With non-performing assets (NPAs) of listed banks at R2.4 lakh crore as on December 2013, finance minister P Chidambaram recently called it the banking systemís biggest challenge. Chidambaram has asked banks to focus on recovery of bad loans.
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 ó including changes to management ó 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