As per a news report in the Businessline, Financial Newspaper of the Hindu, dated 5th July, 2002 (online, Mumbai Edition)

"BANKERS are not too enthused by the recently passed ordinance on securitisation and reconstruction of financial assets. The ordinance, which was expected to help banks in recovery and reduction of their bad debts, may fall short just where it was required, bankers said."

Though the Ordinance effectively covers measures for recovery of secured bad debts under Section 13 of the Ordinance, it does not contain any provision for tackling unsecured NPAs, for which 100% provision has already been made by the Banks. In these cases the Banks have to resort to the conventional recovery process through Law Courts/DRTs. Unsecured NPAs of big borrowers and others form sizeable part of the NPA basket of the Banks (between 35-40 percent).

The measures for Enforcement of Security are effective as far as take over is concerned, but the question is how to convert the junk security of closed units into cash flow? The Ordinance under Section 9 provides two options to the ARCs

1. to liquidate the assets taken over or

2. manage and operate the business of the company or account that has been taken over for realisation

All previous efforts of the Government of India in taking over and running sick industries or efforts by Bankers for revival of such units have turned to be a failure. Banks/ARCs would hesitate and will not dare to venture with this recourse. The effective option is therefore only to resort to sale of the assets of sick units.

This is what SFCs are doing presently and their experience is far from satisfactory. As per Mrs.Rajalakshmi Menon of the "Business Line"

"With legacy NPAs in the system, predominantly of SSIs and other units in the manufacturing sector, the ARC may not find any price for assets since most of the companies have long since gone belly up."

If ARCs were to undersell such assets at a huge discount, the bankers will hesitate to sell the same to the ARC for substantially partial or negligible satisfaction of their outstanding already swelled up on account of compounding of interest and charges.

The Ordinance is an effort to tackle NPA from the terminal end. Its provisions are operative only when an account has turned bad and transferred as NPA. There is no remedial steps contemplated to arrest NPA at source. This is possible only by change in "habits" or practices followed by both the Banks and the borrowers.

A relevant point with regards to taking over the management of defaulting units is brought out by the bankers as another handicap. The bigger amounts, where defaulters may show no sign of loosening up, can be realised by encashing the secured assets in the form of huge real estate, plant and machinery. As a senior law official with IFCI Ltd points out, there are, however, two provisions - section 13(4) and section 9 - that need clarification before banks and FIs move in a big way towards management control.

Section 9, for instance, allows a securitisation or asset reconstruction company to take over the management of a company of "the business of the borrower" or bring in change of management. Section 13(4), though, permits a "secured creditor" to take over the management of the secured assets of the borrower.

It is apparent the ordinance is intended to allow asset reconstruction companies to take over the "management of the business" of a company, whereas a secured creditor can only take over the "management of the secured assets" and not bring in any change in management. With the task of setting up and getting the asset reconstruction companies functional still incomplete, prospects of takeover of defaulters' assets right away seem remote.

A senior banker, as per report by Columnist in the Financial Express, agrees with the view that secured creditors can have difficulty in recovering the dues because of these provisions. That is because sometimes the entire assets of the borrower or company are mortgaged. Unless an operating unit can be taken over by the creditor, it will not be easy to get a fair price for the asset.

Again, transfer of assets to asset reconstruction companies will be a time-consuming task, notwithstanding enabling provisions in the ordinance.

It is pertinent to quote from my earlier article dealing with "NPA" under title "Diagnosis of the Root Cause and Tracing the Solution - Self-Introspection by Industry, Business and Banks"

"Anyone could with conviction and candour say that both the management of the nationalised banks, and business & industry are equally responsible for the emergence of NPA at alarming levels. The root causes are inefficiency and corruption. It is due to lack of capacity and character at both places. This inefficiency and corruption can be traced from the history of the decadence that the social, political and economic institutions of our country underwent during the last six decades commencing from the Second World War."

"Growing indiscipline prevailing at the business and industry adversely affect the entire society and set pace to all our present social problems. Engaged in commercial or industrial activities and dealing with vast resources, business enterprises as part of their activities build wide interactions with the government and public authorities. Prompted by greed and the desire for making quick or easy money, and possessed with vast resources garnered through black money hoarding, there is adequate scope for businessmen and industrialist in this environment to use corrupt ways of getting their things achieved. Corruption is fueled by greed. It is an attempt to look for short cut means for getting quick money. Business and industry promote corruption and public service thrives as the beneficiary of this evil source of earnings. This phenomenon is well documented in Santhanam Committee Report"

At the root of the problem lies the inefficiency in credit appraisal and the prevalence of large scale corruption in attending to credit delivery at the level of the Banks, and decadence of the Business and Industries as sources, originators or providers of such corruption. The point is also well brought in another of my earlier article on NPA titled "Focus at Anomalies at the Credit Delivery Centre - A Detached Survey of NPA from within the Credit Agency" CVC has realised this factor, as the majority of vigilance cases registered with it for advisory opinion relates to PSBs. CVC is now realising the need to build better expertise and investigating talents in respect vigilance cases of Banks and propose to take an experienced banker of repute as one of the Commissioners of Vigilance. It is also worth pointing out that not all cases of corruption in banks are exposed and referred to CVC, but only a microscopic fraction mostly pertaining to the middle level management cadres.

These are internal malaise prevailing in Banks on the one hand and Business and Industry on the other. The malaise cannot be cured by legislation or Government action, but by way of a recourse under the liberalised economic reforms by enforcing self-regulation by Banks and Industry through group discipline.

If Banks were to survive and if Industry and business need support of the Banks, collectively they should accept self-discipline and self-regulation. NPA will cease as a permanent legacy or hazard only when this wisdom dawns on the banks/financial institutions and borrowers. Here primarily the mindset and habits have to be reformed.

The Government of India and RBI was over-concerned by the case of the three weak nationalised banks and appointed a Committee for their rehabilitation, which made extensive study and came out with elaborate remedies. But the CII bluntly suggested that these three weak banks must be closed. Though there was wide protest and condemnation of the Apex body, the message worked. The three weak banks are no longer weak thanks to their own self-efforts. Economic deregulation and liberalisation involves equipping talents by units for survival under keen competition. If this spirit is not enforced, we are again re-entering the protected and directed regime of inefficient banks nurtured and sustained by efforts of RBI/Government of India without self-reliance.