Lenders' liability

BS OPINION

An important issue that emerges from the face-off between BPL Mobile and ICICI on who is responsible for delaying BPL's funding, is the need for a law, or code, on lenders' liability, of the type the government was working on when the Securitisation Bill was passed by Parliament.

While lenders now have a fast-track mechanism to seize assets in case borrowers default on their commitments, there is no such reciprocal facility for borrowers when bankers fail to honour their commitments in terms of disbursing funds on time.

It is true that, as part of the contracts they sign with a bank, borrowers can take a bank to court for breach of contract, but that's a process that can take enormous time "" a period in which their needs for fresh credit will not be looked upon too favourably by other banks either.

The BPL case itself is quite a simple one. In 1998, BPL signed an agreement with ICICI for underwriting a loan of Rs 1,000 crore at a commission of 2.5 per cent.

The financial closure of the project was supposed to be April 2000, yet closure took place only in July this year, after BPL persuaded the finance minister to personally look into the matter.

BPL says that instead of making the money available to it at a competitive pre-negotiated rate, ICICI gave it more expensive bridge loans, and this cost an additional Rs 778 crore, which affected its competitiveness and ruined its business plans.

ICICI, in turn, has given several reasons to the banking regulator, the RBI, for the delay, ranging from the change in telecom policy in 1999 (this seems a weak argument as the new policy reduced licence fees and would therefore have made the project look better), to a more credible argument that the company's cash flows were poor "" against a projected pre-provisions earnings of Rs 511 crore in 2001-02, the actuals were only Rs 55 crore, and so the company was not able to service debt on time.

While the matter finally was examined by the RBI after the banking secretary wrote to its governor, the banking regulator doesn't appear to have taken a firm view on the matter, and has chosen to quote both ICICI and BPL's versions of who was to blame.

It says BPL's project implementation did not suffer because ICICI funded it through bridge loans, but then quotes BPL executives as saying this resulted in an additional interest burden on the company "" which surely would have hit cash flows and upset project calculations.

The regulator has also circulated a Fair Practice Code for Lenders (in May 2003) that is supposed to take care of future disputes about financial closure.

The Code may achieve little, since it is up to the individual bank to lay down the appropriate grievance redressal mechanism, and these disputes are generally to be heard at the 'next higher level' within the same bank.

What is needed instead is to have a more proactive regulatory mechanism, if need be through a law on lenders' liability, to deal with borrowers who feel they've been given the short end of the stick by banks.

India has been in the midst of an acute investment famine for a few years now, and the last thing it needs is to let disputes between borrowers and lenders become another reason for putting off the setting up of greenfield ventures.