Rajan takes his fight against crony capital further with his 'non-cooperative borrower' tag

The Reserve Bank of India (RBI) under Raghuram Rajan has moved once again to end the cosy system of crony banking where politically-favoured borrowers can avoid paying their dues despite having the ability to do so.

Without saying so, the RBI may also be trying to cut off the ability of wayward cronyists from using the courts and other institutions to deny banks their dues. Cronyism is being gradually cut off from its oxygen lifeline of political connections and dilatory court procedures.

The fightback against cronyism began in September, when the central bank extended the ambit of the term "wilful defaulter" to cover everyone - from guarantors of loans to defaulters (including group companies) to individuals on company boards that have been declared to be in wilful default. These directors will now carry their “defaulter” tags to any other boards they may be members of. The boards which are not in default will thus face bank restraints on lending to them.

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Yesterday (22 December), the RBI went a step further and strengthened norms in a category called “non-cooperative borrower” to catch budding cronyism before the stage at which they have to be declared wilful defaulters.

The category defines a non-cooperative borrower as “one who does not engage constructively with his lender by defaulting in timely repayment of dues while having (the) ability to pay, thwarting lenders’ efforts for recovery of their dues by not providing necessary information sought, denying access to assets financed/collateral securities, obstructing sale of securities, etc. In effect, a non-cooperative borrower is a defaulter who deliberately stonewalls legitimate efforts of the lenders to recover their dues.”

The definition does not say that promoters using the courts to delay recoveries face action, but this is implied. Banks which end up categorising any borrower as “non-cooperative” will have to make provisions for new loans to them as though they were “sub-standard”. However, the loans will be considered “standard” for purposes of asset classification and income recognition.

The banking regulator is thus using his regulatory powers to curb cronyism.

In line with its stronger measures against wilful defaulters, companies declared “non-cooperative” will now find this tag travelling with their directors to group companies. The directors too will face ostracism. The guidelines say that if “any particular entity….is reported as non-cooperative, any fresh exposure to such a borrower will by implication entail greater risk, necessitating higher provisioning. Banks/FIs will, therefore, be required to make higher provisioning as applicable to substandard assets in respect of new loans sanctioned to such borrowers as also new loans sanctioned to any other company that has on its board of directors any of the whole-time directors/promoters of a non-cooperative borrowing company or any firm in which such a non-cooperative borrower is in charge of management of the affairs.”

It is unlikely that courts will tread on the RBI’s regulatory turf, but one can’t be sure the courts will not enter the picture at all.

However, the wilful defaulter and non-cooperative borrower tags have the potential to put banks on notice to ensure that they do not fall prey to political pressures to keep lending to crony capitalists or keep ever-greening their accounts despite a manifest reluctance of promoters to pay up.

The RBI’s tough stepsare, in some measure, a reflection of its realisation that India Inc has the ability to endlessly “stonewall” repayments by moving courts or the Board for Industrial and Financial Reconstruction (BIFR).

The RBI and banks are frustrated that despite the setting up of debt recovery tribunals and the availability of clear collateral to realise their dues, promoters and other interest groups can effectively stymie them.

This was seen in the UP sugar growers' case , where the State Bank of India (SBI), despite holding valid collateral, was asked by the Supreme Court to ensure that growers were paid first before recovering their dues. Seeing its Rs 3,000 crore loans to sugar mills rapidly go up in smoke (or turning into bad loans), the bank went to the Supreme Court, where it got this pious statement. “In view of the suicides among farmers, let us put a quietus to this.” The apex court dismissed the SBI’s claims to first right on the collateral.

In another case , involving Arihant Threads, the promoter, after defaulting, found that the debt recovery tribunal had upheld the bank’s right to sell its collateral and realise its dues. But even though this happened in 2003, as late as this year the Supreme Court held that a promoter can neutralise the special provisions under the Recovery of Debts Due to Banks and Financial Institutions Act - an act intended to speed up recoveries - will be over-ridden by the special provisions of the Sick Industrial Companies Act, which provides borrowers a moratorium on payments till a rescue package is worked out.

Clearly, promoters have found a way to block banks from recovering dues by going to courts and using various other laws to their advantage.

This is the other reason why the RBI is gradually tightening the screws - to prevent promoters from using the system’s flaws to endless deny banks their dues.

If the RBI wins, cronyism will be gradually phased out. Using the “non-cooperative borrower” tag, it cancatch crony capitalists before they do more damage.

It’s a pity that the regulator has to do what legislation does not: create an effective bankruptcy law and strong court-barred systems to speed up the recovery of bad loans.

(This is a corrected version of an earlier post. The changes relate to the fact that the category of “non-cooperative borrowers” is not a new one created yesterday - as stated before. Also, this is to clarify that new loans to “non-cooperative borrowers” will be treated as “standard” despite banks having to provide for them as though they were “sub-standard.”)