Banks usu­ally at­tach prop­er­ties worth hun­dreds of crores in their fight against de­fault­ers but of­ten end up re­cov­er­ing only a pit­tance by sell­ing them as lengthy cases rapidly erode their value, says

The Economic Times - - Money & Banking -

Last year, banks, in the course of re­cov­er­ing thou­sands of crores of ru­pees due, got just ₹ 22 lakh from the sale of an ‘asset’ — not a piece of land in a re­mote cor­ner of the coun­try or a used Audi or Mercedes car, but for a de­faulter’s pri­vate ai rcra f t t hat costs crores of ru­pees. Years of wait for a court rul­ing had rusted the ma­chine and it had to be sold to a scrap dealer in­stead of some­one who could have used it. Si mila rly, on t he premises of a locked-up, dusty four-storeyed build­ing near Mum­bai’s busy Santa Cruz air­port lie nine rusting cars, scores of air con­di­tion­ers and bro­ken ta­bles and chairs. These are among as­sets banks have to sell to re­cover ₹ 9,000 crore from Vi­jay Mallya for de­fault­ing on loans to King­fisher Air­lines, but they again may end up as scrap by the time ver­dicts are given.

As bankers to politi­cians to in­ves­ti­ga­tors to reg­u­la­tors pass the par­cel on the sor­did story of banks’ bad loans, things such as the le­gal frame­work and it’s func­tion­ing, and the free­dom for bankers to act in the in­ter­ests of the de­pos­i­tors are miss­ing. Most of the time, an asset loses al­most all its value and in­vari­ably ends up as scrap by the time lenders’ get a court ver­dict in their favour.

“In In­dia, we have a lot of in­dus­trial parks that are full of empty sheds,” Re­serve Bank of In­dia Gover­nor Raghu­ram Ra­jan said re­cently. “Those sheds are not empty be­cause we don’t have en­trepreneurs who need space. They are empty be­cause there is some dead firm that is not al­lowed to die, which is the liv­ing dead. It is not al­lowed to go out of busi­ness. It has a hold over that shed. Can we ter­mi­nate it for the ben­e­fit of all con­cerned and put in a new en­tre­pre­neur­ial firm in that shed?” Gover­nor Ra­jan’s lament points to the dif­fi­cul­ties bankers face in throw­ing out failed busi­ness­men, ar­rive at a mar­ket de­ter­mined price for an asset even if it is lower than the orig­i­nal value, find a buyer for it and get it run­ning again. Right kind of laws, a ju­di­cial sys­tem that acts quickly, a state vig­i­lance team that un­der­stands busi­ness are the need of the hour. The av­er­age du­ra­tion for un­wind­ing a failed busi­ness in In­dia takes some 4.3 years com­pared to the South Asian re­gion’s av­er­age of 2.6 years. In In­dia, re­cov­ery value is lim­ited merely to 25%, while, in more ef­fi­cient bank­ruptcy ju­ris­dic­tions, the re­cov­ery value is greater than 60% in 1.8 years

Even if bankers act swiftly, the in­or­di­nate de­lays and the pe­cu­liar sys­tem of keep­ing as­sets un­used as dis­putes linger lead to de­te­ri­o­ra­tion in the pro­por­tion of dues that banks can col­lect. Pend­ing cases in Debt Re­cov­ery Tri­bunals rose 57% to 72 , 5 0 6 i n De­cem­ber 2015, from 46,224 in 2013, data pre­sented in Lok Sabha show. The amount in­volved is about ₹ 4 lakh crore, al­most re­flect­ing the bad loans num­ber. Against King­fisher, there are more than 20 cases pend­ing since 2012, on which courts have con­ducted over 500 hear­ings, and made 180 ad­journ­ments.

“Im­ple­men­ta­tion of time­lines in DRT and Sarfaesi cases has been a big prob­lem, the de­fault­ers take ad­journ­ments and un­for­tu­nately the process gets pro­longed,” said Biren­dra Ku­mar, MD, In­ter­na­tional Asset Re­con­struc­tion Com­pany. “Many of the benches in DRT and DRAT to­day have no pre­sid­ing of­fi­cers, re­cov­ery of­fi­cers or chair­man. There is so much crowd­ing of cases. There is an ab­so­lute need to fill up cur­rent benches are set up new ones.”

Stressed as­sets have surged to over 11% of to­tal loans and will only in­crease. Banks could re­port losses of ₹ 74,900 crore by the time their clean up their books by March 2017, ac­cord­ing to rat­ings com­pany Moody’s. “Even if one ob­tains an or­der from the DRT court, the same is sub­ject mat­ter of ap­peal in DRAT (Debt Re­cov­ery Ap­pel­late Tri­bunal),” Zul­fikar Me­mon of MZM Le­gal says. “And then the high court and the Supreme Court, which may take years, frus­trat­ing the en­tire pur­pose of at­tach­ing a prop­erty. The amount of money banks spend on lit­i­ga­tion is also booked as losses.” Bankers and asset re­con­struc­tion com­pa­nies are wor­ried as the con­di­tion of scores of steel and other plants are de­te­ri­o­rat­ing. While busi­ness case it­self has brought down their value due to their poor cash flow gen­er­a­tion, a lengthy shut­down re­sults in them be­ing taken only at scrap value.

“For some rea­son if you are not able to sell the asset, may be the prices have come down, may be the bor­rower has got a stay, may be you don’t get a buyer. Ul­ti­mately, the longer the de­lay, the more the fall in the value,” Ku­mar said. The pro­posed Bank­ruptcy Bill has many wel­come changes for the way banks can get back their money. It pro­vides a level play­ing field and enor­mous amount of power to cred­i­tors — gov­ern­ment agen­cies such as the In­come Tax and Ex­cise de­part­ments will be placed even be­low the un­se­cured cred­i­tors.

It pro­poses a time­line of 180 days — ex­tend­able by 90 days — to deal with ap­pli­ca­tions for re­solv­ing cases of insolvency. Dur­ing this pe­riod, the man­age­ment of the dis­tressed firm or debtor could be placed in the hands of a res­o­lu­tion pro­fes­sional — a new class of pro­fes­sion­als equipped to deal with such cases, which would be su-

Grow­ing Count

Right kind of laws, a ju­di­cial sys­tem that acts quickly, a state vig­i­lance team that un­der­stands busi­ness are the need of the hour

per­vised by a pro­posed new reg­u­la­tor. While the bank­ruptcy law winds through Par­lia­ment and gov­ern­ment sets up the in­fra­struc­ture, the ad­min­is­tra­tion has ac­cepted the need to boost bankers’morale.“We­have­tocre­ate­both po­lit­i­cal and eco­nomic en­vi­ron­ment for banks to have a healthy re­cov­ery,” says Union fi­nance min­is­ter Arun Jait­ley. “And that can’t take place in an en­vi­ron­ment of sus­pi­cion. Amend­ments to the Pre­ven­tion of Cor­rup­tion Act, and an om­buds­man-like mech­a­nism is on the anvil. These both will help. This would be a body which would cush­ion bank of­fi­cials on set­tle­ments,” he said.

But as these take time to be­come ef­fec­tive, banks brace for huge ero­sion in the value of the de­fault­ers’ as­sets they own, in­clud­ing fac­to­ries and rusting of­fice equip­ment.

“The large bor­row­ers could at least ti l l re­cently thumb their noses at t he cred­i­tors,” said Ra­jan. “And, the cred­i­tors found it very hard to get their money back. For­tu­nately, things are chang­ing.”

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