FE Editorial : Debt defaults

Written by The Financial Express | Updated: Jun 7 2012, 07:23am hrs
One of the key lessons that corporate and governments will have to learn in this period of downturn is that debt defaults will be more common than India has ever seen. More, the defaults will also happen in the public sector (witness Air India). Ergo, it follows that a significant element in how fast India will recover from here will depend on how it will handle this debt overhang. It is estimated that in the first two months of the current fiscal, an aggregate loan value of R14,000 crore has been referred to the CDR cell and this trend of loans recast has been growing for quite some time. While the aggregate debt referred to CDR rose 49% to R2,06,493 crore in 392 cases as on March 2012 as compared with R1,38,604 crore in 305 cases during the same period last year, the actual loans recast rose 36% to R1,50,515 crore for 292 cases as on March 2012. On a day when finance minister Pranab Mukherjee spoke to the Debt Recovery Tribunals, these numbers provide a useful perspective. It is, for instance, impossible to expect that given the huge jump in the number of cases landing up in the tribunals, they can mechanically follow the 180-day rule to settle the cases. The time limit could lead to a perverse incentive to move towards foreclosure of loans that might otherwise have a chance to become standard again, once better conditions return to the economy. While this is a new perspective on the performance of the corporate sector, it is also necessary at the same time to devise stronger methods to eliminate the rogues in the corporate sector who might deliberately wish to prolong the cases.

In this context, it will be better to frame a more robust bankruptcy code for the Indian economy. Banks should have a larger management role in companies that land up before the DRTs and insist that the promoter relinquish some equity stake in case of debt restructuring. The role of Indias largest debt reconstruction company Arcil is a useful guide. Instead of long discussions on who holds the fiduciary responsibilities for distressed assets, Arcil has extended its expertise to act as the recovery agent of the banks, while allowing the portfolio to remain on the latters balance sheet.

Typically, then, there will be a range of answers as debt problems mount for some time. And as with other sectors of the economy, the problem here is the lack of adequate trained manpower. But at a time when the percentage of gross non-performing assets of 40 private and public sector banks has risen to 3% in the quarter ending March 2012 as compared with 2.32% in the same quarter of last year, debt default is something the economy has little option but to tackle with a lot of interest.