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Why India has failed to deal with bad loans

By Somasekhar Sundaresan
March 29, 2016 14:29 IST
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The problem of stressed assets needs to be addressed with effective recovery, says Somasekhar Sundaresan. 


The banking sector in India is reeling under the stress of stressed assets.

Baby steps are now being taken to deal with the crisis - a bit like digging a well for water when one is parched with thirst.

Most of the steps now being taken had been recommended for action two years ago.

Some of the steps that are critical are even now not being addressed on the war footing that is necessary.

Finally, the "Banks Board Bureau" (BBB) is being made functional with the appointment of former Comptroller and Auditor General Vinod Rai.

A man who oversaw propriety in conduct of the government would be a naturally good choice to oversee who should oversee propriety in governing banks - the BBB would select who sits on public sector bank boards.

However, this was a measure recommended in May 2014 by the PJ Nayak Committee (disclosure: the author was a part of the committee) but was not acted upon until now.

In that report, the BBB was envisaged merely as a transitory feature - a prelude to setting up an investment company to hold the government's stakes and govern the governance of the various public sector banks.

The BBB is not exactly just a "band-aid" in times of surgical intervention, but it is not more than an empanelment process for identifying surgeons to be appointed, initiated when the patients have already been laid up in the operation theatre.

Under the Nayak Committee recommendations, all board appointments were to be recommended by the BBB until the investment company was established.

The BBB was to be eventually transitioned into the Bank Investment Committee (BIC), and the BIC was meant to play the role of a professional shareholder strengthening the respective boards of the respective banks to govern themselves well.

There is no sign of real action being initiated on these subsequent phases.

They are the real end and the BBB was only a means to that end.

Yet, all of this collectively can at best represent just one element of reform needed.

The problem of stressed assets needs to be addressed with effective recovery.

Recovery cannot be effected by debates on prime-time television demonising industrialists who were once celebrated.

Litigation needs to be handled, smoothly conducted, fairly processed, and judicially resolved.

Lenders would tend to paint the borrower in the worst light to cover up their past blunders.

The borrowers would tend to blame the lenders for everything that went wrong with the business and cover up their past lies.

The truth has to be established - fairly, squarely and within a reasonable period of time.

The system is simply not equipped to enable that to happen.

Ask any bank chairman about the most intensely fought recovery proceedings and you would find that there is simply no dearth of the "law" to deal with recovery, but what is woefully lacking is the infrastructure to process the recovery.

Dozens of "hearings" (now a euphemism for the date on which some minor process in the proceedings gets handled - say, fixing of a date to file a reply or a rejoinder is also a "hearing") can go by spread across months, with no sign of even beginning to establish the issues to be dealt with in the proceedings.

According to the State Bank of India chairman, in the Vijay Mallya case alone 81 hearings have been held since 2013 and they are yet to really start the recovery.

The Debt Recovery Tribunal is not manned adequately, either judicially or in terms of support staff with any logical linkage to the burden on its shoulders.

We have 13 judges per million of our population. The global norm is 50 per million.

That we still have a system that works without anarchy taking over the nation is because of judges who play the role of supermen and superwomen.

The infrastructure support given to the judiciary, too, has no linkage to the workload.

No modelling is done to envisage the scale of work a court would need to handle when a new law gets written - for example, when the juvenile justice law was amended to say that kids under 18 should be treated as adults, there would be no study to examine how many more support the criminal justice system would need to handle that many more cases. 

Throwing another law at the problem can never solve it.

A new law on bankruptcy has been tabled in Parliament, but that would hardly matter if the court system that needs to handle this new law is not bolstered and supported to play the role envisaged.

While our judiciary is independent in job content, it is naturally dependent on the executive for any charge on the fisc - "sanctioned" bench strength cannot be expanded by the judiciary on its own.

Even the sanctioned strength does not really get filled up as effectively.

Deeply divisive squabbles over appointment of judges has not helped the situation either - after months of stand-off, one round of appointment of judges to high courts has finally been initiated in the past few days.

When a problem rages like cancer, even surgical cuts can start resembling band-aids.

It is time to sit up and take a holistic view of the state of law enforcement to handle the real threats to the idea of a prosperous developed India.

The author is a partner of JSA, Advocates & Solicitors. Views expressed are his own.

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