BackWhy money lent to Vijay Mallya’s firms won’t be easy for banks to recover
Kingfisher House is the rare instance of a defaulter's property where banks have actually managed to gain possession
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On Thursday, banks failed to draw any bids for Kingfisher House, the headquarters of the Vijay Mallya’s defunct Kingfisher Airlines Ltd, as they tried to auction it to recover loans. Kingfisher House is the rare instance of a defaulter’s property where banks have actually managed to gain possession.
Data shows that while bankers have been filing suits at various legal avenues such as courts and debt recovery tribunals as bad loans multiplied, recovery has been poor. At the end of December, lenders filed suits for recovery of loans worth ₹ 1.13 trillion, show numbers from the Credit Information Bureau of India (Cibil), a credit rating agency. This only includes those loans that are individually worth above ₹ 1 crore and account for roughly one-third of the industry’s bad loans.
Now, as the chart shows, while the absolute number of suit filed cases has multiplied manifold, as a proportion of total bad loans, it is lower than what it was in 2007 or 2009. That could either mean one of three things: that the data doesn’t fully capture all suits, a greater number of suits are those worth below ₹ 1 crore (unlikely because of increasing ticket sizes of loans) or that lenders are not being proactive. Bankers whom Mint spoke to also say that it is certainly not a case of banks not being proactive.
Even when a business goes bust for genuine reasons and can’t repay its loans, it’s a natural process for the bank to file a suit and take possession of assets to recover the loan. However, things aren’t always so smooth. Sometimes, borrowers manage to transfer underlying assets to their relatives or third-party accounts before they default.
“When the bank realizes that there are no assets to be recovered from the account, then it has to take a call whether it is worth filing a suit as this is an expensive and time-consuming process. These are the cases which go to the RBI (Reserve Bank of India). In such cases, we try to investigate the money trail and see if there has been some wrongdoing on the part of bank employees," said Subhalakshmi Panse, former chairperson and managing director of Allahabad Bank.
While such diversion of funds amounts to wilful default under RBI norms, it is not always easy to label a non-performing account as wilful defaulter. It is a long process which requires multiple rounds of investigations, said bankers.
“Since the loan recovery process is the same regardless of the nature of default, most banks do not go through the process of investigation required to declare a defaulter a wilful defaulter," said Deepak Narang, former executive director at United Bank of India, the first lender to declare Kingfisher a wilful defaulter.
“Thus, if the data is showing a wilful default rate of 20-30%, the actual rate of wilful default is going to be much higher, at close to 50-70%. Most cases of default are actually cases of wilful default," he added.
That said, there has been an increase in the reported number of wilful defaulters, a fact which IndiaSpend too reported on Thursday.
However, filing a case does not guarantee speedy resolution. The long legal process with multiple interventions by different authorities means that cases drag on for quite a long time.
Allahabad Bank’s Panse gives the example of a case where a bank got clearance for sale of a building in Mumbai. But the borrower (who was Delhi-headquartered) got a stay for that sale from the Guwahati High Court. Subsequently, that bank decided to file a caveat (to pre-empt stays) in all other high courts in India.
“In view of the multiple avenues available to the customer, getting legal clearance for sale of property to realise bank dues is a time consuming process. As a result, the borrower gets sufficient time to transfer the assets in some relations’ name or third party," said Panse.
“Most of the time, cases which are meant to be solved in six months end up being dragged on for three years," added Narang.
Things have reached such a stage that the DRTs (debt recovery tribunals) have a backlog of ₹ 4 trillion (this typically includes outstanding interest too unlike Cibil data, said bankers).
The Economic Survey said that while recourse to DRTs has increased dramatically, the share of settled cases is small and declining. It added that the delay in debt recovery creates dynamic efficiency cost on the economy since it prevents the cleaning up of balance sheets of banks and the corporate sector.
Moreover, the inability to punish wilful defaulters is also an example of weak institutions. “If demonstrable wrongdoing goes unpunished, the legitimacy of all institutions is called into question," said the survey.
Next week, the finance ministry will meet senior bankers of public lenders dealing with large loan defaults, reported the Press Trust of India. The ministry will also deliberate on ways how banks can be more proactive in dealing with cases of wilful and genuine defaulters, the report added. It would perhaps do better to mull over how fast it can push through the promised bankruptcy law.
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