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D. Sampathkumar

HEWLETT Packard takes pride in the fact they do things differently, and labels it the `HP way'. India too has its own way of doing things, especially when a difficult policy choice confronts the nation. The tendency, for instance, to drown a particularly irksome issue with committees and expert groups till a solution is rendered superfluous by the passage of time. But even by the standards of doing things the `Indian way', the sloth exhibited in policy formulation over the problem of non-performing assets (NPAs) of financial institutions, is extraordinary.

Way back in 1990, the problem gained official recognition when the first Narasimham Committee spoke of an asset reconstruction fund, to take over the problem assets of these institutions. But a decade hence, policy-makers are still wrestling with the mere operational contours of ownership of this new entity. No one is even thinking of the modalities of recovering old outstandings.

In the years following the first Narasimham Committee report, there was a distinct lack of enthusiasm for the concept of asset reconstruction as a solution to the problem of non-performing assets. This was, of course, understandable. For one, the Committee spoke of a fund to be set up with contribution from the Government — a surefire prescription for burying the proposal in the archives. No government could be expected to be overly enthusiastic about a recommendation that increases its own financial burden.

While the initial reluctance may be understandable and, to an extent, even acceptable, the problem has only got worse. A large number of big-ticket loans have turned sour, either because the businesses have turned unviable or because, in the permissive post-liberalisation atmosphere, many borrowers have turned wilful defaulters.

The problem thus brooks no delay. But there is as yet no evidence that the government is keen to do something about it. On the contrary, it is seen as just engaging in shadow-boxing. If the asset reconstruction company is to be owned by the financial institutions themselves, it would be logical to presume that it would be in proportion to the value (net of discount) of problem assets that they bring to the table.

In the event, this would merely be a book-keeping exercise, as there will be no real cash flows to the financial institutions. The financial relief to be obtained from offloading these assets, at whatever the discount, would be completely offset by the need to contribute to the capital of this institution. Now, getting the government to subscribe to the capital equivalent to the net realisable of these assets too is fraught with difficulty.

The resultant increase in its borrowings does not do any good to the government's commitment to reducing the fiscal deficit. So now, there is talk of getting multilateral institutions and the private sector to participate in the paid-up capital of the ARC. But neither private sector players nor, for that matter, the Asian Development Bank or Commonwealth Development Corporation are going to be overly eager to subscribe to the capital unless the structural deficiencies in the realisation of value embedded in these problem assets are first addressed. And therein lies the hitch. The structural problems are simply intractable.

First, there is the question of foreclosure of mortgage in these loan assets. A banker cannot just walk into a factory and take possession of assets; he might be accused of trespass. The bank has to move the courts for satisfaction of its claims. But this is easier said than done. Not only is the legal process exceedingly slow, the borrower invariably ties the lender in protracted legal action with counter claims. It is not uncommon for a delinquent borrower to claim that the bank is liable for liquidated damages due to delay in disbursement of sanctioned loans, or alleges some other sins of omissions and commissions on the part of the banker. There is a need for a comprehensive law that would enable bankers to foreclose mortgages without having to worry about counter legal claims from the borrower. Such a law is nowhere in sight.

If a bank does manage to execute the mortgage in its favour or in favour of the new ARC, there is the question of stamp duty. If assets represented by bank loans were transferred to a new entity, the property in them would attract stamp duty. Any amount paid by way of stamp duty reduces the amount available to the ARC and, by implication, increases the loss in disposal of these assets. A waiver of stamp duty would be a logical answer. But few State governments would be keen to sacrifice anything they feel is their entitlement. Then there is also the problem that much of the underlying assets may be of little value.

For instance, the few hundred crores that the Indian Bank lost in lending to MVR Exports are not backed by anything tangible. Even where the assets in question are tangible pieces of equipment, they may be obsolete as to render them worthless for a prospective buyer. That leaves real estate as the only viable piece of asset worth anything in the market place. But for unlocking value embedded in these assets, closure of the industrial units and cessation of manufacturing activity is a must. This calls for amendments to the Industrial Disputes Act and, if the unit in question is also a sick undertaking, a clearance from the BIFR — the authority to rule on unviability of business units — is a prerequisite. Even if the business unit can be turned around, the prospective acquirer of the assets of a sick company may be interested only in unlocking the value of real estate but is otherwise uninterested in running the industrial unit. But that is something the BIFR, under the present legal structure, is empowered to concede. Thus, asset reconstruction, taken to its logical end, throws a question over the authority of BIFR itself. There is, as yet, no decision on the BIFR's future role. Any attempt at roping in multilateral agencies to subscribe to the capital of an Asset Reconstruction Company without resolving these questions, is an exercise in futility.

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