a la the income-tax department, which too said the preemptive purchase of immovable properties scheme to thwart tax evasion produced a negative side effect in a depressed market for properties.  So much so the scheme was discontinued. But banks must realize that the sacrifices involved in CDR at the end of the day will be a lot more than the loss arising out of possible distress sale of the seized undertakings.

At any rate, the government can relax its FDI norms in favor of such undertakings so that the harried banks can invite global tenders for sale, thus, heightening the chances of better realizations.

The government must realize that indulging borrower default is as repugnant as tax amnesty schemes given the demoralizing effect of both on the honest people.

The ultimate brahmastra of course is disgorgement order passed on the willful defaulters.  Section 266 of the Companies Act does vest the power on the Tribunal to pass a disgorgement order on the defaulting promoters and directors of sick companies if they are found to have misappropriated company’s funds directly or indirectly. 

While such orders must be passed, the institution of benami in the country often thwarts such efforts.

Conversion of outstanding into equity even partially should be a strict no-no.  Kingfisher lenders are holding the can now after being fobbed off with shares in lieu of a part of outstanding.

Lastly, we must emulate the USA, and mandate that legislators cannot earn income from other activities anything more than 15% of their income as legislators.  That would keep crony capitalists away from Parliament.

S Murlidharan is a chartered accountant