Why not transfer large defaulter cases to Supreme Court, hold daily hearings and give a quick ruling?
Given the way defaulters like Vijay Mallya continue to cock a snook at the banks, and make audacious settlement offers after years of running circles around banks – the settlement he offered was less than half the amount he owed the banks – it is perhaps natural to react the way the Supreme Court (SC) has, and want to disclose the amount of money owed to banks by defaulters. While RBI has asked the SC not to declare the names of defaulters since there are confidentiality issues involved, it has done well to request the apex court not to release the amount either – the matter is still being heard – since there could be larger implications. If the number is as large as the SC is indicating, just putting the number out will frighten most bank managements from lending to large industrial/infrastructural projects which tend to be a lot riskier – who would want to risk a midnight call from the investigation agencies in the autumn of one’s life for a loan given since, in the muddled discourse that we have, defaulters are automatically being equated with thieves.
And while it sounds politically correct to juxtapose the seeming ease of default with the pain faced by small borrowers, the Chief Justice of India exaggerated the matter when he said, in the course of the hearing, “people are taking thousands of crore to run their empires and later declare insolvency and do restructuring in BIFR only to take more loans from other sources … this is when poor farmers are driven to suicide for being unable to pay their small debts’.
Data from the central bank makes this clear. For FY15, of the gross NPAs of Rs 298,700 crore, Rs 103,100 crore came from priority sector loans – these are loans made to farmers and others, not to fat-cat industrialists. Indeed, as a proportion of the loans made, 4.9% of priority sector loans were NPA as compared to 4.7% in the case of non-priority sector loans. If farmers don’t figure in the list of defaulters, it is probably because their loans have been written off in the series of loan waivers we’ve had over the decades.
It is, of course, true that there are several borrowers who did siphon off money from their companies and fall in the category the Chief Justice was talking of. There are an equally large number who are not NPAs/defaulters only because their loans are so large that declaring them as NPAs would hurt the bank, so banks prefer to find ways to rollover/evergreen their loans – in the latest update of its House of Debt series, Credit Suisse argues that a large part of the loans given to the 10-most indebted firms are still classified as standard assets in the books of banks even though these firms are too broke to pay even the interest costs on their borrowings. Which means, after the sharp Rs 99,000 crore hike in NPAs declared by banks in the December 2015 quarter, you can expect an equally if not sharper hike in NPAs in the March 2016 quarter.
That said, the role of the courts is not blameless either, and that is something the SC has to keep in mind while asking RBI and the banks uncomfortable questions on why the build-up of bad loans was allowed to go on unchecked. According to data put out by RBI Governor Raghuram Rajan in a speech in November 2014, the total amount recovered through Debt Recovery Tribunals where banks file cases against defaulters was Rs 30,590 crore in FY14 – this is a mere 13% of the Rs 236,600 crore worth of cases the banks had filed. Put another way, over Rs 200,000 crore of defaulters wouldn’t be on the list of defaulters today had the DRTs done their job properly. Indeed, according to Rajan, while the law stipulates that a DRT must dispose off a case in 6 months, the delays suggest it will take a minimum of 48 months to clear a case assuming that there is no build up of fresh cases in this period.
Part of the problem, undoubtedly, is that of the government which has not adequately staffed the DRTs and the appellate tribunals to which appeals of DRT rulings are made, but the fact is that all tribunals come under the jurisdiction of the high courts in their respective territories. Indeed, as Rajan pointed out, the SC was not happy with the way various high courts were giving relief to defaulters – Rajan quoted a judgment of the SC which said, “It is a matter of serious concern that despite the pronouncements of this Court, the High Courts continue to ignore the availability of statutory remedies under the RDDBFI Act and SARFAESI Act and exercise jurisdiction under Article 226 for passing orders which have serious adverse impact on the right of banks and other financial institutions to recover their dues.” Just look at the delays SBI is facing in getting decrees on Mallya’s properties to know how long it takes to get defaulter money back.
While passing around blame is easy – the finance minister has, in any case, promised to staff the DRT process more liberally – there is a simpler solution that can be tried, with the SC’s blessings. The SC could, for a few big defaulters like Mallya, instruct courts across the country that all proceedings will be transferred to it; if daily hearings are then made, some judgments can be given as early as a few months. This will also send out a very powerful message to other defaulters. The ball is really in the SC’s court, not in that of either the RBI or the banks.