A better system, not more laws

We have a tendency to look at everything as one views a chessboard: black or white. It is the same with the new ordinance that transfers at ...

We have a tendency to look at everything as one views a chessboard: black or white. It is the same with the new ordinance that transfers at one stroke power from the defaulter to the bank and indirectly says that there is something inherently wrong with our legal system. That’s so because we have laws to provide redress to harried banks, howsoever feeble they may be.

Until yesterday, I could not repay money borrowed from a bank under the umbrella of legal protection. Banks put forward the view that unless the borrowers were forced to surrender their assets, no progress could be made. And now, almost from nowhere, we will have in place a law that gives the banks the right to do exactly this. What will then happen to the BIFR, which will be out of business? More seriously, what are the issues involved here?

The problem really lies in the processes that keep the system guessing all the time. It would have made more sense if we had a law saying that every time a defaulter went for litigation cover, the case would have to be decided in 30 days’ time. But now the banks have the upper hand in deciding as to who should be punished. They can get hold of a defaulter irrespective of the malafide intent involved. In fact, they can even change the management if they think it is required. Banks, as we know, are all playing the numbers game. They have ambitious targets and can stretch them knowing full well that they are secure. Banks will be tempted to lend recklessly as they can always get hold of the borrower through this law.

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Now let us look at the borrowers. With such tough possibilities looming in case of default, they should logically look at the capital market. This is the first shift that can be seen, which will in a way be good for the latter. Let us assume now that the borrower goes to the intermediary and borrows money, which he cannot repay. The notice is served and he has the right to challenge it with the condition that he has to place 75 per cent of the amount with a Debt Recovery Tribunal. What happens if he does not have the money? Will he take another loan and provide manure to the evergreening process, which is already rampant? Alternatively, he can appeal against the notice served and let the legal processes work — ie, nothing really happens.

The basic message here is that we need to do something about polishing our systems first and not introduce more laws which will ‘take their own course’ ultimately. The financial sector needs to be more adept at assessing risk and this is imperative to ensure that Non Performing Assets are kept in check. Banks have not been willing to expose defaulters in the public, have not had the ability to assess risk adeptly, have been selectively evergreening their loans. How can we be sure that they will succeed now? The problem is merely being tossed around. A public debate on this issue is highly desirable.

(The writer is a Mumbai-based economist working with Larsen and Toubro Ltd. The views expressed here are his own)

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