Never a borrower

First, with less money at their disposal, future lending gets sharply curtailed. Second, since banks and financial institutions have to make provision for this debt never being repaid, this also adds to their expenditure 8212; this ensures when banks lend, they have to do so only at a higher rate of interest. That, in turn, curbs fresh investment in the country.

Of course, the FIs sending out these notices, albeit under the aegis of a tough new ordinance on recoveries of dud loans, will not automatically translate into huge recoveries. In a couple of instances in the past, FIs have taken over control of firms which have consistently defaulted on loans, but this hasn8217;t helped them either. For, in the ultimate analysis, the job of banks and FIs is not to run plants. In order to get their money back, they need to be able to sell these plants to someone else, or close them down and then sell them. That, in an Indian scenario, where it can take upwards of a decade to close a company, is always going to be an uphill task.

Even so the law is an excellent start, as it shuts off a common avenue used by most defaulting corporates. Most declare themselves sick, and then spend the next decade or so under the protection of the BIFR 8212; under the new law, defaulter firms are prevented from appealing to the BIFR. Now, if only the government would make serious moves on making it easier for firms to close down 8212; this was a budget promise made by Yashwant Sinha last year. It will also free up several tens of thousands of crore which are today blocked in sick firms that have not been allowed to close down.

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