The old saying that, ?If you owe the bank Rs 10,000, it?s your problem, and if you owe the bank a crore, it?s the bank?s problem?, has acquired a new meaning in India. Statistics show a worrying rise in wilful defaults by borrowers. Given inordinate delays in justice delivery by the Indian legal system, rogue borrowers make the simple calculation that it is not worth a bank?s while (and cost) to press charges aimed at recovering dues from them. Negotiated settlements, in their estimation, are what banks prefer, and that still allows them to sneak off with a disgustingly large chunk of the original debt. In the sedate language of Reserve Bank of India (RBI), these are non-performing assets (NPAs), against which the banking sector regulator has been issuing cautionary notes to Indian banks as a matter of routine.
Can tightening the law help? Attempts have been made. Debt recovery tribunals set up under the Recovery of Debt Act, 1993, which replaced a circa 1908 legislation, did a fairly decent job of issuing quick judgments on how much money was owed to whom, but banks lacked the power to take action in recovering their dues. Thus came the Securitisation Act, 2002, which empowered banks to go out and seize the secured assets of their debtors even without court orders. This sent out a ripple of fear, but did not help either, as mountains of objections were filed. The lack of emphasis on ascertaining debt positions, the focus of the earlier Act, has meant that very little has been recovered. The core problem continues to be the credibility of the Indian state as an effective arbitrator of debt disputes. While the NPAs problem festers, smaller borrowers get the raw end of the stick, as debt recovery agents get tough on them. The government and RBI should find a way to strengthen debt ascertainment processes and work towards an environment in which wilful defaulters cannot hide under stacks of legal documents. America?s subprime crisis has already made the banking sector cautious of lending exuberance, and it would injure India?s economic growth potential if such conservatism keeps credit away from those who deserve it. The last thing India needs right now, as signs of a slowdown emerge, is a credit crunch. The law ministry should work on closing the last big legal gap that worries bankers.