New Delhi/ Mumbai: Banks have full authority and autonomy to deal with wilful defaulters, finance minister Arun Jaitley said on Monday, while asking them to speed up the process of cleaning up their balance sheets.
“Banks have full authority and autonomy to deal with each wilful defaulter,” he said here when asked to comment on State Bank of India’s recent move to declare promoter Kingfisher Airlines as a wilful defaulter. Jaitley, however, refused to comment on the Kingfisher case saying that he would not comment on ‘individual accounts’.
In case of a default, although various recourses such as taking the promoter to court, invoking the Sarfesai Act are available for banks, the process is cumbersome. For instance, Kingfisher Airlines was grounded in 2012, but it was only in February this year that creditor banks got possession of Kingfisher House estimated to be worth Rs 100 crore.
Arun Jaitley’s commenÂts came even as Mumbai-based engineering and conÂsÂtruction firm Gammon India disclosed in a stock market filing on Monday that its lenders have begun a process to swap their debt into equity under the so-called strategic debt restructuring scheme. The company did not give further details.
In June, banking regulator Reserve Bank of India allowed lenders to temporarily take control of a company under its strategic debt restructuring scheme. The rules for declaring a company and its officials as wilful defaulters have been around for a long time, but Jaitley’s comments assume significance as it signals to banks to get tough on defaulters without looking behind their back.
Jaitley’s comments also assume significance in the context of the latest report by rating agency ICRA warning that the banking system is understating stressed assets by restructuring loans under the 5/25 scheme.
Gross non-performing assets of public sector banks have increased to 5.6 per cent in September compared with 5 per cent as in March. In the past too government has said that banks have full operational freedom and the government would not interfere in their functioning. Wilful defaulter is the one who does not pay back loans despite being in the position to do so. It includes both the company and its key directors.
“The country does not have a single bankruptcy code, but an assortment of laws that govern insolvency. According to reports, there are nearly 60,000 bankruptcy cases that are languishing in courts. The legal system has so many loopholes that promoters can misuse, also it takes years for banks to recover their dues, that’s why the bankruptcy code is in the offing and it would ease that length of time,” said an executive director of a public sector bank.
As per RBI rules, once a a customer is declared a wilful defaulter, he is not allowed to access credit from any source. Even loans for new ventures that a defaulter might float are cut-off for five years. Once a borrower is tagged a wilful defaulter, banks can even initiate criminal proceedings against him.
One of the key hurdles coming in the way of recovery of loans from big defaulters is that the money is typically raised from a consortium of banks. In the past, it was very difficult to bring all lenders on a common platform, but now the RBI has asked banks which have lent as part of a consortium to form joint lender forum to recover loans. In a recent circular, the RBI had asked banks to depute senior officials to these fora so that efficacy of the forum could be improved.
The draft of the new bankruptcy law proposes empowering a single bank that may have lent as a part of a consortium to proceed against the borrower who has defaulted on loans without waiting for others to join in. The process to get someone declared a wilful defaulter is a long-drawn process and people of means manage to delay that process through stays from courts, former chairman and managing director of Oriental Bank of Commerce SL Bansal said.
In June the RBI introduced strategic debt conversion (SDR) norms that give lenders the right to convert their outstanding loans into a majority equity stake if the borrower fails to meet conditions stipulated under the restructuring package. Allowing loan conversion will now be a precondition for all debt restructuring deals.
Jaitley also said that overall NPAs of banks would start coming down “within a reasonable timeframe.” He said that some of the NPAs are due to impact of global factors on local industry here.
Jaitley said banks have suggested ways to deal with the problems of stressed assets in the steel and aluminium sectors. Both steel and aluminium are facing problems, as globally prices of these commodities have fallen substantially and imports have skyrocketed.
The commerce and revenue departments are trying to see in which areas the stress is due to global factors and address them, Jaitley said. He added that government has also made efforts to address the problem of bad debts of state-owned power distribution companies under the new scheme of Uday. The Icra report cited earlier also said that for private banks, gross NPAs were 2.2 per cent versus 2 per cent in March. Within public sector banks, State Bank of India group fared much better on asset quality with gross NPAs of 4.3 per cent as in September.
“Moderation in pace of stressed assets formation (from 5.6 per cent in FY15 to 3.3 per cent in H1FY16) though partly is due to refinancing of large exposures under 5/25 scheme. Stressed assets have remained largely unchanged at 10.7 per cent as in September 2015,” Icra said.
In its August policy, RBI governor Raghuram Rajan had said that he would penalise banks for fudging bad loan numbers and reviewing loans under the 5/25 scheme. Many experts have been saying that banks could misuse the scheme for hiding stressed assets. The scheme allows lenders to give borrowers 25 years to repay existing loans with a review every five years.
The meeting with Jaitley was attended by SBI chairperson Arundhati Bhattacharya, public sector bank heads, RBI officials and secretaries of various departments to discuss rising bad loans in different sectors, including steel, credit offtake, health of the lenders and status of social security schemes.
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