The Supreme Court has raised certain important questions on the state of bad loans that has gripped India's Rs 101 trillion banking industry and has sought to overhaul the banking system in this context. Responding to a petition filed by NGO 'Centre for Public Interest Litigation', the Supreme Court noted that 'something is not working in the system leading to such huge loan defaults'. The court told the government that an expert panel could be set up to examine the issue of bad loan recovery.
The good part here is that the apex judicial institution in the country is paying close attention on the loan issue in the banking sector, including the fight against large corporate defaulters (as seen in the Vijay Mallya episode). SC’s comments are coming at a time when the Reserve Bank of India (RBI) too has initiated an all-out attack on the defaulters by pushing banks on recovery. The RBI has set a deadline of March, 2017 for banks to clean up the mess.
The other side of this issue is that excessive judicial intervention in banks' loan recovery process too has contributed to the current bad loan mess in the banking sector. Under the current legal structure, courts often deny banks the rights over collateral when the loan is in default. One example is State Bank of India's loans to sugar mills in Uttar Pradesh. SBI has an exposure of Rs 3,000 crore to sugar mills. But an Allahabad High court order on 5 September ruled in favour of the growers to have first right on the collateral and get their dues, before banks can lay their hands on the collateral. Even though SBI moved the Supreme Court against this order, the bank didn't get any relief as the SC, in October, refused to interfere with the High Court order.
“We lend against the security of the sugar produced or to be produced by the mills. While banks are supposed to have the first charge over the sugar stocks pledged in their favour, this judgement holds that the dues of cane growers, which are in the nature of an unsecured claim, would prevail over the rights of secured creditors,” the Indian Express quoted the head of a top public sector bank.
Also, it is typical among large defaulters to drag lenders to prolonged legal battles when banks initiate recovery process on bad loans. The repayment process often gets delayed when companies secure favorable court orders, sometimes, on mere technical grounds. For example, in the ongoing Kingfisher-Vijay Mallya mess, where banks are fighting to get back about Rs 9,000 crore money lent to Mallya's now defunct Kingfisher airline, judicial intervention had complicated efforts by one of the lenders in the consortium to recover money.
United Bank of India, one of the lenders to the company, had to withdraw the wilful defaulter tag on Mallya after the liquor-baron managed to get a favorable order from the Kolkata High Court, citing that RBI guidelines required a three-member grievance redressal committee but the bank’s committee had four members!
The current bad loan mess is contributed by a mix of factors including the reckless lending practices of banks, the infamous corporate-banker-middleman nexus and the intervention by the governments in the operations of state-run banks that control 70 per cent of the banking industry. But, the point here is that the judicial system should recognize that it too has indirectly contributed to the mess. The proposed bankruptcy law, once enacted, could offer relief to the banking system since banks can then wind up the company quickly if chances of revival are less.