RBI redefines non-cooperative borrower but Mallya et al will get off the hook still

The Reserve Bank of India (RBI) is leaving no stones unturned to tighten grip on the bad boys among defaulters, who do not honour their repayment commitments to banks even if they do have ability to pay back.

The RBI on Monday modified the definition of a non-cooperative borrower as some who “deliberately stone walls legitimate efforts of the lenders to recover their dues… 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…”.

The only difference between a willful defaulter and a non-cooperative borrower is the tag of a wilful defaulter virtually ostracises the borrower from the financial system as no financial institution will be ready to fund him any more, while the non-cooperative borrower can technically still get funding.

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But, if someone manages to do so, it will be next to a miracle. That’s because once a borrower is declared as non-cooperative borrower, any fresh loans to the company will attract higher provisions for banks, which effectively would mean that banks will think twice before lending further.

High provisions impact the profitability of the bank and, naturally, force it to price the loan expensive to the borrower. In normal scenario, no bank will take that additional risk. In effect, the tag of a non-cooperative borrower significantly reduces the chances of the firm to secure fresh funding.

The RBI, under Raghuram Rajan, has been taking steps to check the rise in bad loans by announcing a roadmap in January 2014 to manage stressed assets through early recognition of trouble in the behaviour of a loan.

As part of this, the apex bank incentivised those banks, who act early on stressed assets and penalised those who delayed action through accelerated provisioning.

The RBI’s efforts to sensitise the banking system and the borrowers about the changed approach towards bad loan recovery, has indeed shown results since then. Banks have begun aggressively approaching the intentionally defaulted borrowers by using all possible measures, including tagging them as wilful defaulters, seeking legal recourse and pushing for asset sales to recover their share of dues.

But, while both the wilful defaulter tag and the ’non-cooperative borrower tag’ are indeed powerful instruments to check the fresh addition of bad loans, but that wouldn’t help much to address the issue of existing pile of bad debt on the books of banks.

Until September, the 40-listed banks in India together had gross non-performing assets of about Rs 2.7 lakh crore. This, if added to the estimated restructured loan pile of about Rs 6 lakh crore, would take the chunk of stressed assets in the banking system to over 14 percent of the total loans given. There are no strong signals yet that tells us the bad/ restructured loan addition is over.

What is more worrying is banks have arguably not reported the entire bad loans on their books and instead have resorted to massive restructuring to show lower bad loans.

These troubled assets have emerged from two categories.

One, genuine cases of defaults, where companies – both large and mid-sized – face stress in the wake of external problems such as the current phase of economic slowdown in both domestic and global markets.

Second, wily promoters, who deliberately default after diverting the funds from the originally stated purpose or commit some kind of fraud as a result their cash flows are hit and loan repayments stop.

As for the first category, there shouldn’t be major concern for banks since once the economy gets it momentum back, these firms too will get back on track and resume repayments.

But that is not the case with the second group. The roots of many such cases can be tracked to the unholy nexus of politicians and corporations. This category, even if classified as bad borrowers, typically moves to courts or tribunals challenging the action of the banks.

Take the case of Vijay Mallya-promoted Kingfisher Airlines.

Mallya was tagged as a wilful defaulter after he defaulted about Rs 7,000 crore of loans to lenders, including State Bank of India (SBI), after he allegedly resorted to irregularities in the use of the bank money.

One of the lenders, United Bank of India, classified Kingfisher and the United Breweries (Holdings) Ltd (UBHL), the holding company of UB Group, as a wilful defaulter. Mallya has moved the court against the bank’s decision and is fighting the matter in the court.

But, beyond that banks haven’t been able to do any meaningful recovery from Kingfisher and are unlikely to do so in the foreseeable future since the matter has been dragged to the court.

Kingfisher is only one case. There are several more, where banks are fighting to get their money back from promoters who have committed financial irregularities and got classified as wilful defaulters.

Among them are Winsome Diamonds and Jewellery, Zoom Developers, Koutons Retail and Mumbai-based Tayal Group-promoted KSL & Industries.

Winsome Diamonds owes Rs 6,500 crore to a clutch of banks including Axis Bank, Canara Bank, Bank of India and Bank of Maharashtra. About Rs 900 crore is balance to PNB going by the information from the bank.

Zoom Developers, which owes about Rs 2,600 crore to banks, has an outstanding of Rs 410 crore to the Mumbai-branch of PNB, while Koutons has Rs 88 crore balance.

Mumbai-based Tayal group, the former promoters of erstwhile Bank of Rajasthan, which has interests in textile to real estate, has about Rs 2,500 crore to pay back to banks.

Typically, if a large defaulted company moves the courts against banks, it will be years before the case is resolved and banks get any power to exercise their right on the pledged collateral and opt for sale of equity, which they might have in the company.

But, by then, the company might have actually got into a tailspin and its valuations would have tanked multi-fold, leaving nothing much for banks.

In the absence of fast resolution in courts, an effective bankruptcy law and management exits, the value of the underlying assets deteriorates and both the creditors and investors in the company face a helpless situation.

Banks need to have full rights to access the assets of a troubled borrower before the assets turns fully bad.

While the fresh problems can be mitigated with new rules, the government and central bank should find out ways to deal with the existing stress.