To reduce NPAs, creditors and debtors need sufficient immunity to hammer out sound commercial solutions
The country’s banking sector is severely stressed with one-sixth of the gross advances of public sector banks (around ₹7 lakh crore) being non-performing assets (NPAs). Existing statutory remedies of insolvency, restructuring of companies, securitisation of debts yield much litigation but insufficient recoveries. The Reserve Bank of India (RBI) brought out a Corporate Debt Restructuring scheme for resolution of dues from the larger companies which account for 70% of the debt portfolio; despite it being a well-structured system, it has failed to deliver substantially. It, however, omitted from attention the smaller borrower with loans less than ₹10 crore.
Now attention is focussed on the concept of a “bad bank”, which would purchase the large loans from the holding banks. The latter would then have better-looking balance sheets; however, the former will find recovery no less difficult. It would then sell off assets to private buyers, who see opportunities for profit-making rather than investment in the economic productive sense.
Roadblocks to settlement
Two core aspects appear to be the major roadblocks. The first is the limiting aspect of direct negotiations between bank and debtor, which usually run on the lines of high demands by banks and low offers by the debtor. The smaller borrower especially is faced with an imbalance in negotiating strength and is thus denied feasible, even if unattractive, settlement terms. Larger borrowers in acute distress may face similar problems. Settlement terms can be onerous which, if breached, have consequences of closure of business and sale of property. A mediation approach, where an independent neutral engages with both parties, is more likely, practically and empirically, to lead to faster and better agreements. In joint and separate sittings with the mediators, this consensual, non-coercive and confidential process enables the parties to discuss options such as debt concessions, repayment schedules, interest reductions, perhaps even additional credit with safeguards.
In face-to-face meetings between only creditor and debtor, the fuller gamut of settlement opportunities are not explored, because this would involve more information being exchanged or conditional concessions being made which borrowers fear will be seized upon by bank officers for enhancing demands and hard bargaining. Mediation reverses this; the process is designed to freely create, explore and refine options to yield a solution both amicable and sustainable. Moreover, in their separate meetings with parties, mediators can bring home to them the problems with their case should it proceed to litigation, the lack of worthwhile alternatives to reaching an agreement at the table, and also persuade them to take more reasonable and practical stands.
Mediation is now well accepted in India, both legislatively and through extensive use by the courts. Agreements reached through this process are enforceable without difficulty. If the RBI sets up mediation panels consisting of bankers, accountants and experienced mediators, that will provide the required institutional framework and enhance trust and credibility in the process and personnel.
Freedom from fear
The other major block, which paralyses decision-making in government and public sectors in India, is the fear of post-decisional retributive action by way of investigation and prosecution by multiple agencies such as the police, the Central Bureau of Investigation (CBI), the Central Vigilance Commission (CVC), the Lokpal, etc. Once initiated, the spectre of lengthy criminal trials looms, accompanied by fear of arrest, denial of bail and public ignominy. Courts respond inadequately — they do not speed up trials or consider bail applications expeditiously or penalise unnecessary prosecution. This inhibits settlements which are in the best interests of the bank but involve some concession or latitude inevitable in reaching the best compromise.
Freedom to take sound commercial decisions must be statutorily structured, else all our schemes will come to naught. One way is to create a high-level body before which settlement agreements can be placed for approval. This body will examine the settlement to see if it is commercially advantageous and is in the interests of the public sector financial institutions, taking all prevailing circumstances into account. Where it comes to an affirmative conclusion, that should provide complete immunity — from the police, the CBI, the CVC, the Lokpal and the courts — for the officers of the bank who have negotiated and recommended such solution. This is a better step than oversight committees which do not provide the backbone to take the commercial decision of beneficial compromise.
Such a body needs to be headed with high authority, drawn from the top echelons of the judiciary, the RBI and public sector banks, serving or retired. It should be a multi-tier body when the number of cases increases, which will happen because once you offer mediated solutions with protection for sound decision-taking, then both banks and borrowers will know that it makes eminent sense to try this approach which essentially means no risk in trying for a settlement, and no risk in agreeing to it.
The country’s banking sector is severely stressed with one-sixth of the gross advances of public sector banks (around ₹7 lakh crore) being non-performing assets (NPAs). Existing statutory remedies of insolvency, restructuring of companies, securitisation of debts yield much litigation but insufficient recoveries. The Reserve Bank of India (RBI) brought out a Corporate Debt Restructuring scheme for resolution of dues from the larger companies which account for 70% of the debt portfolio; despite it being a well-structured system, it has failed to deliver substantially. It, however, omitted from attention the smaller borrower with loans less than ₹10 crore.
Now attention is focussed on the concept of a “bad bank”, which would purchase the large loans from the holding banks. The latter would then have better-looking balance sheets; however, the former will find recovery no less difficult. It would then sell off assets to private buyers, who see opportunities for profit-making rather than investment in the economic productive sense.
Roadblocks to settlement
Two core aspects appear to be the major roadblocks. The first is the limiting aspect of direct negotiations between bank and debtor, which usually run on the lines of high demands by banks and low offers by the debtor. The smaller borrower especially is faced with an imbalance in negotiating strength and is thus denied feasible, even if unattractive, settlement terms. Larger borrowers in acute distress may face similar problems. Settlement terms can be onerous which, if breached, have consequences of closure of business and sale of property. A mediation approach, where an independent neutral engages with both parties, is more likely, practically and empirically, to lead to faster and better agreements. In joint and separate sittings with the mediators, this consensual, non-coercive and confidential process enables the parties to discuss options such as debt concessions, repayment schedules, interest reductions, perhaps even additional credit with safeguards.
In face-to-face meetings between only creditor and debtor, the fuller gamut of settlement opportunities are not explored, because this would involve more information being exchanged or conditional concessions being made which borrowers fear will be seized upon by bank officers for enhancing demands and hard bargaining. Mediation reverses this; the process is designed to freely create, explore and refine options to yield a solution both amicable and sustainable. Moreover, in their separate meetings with parties, mediators can bring home to them the problems with their case should it proceed to litigation, the lack of worthwhile alternatives to reaching an agreement at the table, and also persuade them to take more reasonable and practical stands.
Mediation is now well accepted in India, both legislatively and through extensive use by the courts. Agreements reached through this process are enforceable without difficulty. If the RBI sets up mediation panels consisting of bankers, accountants and experienced mediators, that will provide the required institutional framework and enhance trust and credibility in the process and personnel.
Freedom from fear
The other major block, which paralyses decision-making in government and public sectors in India, is the fear of post-decisional retributive action by way of investigation and prosecution by multiple agencies such as the police, the Central Bureau of Investigation (CBI), the Central Vigilance Commission (CVC), the Lokpal, etc. Once initiated, the spectre of lengthy criminal trials looms, accompanied by fear of arrest, denial of bail and public ignominy. Courts respond inadequately — they do not speed up trials or consider bail applications expeditiously or penalise unnecessary prosecution. This inhibits settlements which are in the best interests of the bank but involve some concession or latitude inevitable in reaching the best compromise.
Freedom to take sound commercial decisions must be statutorily structured, else all our schemes will come to naught. One way is to create a high-level body before which settlement agreements can be placed for approval. This body will examine the settlement to see if it is commercially advantageous and is in the interests of the public sector financial institutions, taking all prevailing circumstances into account. Where it comes to an affirmative conclusion, that should provide complete immunity — from the police, the CBI, the CVC, the Lokpal and the courts — for the officers of the bank who have negotiated and recommended such solution. This is a better step than oversight committees which do not provide the backbone to take the commercial decision of beneficial compromise.
Such a body needs to be headed with high authority, drawn from the top echelons of the judiciary, the RBI and public sector banks, serving or retired. It should be a multi-tier body when the number of cases increases, which will happen because once you offer mediated solutions with protection for sound decision-taking, then both banks and borrowers will know that it makes eminent sense to try this approach which essentially means no risk in trying for a settlement, and no risk in agreeing to it.