Sidharth Birla, president of industry body Ficci, feels banks are also to be blamed for the rise in bad loans as they have not taken swift action against wilful defaulters by enforcing contracts. In an interview with Arun S, Birla said it is important that banks adopt stern measures including changes to management against companies promoted by wilful defaulters. He also said a mechanism similar to Chapter 11 of the US Bankruptcy Code will help Indian banks quickly put to use the assets of loss-making companies. Excerpts
You said the absence of specific NPA data was complicating the problem. Can you elaborate
The problem of NPAs can be handled well if they are divided into three categories with separate data on each. The first, where NPAs happened as a result of projects being stalled due to lack of clearances, external circumstances and economic slowdown, but where the company and its business model are not impaired. The second is where the company has made losses and it is financially impaired due to a faulty business model. The third is the wilful defaulter category, where the company/promoter has the ability to pay, but is not doing so.
How will these data help solve the problem
The NPAs falling in the first category can be turned around if there is proper management action and decision-making from the government, including by the Cabinet Committee on Investment.
In the second category, the promoter has to be encouraged to sell off hard assets so that they can be put to use. Banks might have lent crores of rupees against the asset, but the company is unable to pay back anything. We need to have something similar to the Chapter 11 (of the US Bankruptcy Code) that the US has, which goes beyond our Board for Industrial and Financial Reconstruction process.
Under Chapter 11, the sick company's hard assets, which are capable of being used, are not wasted. We should also ensure that hard assets are taken out of such loss-making companies and used, and the liabilities are left in a shell to be dealt with separately.
For instance, Braniff Airlines filed for Chapter 11 bankruptcy one evening, but it was flying next morning because it was simply another company where the assets were kept in use. Unfortunately, in India, even where certain companies have made losses and loans have turned bad, the assets are heavily under-utilised, further damaging our economy.
With the wilful defaulters, whatever can be done should be done, including change of management and liquidation.
Ideally, there needs to be a high-level review of bad loans at the top political level, finance ministry and the RBI, but it should not include banks as they may not take a neutral stance on their loans and borrowers. The high-level panel should help in dealing with wilful defaulters expeditiously.
As for non-wilful defaulters, the panel should decide on what can be done to bring those assets to use. For instance, in the coal-block allocation case, the government told the Supreme Court that companies had invested around R2 lakh crore in their coal mine sites as hard assets. But due to licence cancellation, can the country afford to not use the R2-lakh-crore worth of assets Of the R2 lakh crore, around R1.5-1.6 lakh crore must have come from the banking system and the rest R40,000 crore is investors money. So can a person deemed by the court to be holding the licence illegally be replaced quickly so that the asset can be used The high-level panel should take a call in a responsible and transparent way on such non-wilful defaults, and see how assets can be put back to full use.
The finance minister and the RBI governor have come down heavily on wilful defaulters. Do you think industry bodies such as yours are vocal enough against these defaulters Have you done something that can be a deterrent
Wilful defaults also indicate gross corporate governance failures. These are people who have run away with the banks' money, or have the ability to pay but are not paying. If they don't have the intention to repay, they can't justify it by saying that the entire sector is suffering. We (at Ficci) are trying to see what can be done beyond just advocating good governance. However, the banking system itself is not doing much about wilful defaulters. There are several cases against listed companies where the bank has issued a notice and published in the newspaper that the company/promoter is a wilful defaulter. But that listed company does not tell Sebi that it is a wilful defaulter, or that it has got notices.
So, as an industry body, should we believe the bank or the company, especially when after several months the bank has not taken any action, including invoking the promoter's personal guarantee, or seizing the assets using Sarfaesi law provisions, or even approaching the courts Ultimately, the banking system should take action. We (at Ficci) say enforcement of contracts is important. The loan is a contract that says in case of default what all the bank can do. So, if banks enforce the contracts, we are not going to come out in defence of a wilful defaulter. At the same time, we say that please respect those who are genuinely stressed. The finance minister and the RBI governor also said they have asked the banks to be careful that genuine cases do not suffer.