Insolvency Code to prevent bad debts

As part of the government’s three-part plan to address stressed assets of public sector banks, structural issues would be dealt with to avoid recurrence of these problems, whether wilful or due to policy paralysis or business challenges, in future. This, Minister of State for Finance Jayant Sinha said, would be done through the Bankruptcy and Insolvency Code, 2015 that was introduced in Parliament in December.

Last week, Finance Minister Arun Jaitley told Parliament that Rs. 1 lakh crore of stressed assets were added in the first nine months of the current financial year itself.

In the case of the largest public sector bank, State Bank of India, loans worth Rs. 11,700 crore have been reported to be locked up as non-performing assets with nearly 1,160 defaulters wilfully deciding not to repay. Of these, the most prominent is UB Group chairman Vijay Mallya, who left for London earlier this month. Mr. Mallya owes a consortium of banks Rs. 9000 crore in unpaid loans and interest.

Separately, a top Government source told The Hindu , that Mr. Mallya was expected to return to India “sooner than later” to appear in court and cooperate with the lenders on the terms of repayment.

“He has no option but to return since he realises that India can cancel his passport which will surely lead to deportation,” the source said.

The source also said that arrest warrants could be issued against Mr. Mallya also for failing to deposit service tax with the authorities that the now-defunct Kingfisher Airlines had collected from passengers on air tickets. The Hindu could not independently contact Mr. Mallya for comments. The source further said that as part of a strategy to demonstrate intent to go after wilful defaulters of bank loans, action is expected against four more cases similar to Mr. Mallya. Of these, two are “absconding”, the source said.

The list includes Winsome Diamonds & Jewellery which owes Punjab National Bank (PNB) Rs. 900.37 crore and Zoom Developers (owing Rs. 410.18 crore to PNB). The source did not identify the other two wilful defaulters against whom action is being planned.

The state-owned PNB has declared 904 borrowers who owe it a combined Rs. 10,889.71 crore as wilful defaulters. Of these, 140 companies were added to the PNB’s list of wilful defaulters in the December quarter alone.

Separately, speaking also at the Advancing Asia Conference, International Monetary Fund Managing Director Christine Lagarde said that Reserve Bank Governor Raghuram Rajan’s move to address bank balance sheets “head-on” is the right approach.

“He is accessing the weakness of the bank balance sheet... [and] those accounts that have extensively borrowed from the banks,” she said. She also endorsed, the Finance Ministry’s move to address the issue from the legal point of view in pushing through Parliament a bankruptcy law that will help reorganise those corporate accounts that are loaded with debt, which weigh on bank balance sheets.

“I think equally relevant are various mechanisms and instruments that are being worked out to deal with bad loans and distressed assets in banks’ balance sheets and are clearly clogging their balance sheets,” she said.

Ms. Lagarde said reorganising them in such a way that they become more agile and are able to lend better in a more sustainable basis is going to be good for growth. She expressed confidence that the banking system of India is well-capitalised. This effort to reinforce and strengthen it is well-taken, she said.

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Printable version | Jun 27, 2022 3:11:37 am |