The first dose

It is always good to test a new law as quickly as possible. So compliments are due to ICICI Bank for acting against its biggest defaulting b...

It is always good to test a new law as quickly as possible. So compliments are due to ICICI Bank for acting against its biggest defaulting borrower, Mardia Chemicals, and getting hold of the company’s Vatwa plant in lieu of sums owed. This decisive action should not only act as a warning to other defaulting companies and force them to pay up, but should also give courage to other lenders to use the instrument of the new law. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Bill, 2002, empowers financial institutions to recover their funds from defaulters by taking over their assets. Regrettably, a recent Supreme Court decision has stayed the hand of the lender from disposing off such assets.

This was not a wise order since it forces the lending institution to in fact take charge of the management and reconstruction of the recovered asset. Banks and financial institutions are not always equipped to do this efficiently and effectively, nor indeed should they be forced into doing so by law.

They have every right to recover a loan in a tangible form, if the borrower defaults on payments, but why should they then be required to manage the asset so recovered? The issue is still pending before the Supreme Court and hopefully the learned judges will take a holistic view on the matter, viewing it from a managerial and business perspective apart from a legal one, and not kill the bill.

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The ICICI Bank’s action against Mardia Chemicals must embolden other financial institutions to also act. In this particular case, it is instructive to note that apart from this bank other lenders include IDBI, IFCI, UTI, LIC, GIC and IIBI.

While all of them did join the ICICI Bank in pursuing this case, a question does arise as to why other institutions have not been as active in pursuing defaulters. Partly there may well be a purely managerial explanation, in terms of the tenacity of some individuals in some institutions willing to go the extra mile in nabbing defaulters, but there is also, partly, a political dimension as well.

Most defaulters have strong political connections, in some cases they are related to politicians in power. The attitude of some public financial institutions in the action against Rasiklal Mardia, the promoter of Mardia Chemicals, may well have been coloured by the fact that his political connections are to those who are currently out of favour with the powers that be in New Delhi.

The real conviction of the lenders in making use of the new securitisation bill will be demonstrated when they also go after the politically better connected. For too long have public financial institutions used public money to enrich private promoters and contributed to the aphorism that there are only sick industries but no sick industrialists. Strong medicine for a few sick industrialists may restore the health of both industry and the financial sector.