NPAs and stressed assets with the Banks are causing serious concern in government and business circles. Almost everyone is talking about how this is affecting our growth now and there is serious concern that this is dragging our nation back to low growth rate and seriously threatening financial health of our nation. RBI has come up with some guidelines for resolving the issue. We shall discuss the RBI steps separately in another piece. In any event given the seriousness of the situation the same may not be sufficient to redress the issue of NPAs.
At present there are two main legislations to deal with recovery of bad debts due to banks. Firstly there is the Recovery of Debts due to Banks and Financial Institutions and the Securitisation and Reconstruction of Financial Assets and enforcement of Security Interests Act which is generally called as the Securitisation Act. Both the legislations require establishment of huge number of Debt Recovery Tribunals to manage the litigations under these Acts. There is clear mandate to them to dispose the litigations in a time bound manner. For Application filed before it within 6 months and each appeal filed against the proceedings under Securitisation act within 4 months.
The Tribunals can be created by Finance Ministry with little difficulty. Yet the Ministry does not establish the same in required numbers, so that cases can be disposed off within the mandated time period. The lack of seriousness in the Ministry can be seen by the fact that thousands of pending cases before each judge. Is it practically not possible for a single tribunal with a single Presiding Officer (Judge) to hear and adjudicate thousands of cases within the above stipulated periods? This situation is quite serious with thousands of cases pending in some of the tribunals and nothing is done by Ministry to resolve the issue. The Ministry does nothing even when they have information. The present situation is that in most of the Tribunals, cases are pending for years making mockery of the statutory mandate of time bound disposal. Further in these tribunals, the actual recovery of the amount is left to recovery officers specifically created to execute the judgement and the recovery certificates issued by the Presiding Officer (Judge). In most of the tribunals these recovery officers are not appointed or if appointed found to be unable to perform their duties effectively as they are mainly deputed from other central government departments and thereby could not manage the litigants and recover the amounts as per the orders of the Presiding Officer (Judge) of the Tribunal. The failure of management of the litigations and failure to recover the amounts due to banks in a faster mode can only be attributed to Finance Ministry because it is the Finance Ministry under which these tribunals function.
There were also demands to make changes in the existing Insolvency laws which continue from pre Independence era. Yet nothing came out of it. As a result people who are facing a recovery suit for crores of rupees can continue to have good time where as the lenders are left to run from one court to another to recover their dues.
The procedure under Civil Procedure Code for the recovery of dues under a recovery suit is also completely out of date. It puts no obligation on the person against who the court passed a judgement and decree to do anything. The person who won the case and in whose favour the judgement and decree is passed once again is required take further steps like filing an execution petition and so on. In fact it is very difficult to actually execute any decree under any civil suit as per the Civil Procedure Code as the Order 21 of the Code left largely unchanged from British era.
One of the other urgent requirements is faster revival and rehabilitation of Companies under stress. While the new Companies Act 2013 was notified more than a year back, the National Company Law Tribunal and National Appellate Tribunal to be constituted under the said Act are yet to be constituted to do the same. Had the respective Ministries acted properly in creating and sustaining important judicial and quasi judicial institutions required in recovery of the bank dues and made them effective the same would have acted as a deterrent to other defaulters.
The infrastructure companies are suffering from serious financial problems due to various reasons. Huge borrowings outstanding against these companies are also cause for serious concern that these borrowers may turn into stressed assets. There is hardly any public holding of these companies’ shares and thereby there is no accountability of the management to shareholders etc. While the main promoter holding company in some cases is a public limited company, in most of the cases these companies are mainly held by promoters and respective authorities who had granted the concessions. (The word concession here does not mean any financial or other concessions etc but permission granted by the respective authority for the project) The actual paid up capital of these companies in many cases is a nil amount in reality. In most of the cases the construction and others costs are shown significantly higher than the actual amount.
This is further facilitated easily as the constructor or contractor for the project belongs to the same promoters. Many times cost over runs etc are rushed through by the lenders with little or no oversight or close examination. In many cases even when faced with serious financial difficulties the promoters were reluctant to dilute their share holding by going for a public issue etc or a private sale. In fact in most of the cases the shares held by the promoters of the infra companies are pledged to secure one borrowing or another. There is also no mortgage of personal assets of the promoters and their family members and not even personal guarantees of promoters and guarantees of directors for these borrowings. In earlier days bankers used to obtain personal guarantees mortgages of personal properties etc without fail. That practice is now discontinued. There is also no declaration of the details of the personal assets etc of the guarantors required as per the guidelines now so that lender can effectively enforce the personal guarantees given. This lack of personal financial risk on the promoters is a regular feature to large corporate landings particularly infra sector lending. This created a situation now wherein the infra structure business is almost no risk one for promoters, in which they can do anything they please with no accountability. This is not an insinuation of any serious and large scale wrong doings by corporate promoters, but the presence of serious risk which is a recipe for huge disaster similar waiting to happen in China.
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