With bad debts assuming alarming proportions for banks at $110 billion, it is time we went for the broke---Escrow account mechanism.
Under this, sale collections, be they cash or receivables, are, through a tripartite account, mandated to be deposited into a designated bank account. The lender(s), the designated banks and debtors enter into a tripartite agreement for this purpose. Often it is the heavy duty customers who are made parties to the tripartite agreement.
To wit, a power supplier would have both industrial and household consumers. If industrial consumption is large enough and would sufficiently take care of the interest and principal repayment obligations of the power supplier, the lender(s) may not bother the households. Escrow then can be likened to tax deducted at source (TDS).
Roughly, 30% of direct taxes collections are through TDS which is almost fool-proof. Small wonder, the salaried class is the best tax complier. The employer is mandated to deduct tax from salary not at an ad hoc rate but at the actual slab rates applicable that makes him virtually the assessing officer. Likewise if a large part of receivables are pooled into a designated bank account under the control of the lender(s), their comfort level would go up considerably and the overall NPA levels would come down.
The lenders would take what is due to them and release the balance for the regular business needs of the borrower. Strategic Debt Restructuring (SDR) permitted by the RBI recently pursuant to which the harried banks can convert a part or entire amount of the dues from a borrower into equity can be successful only in a limited sense---instilling a fear of being ousted from the scene in defaulting promoters.
Of course there is also reprieve for 18 months from provisioning with the loans making the standard grade during this period which is a sort of manna from the heaven for banks. But this could virtually amount to buying pig in a poke in hindsight because pray what they would do with these businesses if they are unable to find take suitors for them at the end of the dah?
From troubled loans, they would have morphed holding troubled investments in the manner of jumping from fire to frying pan. Of course SDR is a shade better than Corporate Debt Restructuring (CDR) under which the wily borrowers bought time repeatedly harking back to the deceitful practice of ever-greening under which a banker deluded himself ostrich-like.
According to the brokerage firm Religare, the SDR loans presently stand at 1% of the total loan by the banking system and in absolute terms, stand at Rs 64,100 crore. Both SDR and the power of seizure of assets vested in secured creditors holding more than 75% of the outstandings by the Securitization Act 2002 flutter the dovecots of the defaulting promoters but the success of both hinge on how quickly and effectively suitors are found. It is not an easy task. BIFR has had a tough time.
Banks and financial institutions cannot be luckier especially in a milieu when business sentiments are down. Escrow will be resented by other stakeholders especially those like workmen enjoying preference on winding up. Trade unions may therefore not take kindly to the proposal.
One hopes the Congress Party doesn’t see in the proposal a desire to help the suited-booted people because the help after all is not to the deep-pocketed industrialists but to the banking sector 70% of which even today is in the grips of government, with PSB looming large.
The government at the center therefore must in consultation with the RBI put in place appropriate regulations for systematic use of escrow account mechanism while simultaneously unfurling the bankruptcy code given the fact both should go hand in hand. If despite the escrow mechanism in place, the default continues may be due to poor sales, then bankruptcy cannot be put off for long.
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Updated Date: Dec 12, 2015 10:02:59 IST