There has always been a covert nexus between banks and financial institutions on the one hand and large corporate borrowers on the other. The Indian Express, in a telling expose, has listed, by name and amount, major companies of the Indian corporate sector and the amounts they have borrowed from banks and have not paid back till now. The total runs into tens of thousands of crores; probably more considering that the India Express list is restricted to those companies to whom notices have been issued under the new Securitisation Ordinance (Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002, to give it its full name).

Essentially, this new law allows lending institutions to seize assets of company defaulting on loans and sell them as repayment of its lendings. Before this law, the consensus was that non-repayment of borrowings was not a crime but only a breach of contract and action lay in civil proceedings. It was only if ‘fraudulent intent’ was proved that the matter became a crime attracting the Indian Penal Code. This aspect allowed borrowers to play merry hell with banks. Huge amounts were taken on loan, repayment defaulted and the lender practically blackmailed into lending more to cover the interest on the outstanding loans. The were two reasons why banks became victims of such blackmail: one, it allowed them to show the overdues as current outstandings since interest was repaid (thus making their balance sheet look better) and, two, the banks knew that taking the defaulting company to a civil court just did not pay in view of the numerous loopholes available to the company to delay the proceedings. In some cases, such proceedings took decades and the cost to the bank was so high that it, perforce, had to write off the loan. The borrower was then free to run laughing all the way to another bank.

Proving ‘fraudulent intent’ so that a case can be registered under the Indian Penal Code, is also almost impossible. Again, there is immense room for the borrower to manoeuvre and claim that there was no such intent involved. Often, the bank, which was supposed to have vetted the loan and approved it after strict screening, has been asked to explain why it had not found any defects or risk factors in the loan application before approving it and was now claiming that there was fraudulent intent.

A third escape hatch for defaulting companies was provided by the Bureau of Industrial Financial Reconstruction (BIFR). The normal modus operandi was to take a large loan, set up an industrial unit, drive it into the ground, milk it of its cash flow, strip its assets and apply to the BIFR for ‘sick unit’ status that demands reconstruction. The BIFR supposedly works out a package for your revival with the creditor institutions and, hopefully, bails you out. A significant factor for the process is that creditors cannot take any action against you for outstanding loans.

However, now that the new securitisation law prevents companies from approaching the BIFR or gong to the courts against notices of intent from banks to seize the companies’ assets due to default in repayment, the borrowers find that suddenly they cannot play ducks and drakes with the financial system any longer and, worse, face severe penalties, losses and even bankruptcy. Readers of financial papers will have found, of late, a number of statements and articles from corporate federations and corporate sector-linked economists putting up the argument that the securitisation law is not equitable since it is bent in favour of the lender. They have hinted that many loans to the corporate sector (now overdue) were ‘fraudulently sanctioned’! Implicit is the argument that, therefore, the borrower is not at fault or, if he is, the lender is equally to be blamed. The boot is now on the other foot. Previously, the bank was required to prove fraudulent intent by the borrower. Now it is the borrower who has to prove fraudulent intent by the bank if his argument is to be taken to its logical end. This is just as impossible to resolve as the early impasse (the burden of proof on the bank). In any case, can a borrower prove such connivance on the part of the bank without implicating himself in the crime?

We now come to the business federations. FICCI is a typical case in point. This body says that 90 per cent of the defaulters were unable to repay their loans due to ‘adverse market conditions’ which, according to it, include decline in market prices, lack of demand, economic recession and structural changes. If these factors are accepted as valid, can someone explain why it should be restricted to the corporate sector alone as a reason for not making repayment? What about the salaried individual or small businessman who takes a personal loan of, say Rs. 50,000 and is unable to repay it? Will the banks accept such an argument from him? But a company like SPIC can get away with borrowing hundreds of crores and then try to take refuge behind such an argument.

And who do you think is the chairman of SPIC which is under notice of seizure of assets? Mr. A. C. Muthiah who, co-incidentally, is also president of FICCI.