In a year-end letter addressed to all his colleagues in the Reserve Bank of India, Governor Raghuram Rajan has yet again exhorted regulatory and banking institutions in the country to demonstrate that India is not a weak state when it comes to bringing the big loan defaulters to book. “Not only are we accused of not having the administrative capacity of ferreting out wrongdoing, we do not punish the wrong-doer — unless he is small and weak. This belief feeds on itself. No one wants to go after the rich and well-connected wrong-doer, which means they get away with even more,” he wrote. This is not the first time that Rajan has raised this issue. On November 25, 2014, while delivering the third “Dr Verghese Kurien Memorial Lecture” at the Institute of Rural Management, Anand, Rajan had launched a scathing attack on the dominant banking culture in India, which works like a net that lets the big defaulters, including industrialists who have spent unwisely and lost huge amounts of money, escape without any penalties by restructuring their debts, while catching only the small borrowers. The backdrop of Rajan’s lecture, then, was the growing burden of restructured debts.
Rajan had pointed out that the amount recovered from cases decided in 2013-14 under the Debt Recovery Tribunals was Rs 30,590 crore — or just 13 per cent of the total amount at stake. Worse still, these cases were estimated to take four years, instead of the mandated six months under the law, to resolve. It is not surprising that often this inability to make big business comply has led to allegations of crony capitalism. Rajan’s latest missive suggests that much still needs to be done and that lack of compliance continues to pose a challenge to the viability of the banking system.
To be sure, under Rajan the RBI initiated the Strategic Debt Restructuring (SDR), which allows creditor banks to convert their unpaid loan into equity and take a majority ownership of the troubled firms. This then allows the banks to look for new owners and redeem their investment. But till now, the SDR has been used by banks in nine cases, and there are question marks on its efficacy as an instrument to enforce compliance.
In this context, the government can help the RBI’s cause by passing the long-pending bankruptcy code. One of the key reasons why large defaulters tend to get away is that they can seek legal recourse, which is a very long-drawn-out process in India.
Under the proposed bankruptcy code, a solution will have to be found within 180 days.