Faster recovery a shot in the arm for bankers

The section in the report of the committee on a new bankruptcy law, submitted on Wednesday, on speeding the process of fund recovery will be a shot in the arm for banks, if accepted. They could then take charge of the entire business for a single default by a borrower. According to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, the trigger for a bank to enforce its security starts after 90 days, after the loan becomes non-performing.

"According to the proposals of the committee, a bankruptcy petition can be filed the next day after a company has defaulted. One single default and the promoter can lose control of his enterprise," said M R Umarji, member of the committee and former member of the Indian Banks Association. "This will make the promoters more serious about repaying their dues on time."

Reserve Bank governor Raghuram Rajan has also spoken of the need for an effective law. "In India, too, many large borrowers insist on their divine right to stay in control, despite unwillingness to put in new money. The firm and its many workers, as well as past bank loans, are hostages in this game of chicken - the promoter threatens to run the enterprise into the ground unless the government, banks and regulators make the concessions necessary to keep it alive," he'd said.

The committee has recommended six to a maximum of nine months to deal with insolvency and enable winding-up of operations of a company or a limited liability entity.

Ashvin Parekh, head of Ashvin Parekh Advisory Services, says the proposed code is likely to be more effective than the earlier regulations. "The concept has been derived from the US Insolvency Act, which envisages different situations if the credit is not paid off and is fairly detailed. I believe that establishing a regulator is the most prudent of the recommendations, as it can tackle the different issues effectively. However, there is one major loophole -how do you determine if there is any value left and who do you give it back to?" If accepted, the proposals are also likely to boost the corporate bond market, as unsecured lenders are given priority. Bankers say bond holders get least priority in the present rules.

The situation now is an improvement over previous regimes. Bankers said the system now has credit information bureaus and some turnaround specialists/entities. The resolution process would be managed on professional lines, with an eye on timelines and financial health.

"While showing willingness to adopt the new regime with open arms, bankers are cautious about the enforcement, wise from bad experience with implementation of previous laws," said a senior IDBI Bank official.