Bankruptcy Law will not be able to solve the NPA problem in the banking sector. Here's why

The liberal market columnists in the pink papers have been praising the Modi government for bringing in an exit policy or the Bankruptcy Code in the country. In one such column that appeared in a leading financial daily on Sunday (17 September) a senior columnist, SA Aiyar, went to the extent of declaring the Bankruptcy Code as being pro-worker and anti-owner.

It would be baffling for anyone, even Marxist critics, to understand the pro-worker elements of a law that has its origin in the philosophy of saving capitalism and capitalists.

Even by the standards of the Bankruptcy Law's pro-industry posturing, there is not much to talk about the success of this legislation, that many expect will solve the issue of rising Non-performing assets (NPA) in the banking sector.

The intervention by the Supreme Court in the case of Jaypee Infrastructure's liquidation process has already raised questions over the competence of the law when it comes to resolving the problem of loan defaults by companies in India.

While the RBI has recommended over a dozen cases of loan defaults by corporate houses to be tried in the National Company Law Tribunal, there is not a single case out of these that is likely to reach a resolution. And there are thousands of such cases and the number of willful defaulters is on the rise. According to Indian Express, banks have seen a 45% spike of Rs 34,900 crore in willful defaults since last year.

Data reported by the newspaper show that “willful defaults by borrowers from banks rose from Rs 74,694 crore in March 2016 to Rs 1,09,594 crore as of March 2017”.

As per RBI's definition, a willful default is one where a company's promoters have defaulted on the loan servicing obligation to the lender despite having the ability to honour their commitment.

Facts & figures

There are over 5,000 companies in the country that make the list of over Rs 1 lakh crore of willful defaulters in the Indian banking system. The most disturbing fact is that the government of India till date has not come clean on the names of defaulters in the banking system.

The names of the companies that have come in the public domain are on the basis of RBI's decision to recommend them to the NCLT for resolution. All other defaulters so far have enjoyed anonymity - thanks to the government's decision to hide their identity based on a warped logic that disclosure will harm the workers of the company.

Contrary to the logic of the celebrated columnist mentioned above, who said the Bankruptcy Law will take care of the workers, the RBI and the government feel that keeping the names of defaulters hidden will benefit the working class of the country.

In the words of Mark Twain, “Truth is stranger than fiction, but it is because Fiction is obliged to stick to possibilities; Truth isn't.”

If the government actually wants to resolve the issue of rising loan defaults in the country, all it needs to do is to kill the possibilities of industrialists getting away without repaying the money they owe to the public sector banks.

All this requires is transparency when dealing with each and every defaulter account and a candid policy of investigating the possibilities of siphoning off of the public money in the name of a business.

But can the government deal with this reality?

Edited by Jhinuk Sen