Talking tough

On Tuesday, announcing measures to be used henceforth for the recovery of outstanding bank loans, the Finance Ministry and the Reserve Ban...

On Tuesday, announcing measures to be used henceforth for the recovery of outstanding bank loans, the Finance Ministry and the Reserve Bank of India sounded uncharacteristically tough. Not surprising then that the next morning8217;s reports were replete with images of crackdowns and whips being cracked. After all this, the public should be forgiven for thinking the Finance Ministry actually means to do something about reducing banks8217; non-performing assets which have shot up alarmingly over Rs 50,000 crore. However, it looks like another case of the bark being worse than the bite.

Tough language has been heard often enough in the past. Every time the guardians of the health of the banking system suffer an anxiety attack there is a flurry of statements about what needs to be done. Expert committees are set up and they, naturally, advise firm action. But as often as not, whatever action does follow is half-hearted and ineffective and the NPAs just keep piling up. So what is there about the tough talk this time to indicate a happier outcome? Unfortunately not very much.

There is an attempt to distinguish between big defaulters and small ones, the latter being those with outstanding loans of Rs 10 crore or less. A pragmatic sounding concept is the offer to small defaulters of a limited interest waiver. The intention here seems to be to concentrate on quick recovery rather than follow the legal route of referral to a debt recovery tribunal for an order, a protracted and no doubt frustrating process.

Some four out of five defaulters fall in the small category. But can these defaulters be persuaded to make a deal, to pay up minus a proportion of interest due on the loan? Yes and no. One group will not have the wherewithal to pay and this includes those who have had plenty of time to strip their assets and as well as those who had very few worthwhile assets to start with. The rest of the small defaulters will, perhaps, pay back their loans but only if the banks demonstrate unequivocally that they mean business, that they will go the full distance to recover their outstanding loans. At the very least that means the August 31 deadline will be missed.

In order to put the squeeze on small defaulters the banks will have to act against big defaulters. These big borrowers from the banking system are generally the ones with the most powerful political connections. So the banks have to steel themselves to act against them and to act not against one or two but against a sufficient number so as to send a message to all defaulters. Furthermore, legal action must reach a satisfactory conclusion, that is, receipt of orders from the tribunal must be followed by seizure and auction of property as provided under the law.

The successful completion of a number of big cases will be a salutary message to all defaulters. Only then will it be certain that there is to be no more laxness, or leniency or political interference. The banks and financial institutions must have the will to pull that off. Otherwise, the latest get-tough proposals will get nowhere. In banking as in many other fields the government and its agencies have to be seen to enforce the law and the rules.